Often when I help clients form an estate planning options, they need to decide if a trust is the best for their loved ones. And for many reasons the trust can be the best option. However, what’s right for one client may not be the best for another.
I was just speaking with a client yesterday and their estate planning options were either beneficiary designations or a trust. Both had benefits and disadvantages. The client wanted to know which plan would be best for them. In the end I recommended a trust because they had multiple children. However, a trust isn’t automatically “better” than another plan. While a trust has many advantages and many great reasons to use one, a trust can make things more complicated.
For very simple estate plans, i.e., there’s one adult beneficiary who’s good with money, the appeal of using beneficiary designations can be the simplicity. A trust upon someone’s death often requires a new tax ID number, separate tax filings, and can require interpretation or assistance in making sure all the terms are met. Beneficiary designations, on the other hand, only require a death certificate. So, a trust can be overly burdensome, especially for simple plans where the people involved may not have a lot of experience with legal documents.
However beneficiary designations have a lot of downsides.
- First, you have no control after you pass. The money goes to the beneficiary and that’s it. You can’t tell them what to do or not do with it. If you have minor children or someone who is bad with money, even just wanting something specific with real estate, beneficiary designations may not be a good plan for you.
- It’s also much harder to plan for contingencies. Many beneficiary designations only allow a primary beneficiary. So, if something happens to that primary beneficiary and you don’t (or can’t) update your plan, that asset will end up in probate.
- Another major problem is that there’s no one person in control. Each beneficiary receives their share, so any expenses that are paid are paid by an individual, not the estate or by everyone. That person then needs to work with the other beneficiaries to pay bills and make sure everyone pays their share.
So, when deciding between estate planning options, there’s advantages and disadvantages to trusts and beneficiary designations. It’s best to evaluate your options, knowing the good and bad of all possible estate plans, then choose based upon your family and which path will be easier for your loved ones. Maybe that’s simple beneficiary designations or maybe that’s a trust. A good estate planning attorney can help you explore all the estate planning options and help decide what’s right for you.