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How Do Payable on Death Accounts Work with a Trust?

Attorney Thomas B. Burton answers the following question: "How do payable on death accounts work with a trust?" Attorney Burton discusses beneficiary designations, also known as payable on death accounts, and discusses the pros (avoiding probate) of using payable on death accounts, and also discusses some of the potential cons of using payable on death accounts for certain beneficiaries. Attorney Burton also explains how you can use a payable on death beneficiary designation in conjunction with a revocable living trust, in order to provide a "one vehicle" concept where all of the assets avoid probate by flowing through the trust after your death, and are administered privately, according to your wishes as expressed in the trust document.

Want to know what type of estate planning documents are best for your situation? Download a free copy of my easy estate planning guide. Obtain Your Free Will vs. Trust Estate Planning Guide here.

Welcome Back!

I am Attorney Thomas Burton. I am an estate planning and asset protection attorney here in Wisconsin and today, we return to our popular Question & Answer Series, and this is a new viewer question which was recently submitted through my Video Ask Tool.

If you haven't seen that tool, check out my Facebook Page or my Website, but basically, there is a section in the Video Ask Tool where it says, if you have a question, you can submit it here, and that is what this viewer did. So thank you to the viewer for submitting it.

Here's the question - "I have completed my Power of Attorney for health and financial and I also have designated beneficiaries on all my financial accounts."

So good job, first of all, getting those important tasks taken care of.

Then they say, "My question is, I want to specify how, when, how much of my money/assets are distributed which I assume is through a trust. But how does designated beneficiaries work with a trust?"

So, excellent question because you really zeroed in on a topic here, the intersection of beneficiary designations and trust.

So first of all, I would say, you are on the right track because you have your powers of attorney filled out and you are thinking about avoiding probate by using those beneficiary designations on financial accounts.

Now, for our other viewers, if you hold assets in a Bank Account, a Brokerage Account like TD Ameritrade Schwab, you can fill out a beneficiary designation that says, 'if I die, I want my assets to go to this person or these people.' And then, there's a section, it says, if those people are gone, so let's say you are married, and you say my spouse - the primary beneficiary. But if my spouse is gone, I want to leave it to my children, the secondary, the Contingent beneficiary. You can do that and that method is effective for avoiding probate on those assets held in that bank account or that brokerage account upon your death. And this is a popular way to avoid probate and it will accomplish your goal of avoiding the assets flowing into probate court, and then being assessed a fee by the probate court on those assets. And in todays world, many people have significant assets in bank and brokerage accounts. So for this type of assets, using the beneficiary designation can be an effective way to avoid probate.

Now, the downside is a bank or financial institution will just follow, exactly what you have on file, on the date you pass away. So, if you don't have those beneficiary designations updated and correct, they will still go by whatever the last contract you submitted and signed to them was because it is a matter of contract law. So the more of those accounts you have, the more you need to think about maintaining all those and having them match your estate plan.

Now, the other way to do it, which I would suggest is often simpler, is put together a Revocable Living Trust. A trust is a private document during life and it stays private after your death. So unlike a will, it doesn't have to get filed anywhere and become public. And then what you can do is designate the trust, as the beneficiary of all those accounts. So instead of listing all the different people on each account, you can list the trust directly, let's say, your name is Smith, ,Smith Living Trust', dated whatever date you sign the trust, you list that on each financial account. Then the bank or the brokerage account can pay on death, though the trust. The trust accepts the assets and then the terms of your trust dictate where they go.

So this works really well if you have minor children or anyone, who is a trust beneficiary, who is under age 18 because minors cannot legally inherit property in the State of Wisconsin. So the trust can hold the property for them, until the age you choose.

The other upside to a trust is, by law, a child would receive the inheritance under a will at age 18 or the maximum age 21, if you hold it in an ATMA Account.

But under a trust, you can say, you know what, I don't know that I want the children to receive all these money at age 21 and in fact, there's research showing most young adults brains are not fully developed until 25. So what I often do with planning, especially, when we are planning for grandchildren and there's lots of grandchildren and they are variety of ages, as you can choose three ages they would receive their inheritance. Maybe, it's 22, they get one-third. 25 another third, 28 another third. Or maybe it's 25, 30, 35. You can do it however you want and then the assets are protected until those ages when the trust pays out and this not only protects the assets, it protects your heirs from just making, you know, an error in judgement when you are 18 - buying a brand new car with all that money seems like a good idea but maybe by 25, they realize, 'I think I would rather put the down payment on a house' or something like that. So, if you use a trust, you can write out the terms exactly of who should receive, what amount of money at what age.

So going back to your question, you said my question, 'I want to specify when, how and how much of my assets are distributed?"

For this, I would recommend you use a trust because the beneficiary designation on a financial account, they are not complex enough to get to that level of planning. All they would do is say whatever age when you die, we pay the assets to this person. The financial institution wants to wash their hands of it, be done. They don't want any responsibility generally, for managing the asset or holding it for the person. So if you want to specify the ages, how much the distributions, then you want a trust in place, a private trust document will govern.

Now, the assets can still be held on a bank, a brokerage account or a financial institution but you need to name a trustee to manage the assets for the beneficiary. So you can chose someone in your trust to act as trustee, after you are gone. Or you can name a corporate trustee such as a bank or a trust company and they will do it for a fee.

So in my opinion, that's the best way to manage assets after you are gone and safeguard them for the next generation.

The beneficiary designation will work just to avoid probate but again, it will just pay out all the money whenever you die and generally, you provide a death certificate, and then the account would pay out to the people named.

So that can work well if you have one beneficiary like your spouse and you have no concerns about leaving it all outright to them. But for situations where there's multiple beneficiaries of multiple ages, in my opinion, it is much better to use a trust to do this type of planning. Then you can keep it all private and still avoid probate.

So thanks again, for submitting this great question.

If you are watching and you have a question, you would like to see answered on a future video, please consider submitting it to the office by email or using the video ask tool, as mentioned. We will get to it, as soon as we can.

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Thanks for watching and we will see you next time.

© 2021 Burton Law LLC. All Rights Reserved. Transcript and captions provided for ease of access for the hearing impaired. For questions about this topic, or to suggest a topic for a future blog post, please contact the office.


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