Should You Name the Trust as Beneficiary or Name Your Children Outright?

Should you name the Trust as a beneficiary or name your children outright? Attorney Chris Berry answers this question on this episode of Daily Wisdom.

Estate Attorney and Advisor Chris Berry of Castle Wealth Group answers questions on retirement and estate planning every Wednesday at 1pm. Register via this link or give our office a call at 844-885-4200.

Castle Wealth Group and Christopher Berry help families with estate planning, elder law, retirement planning, and tax planning from their offices in Brighton, Ann Arbor, Livonia, Bloomfield Hills, and Novi.

Castle Wealth Group helps families with their legal, financial, and tax planning for their retirement and legacy.

With the use of legal structures like revocable living trusts, Castle Trusts (asset protection trusts), Chris Berry and Castle Wealth Group can help your family plan, protect, and preserve what is important through their Retirement and Legacy Blueprint Process.


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Episode Transcript

The Trust Setup

Depends on what type of trust you have. If you’re relying on beneficiary designations to pass assets, like you just named your kids as beneficiaries, then you’re basically launching a pillowcase of money at them. That could be a problem for one or two reasons. One, it could be their own poor financial mismanagement. If you have any beneficiaries or children that maybe can’t necessarily manage money or maybe are minors, you don’t want it to go outright to them. Instead, you want to have a trust set up, and maybe someone else manages it. But the second issue why you might not want to rely on beneficiary designations, I see a lot of trusts that say outright distributions, which I’m not really a huge fan of is because while we might trust our children to make good decisions, a lot of my clients don’t necessarily trust the outside environment.

What happens if you pass away? You’ve set an outright distribution to your child, and then they get a divorce. Half that money might be lost in that divorce, or what happens if they inherit this money and they pass away? All that money might go to a spouse who might remarry versus going down to your grandkids. In our trusts, and this is not all trusts, a lot of the revocable trusts that we review say outright distributions. If you already have a current trust, and you want us to take a look at it. We didn’t draft it. We can do what we call an estate planning audit, which is we go through about 10 different items.


Legacy Inheritance Trust Provisions

One of those is we look at the distribution pattern. Is it this pillowcase of money approach, or a lot of times what we do, and we call this Legacy Inheritance Trust provisions, so LIT, is we leave it to our beneficiaries, so it’s held in trust. They could even be the trustee of their own trust. But by doing this, saying that instead of it going out it’s held in trust for their benefit, where they can decide how it’s invested. They can receive the income, so it’s not taxed any differently. But what we’re doing is we’re giving our beneficiaries the opportunity, so whatever they inherit from you are protected from creditors, protected from divorce, and the money stays in the bloodline. That’s a big advantage for naming the trust as the beneficiary.

Now, why do you hear conflicting advice on this? One, sometimes people don’t like doing the additional paperwork of naming a trust as a beneficiary. Some other financial advisors pushed back on it because they don’t necessarily understand trusts and how they work. They don’t understand it from a tax perspective. As long as you have the income coming out of the trust, it’s taxed at personal income tax rates.


Pros and Cons

The way I view it is really, there’s no downside of naming the trust as a beneficiary. There’s only advantages. Advantages, depending on how the trust is set up, if it does have this legacy inheritance trust provision from protecting against creditors, divorce, and make sure the money stays in the bloodline. While I say it depends on whether you should name the trust or children, if we’re the ones to set up the trust and we build in this legacy, inheritance trust provisions inside of the trust, it’s a no-brainer to name the trust as a beneficiary. The only downside is maybe you have to fill out a little more paperwork, and that’s something, if you’re our client, we’re going to help you and advise you on how to do that.

In our office, we always name the trust. Another point of confusion is sometimes I hear people say, even advisors, even attorneys sometimes say that, well, if you name the trust with a retirement account, you can’t stretch it out. Well, with a secure act, at most, even if you name the kids as a beneficiary, you can only stretch out those taxes up to 10 years. Same with a trust. If the trust is set up properly, we can still stretch it the full 10 years. Again, there really isn’t much of a downside of naming the trust as a beneficiary, other than some additional paperwork.


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