Can Beneficiary Designations Replace a Trust?

Many North Carolina residents are using a trust to aid them in their estate planning. Many benefits come from using a trust, such as avoiding the probate process, enjoying privacy, and potentially saving money on taxes. Creating a living trust is a straightforward way to pass your beneficiaries assets while bypassing the probate process. You may be wondering whether using a beneficiary designation can replace the benefits of using a trust. Using a beneficiary designation is a more straightforward process than creating a trust, so people may be tempted to skip creating a trust. However, there are several benefits that are unique to trusts that you cannot get with a beneficiary designation.

Most people have beneficiary designation set up, but they may not know it. If you have a retirement account set up through your employer, you have probably named a beneficiary for the assets in your account. The person you selected to receive the assets in your retirement account when you pass away is your designated beneficiary. Any type of account with a transfer on death or payable on death designation counts as a beneficiary designation. Owning a property as a joint tenancy with the right of survivorship is a type of beneficiary designation in real estate.

Beneficiary designations are relatively easy to set up. In most cases, when you set up a bank account, retirement account, or another type of investment account, you will be asked to name a beneficiary. You simply write in the beneficiary's name and sign the document. When you pass away, the assets in the account will transfer to the designated beneficiary. The beneficiary will not need to go through the probate process to access the assets or funds.

Beneficiary designations may seem more straightforward and more effective than creating a trust. However, several issues can arise when you use a beneficiary designation to transfer wealth. First, what happens if the beneficiary passes away before you do? If you do not quickly change your beneficiary designation, there is a chance that the asset could go through the probate process. If you are trying to prevent the probate process, this can be a problem. It is easy to forget to change your beneficiary designation. We have had many clients who have gotten divorced, adopted a child, or gotten remarried and forget to update their beneficiary designation.

It is possible to name a contingent beneficiary in some cases. The contingent beneficiary will take the asset if the named beneficiary has died. For example, suppose you name your spouse as your benefits son as the contingent beneficiary. In that case, if your spouse passed away, and then you passed away, your son would inherit the assets in the account. Unfortunately, many people do not name contingent beneficiaries. As a result, when the beneficiary passes away, the asset will need to enter probate.

Setting up a living trust takes more time and costs more money than simply naming a beneficiary. However, the benefits of setting up a trust often outweigh the disadvantages. When you create a trust, you can avoid the probate process, avoid accidents, protect yourself from lawsuits, and manage your assets while you are still alive. Creating a beneficiary designation does not allow you to take advantage of any of these benefits.

What happens if you become incapacitated? In that case, a beneficiary designation will not help you because these types of accounts only transfer upon your death. Beneficiary designations do not designate a trusted person to help manage your assets while you are alive. When you create a trust, you can set up a procedure for what should occur if you become incapacitated. You can appoint a successor trustee who will manage the assets in the trust for you while you are incapacitated.

If you are considering what you should do regarding your estate plan, the experienced lawyers at Arnold & Smith, PLLC are here to help. We will carefully review your financial situation and advise you on what steps you should take. We will help you create a thorough estate plan that means all of your goals and needs. Contact us today to schedule your free initial consultation.