The short answer is YES.
Revocable trusts are most famous for helping people avoid probate, especially when they own real estate or multiple properties. What if you don’t own a home? Do you still need a trust?
A few weeks ago, we talked about the benefit of privacy. This week we’ll talk about the benefit of control.
Control is the second big advantage of using a trust even when you don’t own a home or real estate.
The Problem with Beneficiary Designations
Most bank accounts allow you to name one or more beneficiaries. Beneficiaries are individuals or trusts who receive the funds in the account after you die. For many parents, those beneficiaries are their children.
A beneficiary on a bank account is often called a:
- Transfer-on-Death (T.O.D.) beneficiary or
- Payable-on-Death (P.O.D.) beneficiary
Under O.C.G.A. Section 7-1-813, when an account holder dies, the bank distributes the remaining funds to the living beneficiaries.
The important word is LIVING.
Banks will distribute funds only to beneficiaries who survive the account holder. If a beneficiary dies before you, that beneficiary’s share is typically not passed down to his or her children.
For Example:
Suppose Mom and Dad have three children:
- Mary
- Sue
- David
Their bank account names all three children as beneficiaries.
If David dies before Mom and Dad, the bank will distribute the account only to Mary and Sue after Mom and Dad pass away.
David’s children, Sean and Laura, receive nothing.
The only way Sean and Laura receive a share is if Mary and Sue decide to “do the right thing” and voluntarily share the money.
Unfortunately, hoping someone will “do the right thing” is not an estate plan. In many families, that approach creates disappointment, conflict, or unintended results.
What If the Will Says Everyone Shares Equally?
Many parents assume their will solves this problem.
For example, Mom and Dad may have a will stating that each child’s family should receive an equal share of the estate.
However, the will never controls the bank account because the account already has living beneficiaries.
A will generally applies only to assets that:
- Do not have a living beneficiary designation, and
- Require someone with legal authority to transfer ownership after death.
When Does a Will Apply?
Consider Mom and Dad’s home.
If they owned the home together and both have now passed away, the will of the second parent to die will typically need to be probated.
The probate court authorizes the executor to:
- Transfer the property to the beneficiaries, or
- Sell the property and distribute the proceeds according to the will.
Because no beneficiary designation controls the home, the will determines what happens.
Why Not Let the Bank Account Go Through Probate?
If Mom and Dad wanted their will to control the bank account, they could simply leave beneficiaries off the account and allow it to pass through probate.
Of course, many parents worry about practical concerns, such as:
- How will the children pay for funeral expenses?
- How will immediate bills be paid after death?
Fortunately, there are other ways to address these concerns. For example, funeral arrangements can often be prepaid.
As a result, many parents end up in one of two situations:
- They do not understand how the bank’s beneficiary rules work, or
- They are relying on Mary and Sue to “do the right thing” and share funds with David’s children.
What About “Per Stirpes” Beneficiaries?
Some financial institutions allow contingent, or secondary, beneficiaries.
You may also hear the term per stirpes, which means “by the branch.”
A per stirpes designation tells the institution to look to a deceased child’s descendants, such as children or grandchildren, if that child dies before the account owner.
Many brokerage firms allow clients to designate beneficiaries as “per stirpes.” However, most banks offering checking and savings accounts permit only standard P.O.D. beneficiaries and do not allow a per stirpes designation.
How a Trust Solves the Problem
So how do you prevent a child from being unintentionally disinherited without relying on the “hope they do the right thing” method?
You use a trust.
A trust allows you to build backup plans into your estate plan.
For example, a trust can provide that:
- Assets pass equally to Mom and Dad’s children.
- If a child dies first, that child’s share passes to his or her children.
- If a grandchild dies first, the share passes to that grandchild’s children.
- If all children, grandchildren, and great-grandchildren die before Mom and Dad, the trust can direct where the assets go next.
In other words, a trust gives you control over what happens when life does not go according to plan.
The Bottom Line
Most of the time, our clients are surprised to learn how beneficiary designations actually work. That’s because we rarely ask the bank what their rule is if one or our beneficiaries predeceases us.
A trust can provide clarity, flexibility, and control that simple beneficiary designations often cannot.
If you would like greater control over what happens to your bank accounts and other assets, speaking with an estate planning attorney can help you understand your options and create a plan that reflects your wishes.
For help with your plan, please give us a call. We’re happy to review your strategy and avoid any loved ones being accidentally cut out.
