Beneficiary Designations: Using a Trust to Protect Your Assets

Most of us have at least one asset that requires a beneficiary designation. A life insurance policy, CD, IRA or 401k, for example. The contracts that govern these types of assets allow us to name who will receive the funds at our time of passing.

How carefully have you thought about your designations and the extent to which they’re protected? Many individuals don’t give it as much attention as they should, thereby exposing their hard-earned savings to threats, such as future ex-spouses, creditors, scam artists, even their spouse or children’s own poor decision-making.

Often people name their spouse as primary beneficiary and their children as contingent beneficiary. This means that if the spouse survives, he or she will have complete access and control over the funds. If the spouse fails to survive, the children have complete access and control. People like the idea of this simplicity, but while this course of action is straightforward, it, unfortunately, can leave the assets and beneficiaries exposed.

For example:

• What happens if, after the funds are paid outright, your spouse gets remarried and later divorced?
• What if your children are minors at the time of distribution?
• What happens if your spouse or children have creditor problems?
• What happens if your child gets divorced after receiving the funds?

The answer to each of the questions is this: if you simply name a person as the beneficiary, the financial institution managing your account or holding your insurance policy funds must pay the monies to the person or persons named individually. In other words, your funds aren’t protected. Exposure attaches when the monies are paid out.

In Georgia, if your child is under the age of 18, the funds cannot go directly into the minor’s name. If the funds are in excess of $15,000, a conservator (someone assigned responsibility for your child’s financial interests) must be appointed to accept funds on behalf of him or her. Life insurance companies may specify that proceeds be held until the beneficiary reaches age 18 or until a conservator is appointed (whichever occurs first). A conservatorship is governed by the court and the conservator makes discretionary distributions, with court supervision, on behalf of or to your child.

Most states provide that a conservatorship ends at age 18. Commonly, “adults” who are age 18 aren’t mature enough to handle large sums of money. Would you want to turn an 18-year-old loose with substantial liquid assets? Likely not! Moreover, once the conservatorship ends, there is no legal protection for the assets. If your child wants to spend the money, he or she can do so. Additionally, if your child runs up large debt, there’s no trust in place to protect the funds from creditors. The money you saved for his or her benefit could vanish quickly. And if that isn’t enough, if your child marries and divorces at a young age, the funds could be subject to division with his or her spouse.

Similarly, if your surviving spouse isn’t fiscally responsible, the funds could be squandered leaving him or her in a precarious financial situation. Worse yet, your assets could be lost – or significantly diminished – in a subsequent divorce action.

Some clients believe that naming their “estate” as beneficiary gets around these problems. However, it usually isn’t wise to do so because such a designation could subject the funds to your own creditors after you pass away and unnecessarily reduce the proceeds you intend for your spouse or children to use. Furthermore, if there are net proceeds remaining after paying your debts, the terms of your Will may require that the money then be paid outright to your spouse or children, creating the same exposed positions discussed above.

So what other options exist? Often the best one, in our opinion, is to use a trust as the beneficiary. Georgia law specifically provides that doing so under your Will prevents the funds from being considered part of your estate. Therefore, the proceeds can’t be used to satisfy your debts. Additionally, you can empower the trustee to protect the assets for the benefit of your spouse or children (or whomever you intended to benefit) while still having the funds available for their use and enjoyment.

If you haven’t already done so, consider contacting your Redwood Advisor or asking your estate-planning attorney to draft a trust under your Last Will and Testament that can be named as the beneficiary of life insurance proceeds or funds from qualified retirement plans or CDs. It’s an excellent way to help protect your loved ones and ensure your savings are used as you intend.

Authors
Cleve Hill, Esq. & Caroline Vann, Esq.
Bettis, Hill & Vann, LLC
Alpharetta, Georgia