It’s important to pay attention to the beneficiary designations on all of your financial accounts. Failure to fill out such a designation properly — or to update it after a change in circumstances — could create a serious problem for your entire estate plan.
One mistake some estate planners make is to list a child as the beneficiary of an IRA. When an IRA is left to a minor like this, it can result in legal complexities in the event of the estate planner’s untimely death. That said, there’s a fix to this, and it involves naming a revocable living trust as the IRA beneficiary.
When should you name a trust as your IRA’s beneficiary?
Some assets that have named beneficiaries — like bank accounts, life insurance, retirement accounts, annuities and other accounts — will go directly to the named beneficiaries and completely bypass probate. As such, you won’t need a living trust for these assets. However, there may be some circumstances in which it’s advantageous to name your revocable living trust as the beneficiary of assets that have beneficiary designations.
For example, imagine you want to put your child’s name on the beneficiary designation of your Individual Retirement Account, but your child is not an adult yet. Until your child becomes an adult, you may want to list the revocable living trust as the beneficiary of the account. This way, rather than needing a guardianship to hold the proceeds of the IRA in the event that you die, the proceeds can be transferred to the trust and you can dictate in the trust how you want the proceeds to be distributed to your child.
Naming a revocable living trust as the beneficiary of an IRA may not be entirely straightforward. As such, it’s vital that before you take such an action, you fully understand Illinois estate planning and trust law so that you can avoid the potential of a financially costly mistake for you and your loved ones.
Learn as much as you can about your trust creation options
A revocable living trust can help you take advantage of different tax breaks, or it can help you dictate how their money should be distributed to family members after you’re gone. Meanwhile, others might not benefit from a trust, and creating one would be a waste of resources and time. The more you know about trust and estate planning law in Illinois, the better chance you’ll have of making this call.