Titling Trust Accounts - Titled As Trust vs. Naming Trust As Beneficiary

[Thank_You]

What is the name of your state? New York

So far I have not gotten a definitive answer to this question. Hope I can find one here.

Many financial institutions do not permit you to open an account titled in the name of a trust, but do allow you to open an individual account and name the trust as a beneficiary.

Say you have an individual account titled in the name of the grantor and their revocable living trust is named as the sole beneficiary.

My questions are whether or not this will preserve all the benefits of the trust and whether there is any important legal difference between the two types of titling.

I know that if you open say a POD account and name beneficiaries, the account does not have to go through probate. Is this also true of an account titled as above?

Are there any other risks to titling this way versus titling in the name of the trust.

There are a few reasons this is important. Two of them are that it is much easier to title an account as an individual account in the name of the grantor and name the trust as a beneficiary than it is to open an account titled in the name of the trust. And another one is that it gives you more options for investments as many institutions will not allow accounts titled in the name of a trust.

 

[FlyingRon]

Well, there are issues here. Yes naming the trust as a POD or beneficiary will "work." The question is whether it is advisable. You'd need to know the nature of the trust. If you have multiple beneficiaries to split with, then this may be the only way. If not, you might be better off just listing the eventual recipient and bypassing the trust. Your best bet is to talk to the attorney who set up the trust and ask her for a read on what the best way to handle the accounts are.

The other option is to move the account to one that permits the trust to be named. Many brokerages (if you have other accounts with them) have related money market or other accounts that may be available to you.

 

[Taxing Matters]

What is the name of your state? New York

So far I have not gotten a definitive answer to this question. Hope I can find one here.

Many financial institutions do not permit you to open an account titled in the name of a trust, but do allow you to open an individual account and name the trust as a beneficiary.

At least around me I've not found that to be true. But in any event, if one institution won't do it, go and find one that will if you want to use a trust. It will need to have at least a bank account anyway to take the money that you discuss in your hypothetical of a POD account naming the trust as beneficiary.

I know that if you open say a POD account and name beneficiaries, the account does not have to go through probate. Is this also true of an account titled as above?

The trust is a beneficiary if you name it as POD beneficiary and yes, it still avoids probate.

 

[justalayman]

If it is trust funds, it would not be a proper means of holding the trust money by placing it into an account with your name. The trust is a legal entity and owns the assets in the trust, not you.


Holding the funds in an account in your name makes them susceptible to seizure for your personal debts. It also makes income from interest or investment taxable to you, not the trust.

If the bank will not allow an account in the name of the trust, or at least in the name of the trustee as trustee for that particular trust, walk away from that bank.

 

[Thank_You]

Thanks to all for the responses.

I know that by titling all of the trust accounts in the name of the trust this would become a non issue. But I have already determined that for reasons I won't get into here, it would be beneficial from a financial and administrative point of view to be able to hold some of the funds in institutions that do not allow accounts to be titled as trusts. Let's start with that as a given. Assume the decision has already been made that it would be beneficial to use a financial institution that allows the beneficiary form, but not the trust titled form of ownership unless there is a specific valid reason that would make that inadvisable.

So the question is not should I do it, but what are the specific reasons why it would be inadvisable to title the account this way.

So what I am looking for is a description of the specific risks of of holding the funds in an account titled as an individual account in the name of the grantor and naming the trust as the sole POD beneficiary versus holding the funds in an account titled as a trust.

It has been very difficult to get an answer to this. Even some lawyers who responded elsewhere did not give any specific reasons why this would be a problem. I've yet to hear a satisfactory answer. I'm not denying there is one, it's just that so far I have not heard it.

justalayman, you made some good points and provided what I believe may be one valid risk. Let me try to address that.

I should point out that this trust already exists. It's a revokable living trust. The grantor can dissolve the trust at will at any time until their death.

As it stands now, the individual whose name the account would be in already pays the income tax on the income of the trust on their personal income tax return under their own social security number. The trust does not have it's own TIN or pay any income tax. So I don't think that would be any kind of change. My understanding is that this is pretty standard for a revocable living trust.

As to the holding the funds in the individual name of the grantor rather than in the trust, and the potential liability that involves, there may be a valid point here although I am not sure if having the funds in the trust rather than outside the trust would provide much shelter from the debts of the trust anyway in this kind of trust. That's a legal question, and a fair point, although not necessarily a reason by itself not to use the beneficiary type account in this case. But so far it's the only specific potential risk I have heard of, and worthy of further exploration. I'd like to hear any other specific risks anyone knows of.

Other than this potential risk (I am not sure yet if it is an actual risk) I have so far heard no other specific reason why this "trust as beneficiary" form of titling a trust account, at least for this kind of trust, is inferior in any way to holding the funds in account titled in the name of the trust.

I am not concluding that it is just as good, just noting that the case against it has not yet been made so I don't know if it is just as good or not. That's what I am trying to determine.

As a side issue... Can someone tell me the purpose of this forum? Do lawyers ever chime in here, or is it just for discussion among non-lawyers? Is free legal advice other than "You should consult a lawyer." ever offered or is there actually free legal advice given? The site is called "freeadvice.com," but what kind of advice are they talking about and from whom?

Thanks again for any information. I hope I have clarified what I am looking for. I may have just thought of a potential risk that I have never heard mentioned. But I want to hear what others have to say. I am very interested in an explanation of the specific reasons why this may not be advisable.

 

[justalayman]

Taxing matters is an attorney. We have another one or two regulars that post regularly that are attorneys and we have a few that are regulars but don’t post a lot that are attorneys. Most are laymen but many are quite knowledgeable of the topics discussed.

And I believe you got some advice other than just call an attorney.

The forum is only one aspect of the free advice website. They do have other parts to explore.

 

[Thank_You]

I don't mean to discount any of the responses to my post. They have all been useful in one way or another and all appreciated. I just wanted to clarify that I am looking for specific reasons why titling as an individual with the trust named as the sole beneficiary may be a bad idea.

 

[Taxing Matters]

I don't mean to discount any of the responses to my post. They have all been useful in one way or another and all appreciated. I just wanted to clarify that I am looking for specific reasons why titling as an individual with the trust named as the sole beneficiary may be a bad idea.

That would depend on the particular circumstances and the goals of the person doing the estate plan. In general if John Doe sets up a revocable living trust with himself as trustee and he wants his investment account at some institution to be distributed under the terms of that revocable trust, he has three choices: he may (1) transfer that account to the trust before he dies (assuming the institution allows for that); (2) he may name the trust as a pay on death (POD) beneficiary for the account; or (3) he may leave the account to the trust as a beneficiary in his will. All three will get the account to the trust in most circumstances and once in the trust the trustee will deal with the account the same way. Of course, option (3) means the account is part of the probate estate, which has the drawback that it may take awhile before the personal representative distributes the account to the trust. Options (1) and (2) are not very much different from each other other than the timing of when the funds are transferred to the trust. There may be certain circumstances in which one would clearly be preferable to the other, but in most cases it really wouldn't make much real difference.

The one thing I wonder, though, is this: if the institution truly does not allow for funds to held in the name of any trust (which as I say I've never seen) then none of those options would work because the institution would not allow the trust to be an owner of the trust. That suggests that in order to get the money to the trust, John Doe, the trustee, or the personal representative as applicable would have to liquidate that investment account and direct the investment company to send the cash to the trust. That might not be desirable depending on the particular investment involved. So if the investment company tells you that it does not allow accounts to be held in trust I would want to know what the institution does at the time the account would have to be transferred to the trust, either with a POD designation or by the will. That may impact your planning.

Is it only certain kinds of accounts that the institution has that restriction? There are few types of accounts where I could see that kind of restriction might be applied, like some retirement accounts, and those accounts require some careful thought as to how you deal with them to avoid triggering unwanted tax or other effects. So what kind of account/investment is involved here?

 

[TrustUser]

many, if not most or all, institutions have different protocols for revocable and irrevocable trusts.

for example, it is difficult around here to open an account at a credit union for an irrevocable trust.

it seems likely to me that any transfer of funds from a pod designation is gonna happen when the grantor dies, and the trust becomes irrevocable, with its own tax id number, etc.

to reiterate what tm said - you will want to find out just exactly what happens when the pod designation occurs, and if the grantor is okay with it

 

[Taxing Matters]

many, if not most or all, institutions have different protocols for revocable and irrevocable trusts.

for example, it is difficult around here to open an account at a credit union for an irrevocable trust.

I could see smaller institutions not wanting to deal with irrevocable trusts since they likely don't deal with them much and as result would rather not handle them.

 

[TrustUser]

what i dont understand - is that i cant figure out how it affects the credit union, any differently

 

[Taxing Matters]

what i dont understand - is that i cant figure out how it affects the credit union, any differently

It shouldn't make a difference to the CU whether the trust is revocable or irrevocable. From its perspective the issues it has in servicing the account should be pretty much the same. Both are trusts; they just have different terms. But small CUs tend to be pretty conservative in their business approach and seem to be uncomfortable handling things they do not see much.