You can pass on your investment accounts by naming one or more beneficiaries on the accounts or by placing the accounts in a trust. With an investment account, you must notify the investment company and file new documents every time you want to change your beneficiary designation. Placing the investment accounts in a trust names the trust as the account owner. You can change your trust beneficiaries without changing the designation on the investment account. However, placing an investment account with named beneficiaries into your trust could cause problems for your beneficiaries and result in additional costs for your trust.
Designating Individual Beneficiaries
When you name beneficiaries on your investment accounts, the accounts pass directly to the person or entity outside of your estate or trust. However, if there are no living beneficiaries at the time of your death, the account is distributed according to the investment company’s hierarchy of beneficiaries. In this case, the investment account may go to someone other than your intended beneficiary. If the investment company cannot find a living beneficiary, the company will distribute the account to your estate or trust.
Trust as Beneficiary
An alternative to naming individual beneficiaries is to place your investment accounts in a trust. The trust retains ownership of your investment accounts until your death. At that time, the investment accounts pass to the beneficiaries according to the terms of the trust. If you name a contingent beneficiary, the account will pass to this beneficiary if the first beneficiary is dead. With a trust, you can transfer a specific investment account to a particular beneficiary or have the investment accounts liquidated and the proceeds divided among the beneficiaries.
Original Beneficiary Rights
Placing an investment account with a named beneficiary in a trust does not negate the original beneficiary designation. The investment account still passes to the named beneficiary outside of the trust by operation of law. Your trust does not override the beneficiary named on the investment account. This can cause confusion among the trust beneficiaries as to why the investment accounts are not included in with the trust assets. An unhappy beneficiary could take the matter to the probate court. This would stop any asset distributions to the beneficiaries until the court resolves the matter.
Selecting a Trust
You can choose from a revocable living trust or an irrevocable living trust to pass on your investment accounts. With a revocable trust, you retain control over the accounts even though they are held in the trust’s name. You can take the investment accounts out of the trust at any time or sell the assets in the investment accounts. However, when you put investment accounts in an irrevocable living trust, you give up control of the assets and the account. The assets are owned by the trust and remain in the trust until the are distributed to the beneficiaries after your death.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.