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Tips for including non-probate assets in an estate plan

Certain types of assets may not be subject to probate, such as contractual designations, but that doesn’t mean that an estate plan can’t address them, along with probate or trust property. Indeed, beneficiary designations of non-probate property like 401(k) plans or life insurance might be titled in the name of a trust. But why would you title a life insurance or retirement policy in the name of a trust, you ask?

There are several reasons. A trust can offer more options than a beneficiary designation. A trust might be set up for specific reasons, such as to provide for medical expenses or an heir’s first home purchase. A trust can also impose an age requirement, ensuring that beneficiaries do not inherit payments when they are too young to understand. 

Such measures of control over how an inheritance is used generally are unavailable with simple contractual arrangements where a beneficiary is named. Typically, such contracts make a lump sum payment when the benefit is triggered.

However, titling life insurance, retirement or other plan assets in the name of a trust might raise complex tax issues, depending on the type of asset and whether the trust was revocable or irrevocable. 

For example, assuming that a retirement plan was transferred to an irrevocable trust, the trustee is technically the legal owner of that asset. The grantor receives a tax benefit during his or her lifetime from the transfer because control is no longer exercised over the asset. If the grantor then receives retirement plans from the trust, a different income tax treatment may be implicated. A law firm like ours that focuses on wills, irrevocable and revocable trusts can help a grantor decide which option is the best fit.

Source: American Bar Association, “Revocable Trusts

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