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Beneficiary designations. A simple document, but oh the headaches it can cause!

A beneficiary designation is a document that identifies the person, organization, or trust which is to receive certain assets at a specified time. Most commonly, a beneficiary designation identifies the person who is to receive proceeds from a life insurance policy when the insured person dies, but beneficiary designations are used also to identify the person who is to receive bank accounts, annuities, and many other financial assets, usually at the time of the owner’s death.

Rarely do we have trouble completing a beneficiary designation when the recipient of the asset is an individual. If you want Megalina Pegalina to receive the proceeds of your life insurance policy when you die, you simply put her name on the form where it asks you to appoint your beneficiary. If you want Meg’s son Jehosephat to recieve the money if Meg dies before you do, you just write Jehosephat’s name in the place where it asks you to name your “contingent” or “successor” beneficiary.

But matters become a bit more complicated when you are naming a trust as the beneficiary.

There are many reasons why you may want to place the assets into a trust. It may be that you have in mind to use the money for some charitable purpose which can best be achieved through the use of a trust. It may be that you want your children to have use of the funds but you think it would be best for their access to the money to be limited by a trustee’s judgment. It may be that your child is a minor and therefore cannot own the funds outright. And it might be that you have a disabled child whose eligibility for governmental assistance with her basic needs would be impaired if she received the funds outright.

The proper way to name a trust as a beneficiary is to say, “Trustee, the Isaac Abrahams Family Trust” (using, of course, the correct name for the trust). We do not ordinarily name the specific trustee, instead simply using the title, “trustee”.

Unfortunately, banks, insurance companies, and other institutions sometimes make matters unnecessarily complicated by imposing rules and guidelines on what you can write and the information you must give when naming a beneficiary. For example, a client recently reported to us that the web site of one such company asks for not only for the name but also the date of birth and the social security number of the beneficiary.

Of course, a trust has no date of birth. So you obviously cannot comply. In some cases, though, the trust will have a date of formation. If the trust has actually been formed already, use the trust’s date of formation as the “date of birth”. Many trusts, though, are “testamentary”. This means that while the terms of the trust are described in some document, the trust itself will not come into existence until its creation by your Last Will and Testament. In that case, the trust will not have actually been created yet, and it is impossible to give it a date. You must either leave the “date of birth” empty or, if the web site insists on that data, call the company to ask them to create your beneficiary designation for you.

Likewise, a trust has no Social Security Number and so you cannot provide that information. Again, though, in some cases a trust which has actually been created will have a Tax ID Number (known as a “TIN”). If your trust has a TIN, you can input that data as the Social Security Number. More often, though, the trust has no TIN. This is typically for one of two reasons. First, the trust may be a testamentary trust and so, just as with the date of creation, it will not yet have a TIN. A testamentary trust cannoto have a Tax ID because it has not yet been formed. Second, the trust may be a “grantor trust”. A grantor trust is a special type of trust that is an independent, stand-alone trust but for which the grantor has liability to pay the taxes. A grantor trust may have its own TIN but usually the grantor’s Social Security Number is used.

Often, difficulties identifying a beneficiary can be resolved by looking at the financial institution’s instructions, which will often provide details on how all of these special cases are to be communicated.

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