We are often asked whether one should name individuals or their Trust as the designated beneficiary on their retirement plans.  There is no one answer to this question.  In other words, it depends!   Here are some considerations when naming beneficiaries on your retirement plans:

Do you and your spouse have different heirs? Naming your spouse, individually, as the beneficiary does not insure that your retirement plan will be passed to your beneficiaries upon your spouse’s death later on.

Do your retirement assets make up a significant part of your estate? If so, then leaving them individually to your beneficiaries may use up your estate tax exemption and reduce the amount available to fund your credit shelter or bypass trust.

How much control do you want to give to your beneficiaries? In naming a beneficiary individually, he will have full control over the assets (and can spend frivolously).

When will your spouse need to take distributions? In naming your spouse individually, you preserve the option for your spouse to “roll-over” the retirement account, and defer distributions (as well as its tax consequences) for a later day.  However, if you name your Trust, your spouse may be required to take distributions immediately after your death (and therefore pay taxes too).

Everyone should review their beneficiary designations frequently to make sure you have made the proper designation.  Work with your estate planning attorney to make sure you have made the proper designation which will accomplish your goals.

The focus for many people when they create a Trust is the distribution of their assets at the time of their death. We are seeing more clients who are living past their ability to direct and maintain their own finances. Make sure your Estate Planning documents are clear as to what you want for yourself in the event that a Conservator is appointed for you or in the event your Successor Trustee takes control of your finances during your lifetime.  What care and level of living do you want? Do you want to remain in your home for as long as possible despite the cost of home healthcare? Do you want annual gifts that you make to continue during your lifetime? Remember your Agent for Power of Attorney does not have authority or control over your Trust assets. If a Lease needs to be renewed or a Certificate of Deposit needs to be renewed and the assets are in the Trust name it will take the power of your successor Trustee to direct those assets.

Often time companies will have the need to create related businesses to their core business.  While in theory this is great, in practice it can be more than problematic.  For instance, you are the key shareholder in a product company.  You see great opportunities that relate to your product company by setting up a transportation company that can ship your products and possibly others’ products within the industry.  You also see the opportunity to establish an insurance company that insures your products and again, possibly those of others’ in the industry.

Excited about the potential revenue that you can capture, you have these two additional entities created.   You also take money from your product company and place it in two new bank accounts for these two new companies that you now own.  As time goes on, these new companies need additional capital in order to sustain themselves and reach your goals.  You have bills for each of the new companies paid out of the product company.  You also have employees working on all three companies, but only have their payroll taken from the product company. In addition, you mix and commingle money, assets, and human capital between all three of your business entities—because, after all—they are all your companies.

Is there a big deal?  Yes! Why? Because by failing to maintain and operate all three entities separately, you have now risked liability from each of these companies as to the other.  For example, if the transportation company gets sued and is subject to damages as a result, the lack of keeping all the “eggs” of each company in their own “basket” now permits the plaintiff to reach assets of the other companies.  If the product company has cash flow and/or sizable assets, your operating the three companies interchangeably has now put your product company at risk.

Therefore, it’s important to ensure that each company operates as if it has three different owners, notwithstanding that you are the only owner.  One example of operating under complete separateness is the following:  If one company needs cash, make it a loan, document it as between the two companies, and ensure that the company who needs the money pays its bills from its bank account with that loan money.

Operating completely separately may take some getting used to; however, it beats having to risk everything you worked for to build up that product company.  Making sure you have the right systems in place in the short run, will position you to try to reach your goals in the long run.