I get a lot of questions about how to fill out beneficiary designation forms for IRAs, 401Ks, 403Bs and other similar tax-advantaged retirement savings accounts. This is actually a rather complicated subject that cannot be handled in full in a simple blog post.  My purpose in writing this particular post is to handle one and only one frequently asked question, which is how do joint revocable living trusts fit into the picture for a married couple?

It is common for a married couple with a will-based estate plan (or no estate plan) to name each other as primary beneficiary, followed by a child or children or other beneficiaries as contingent beneficiary(ies).  Absent the existence of a trust, there is not much that can be done to improve upon that.

However, most of my married clients have one joint revocable living trust.  If that is your situation, please read on.  If that is not your situation, e.g. you have more than one trust between the two of you, this blog post is not for you and you should contact me for further instructions. 

My typical advice is to name the trust as the primary beneficiary, then the spouse as secondary beneficiary.  Sometimes I recommend tertiary beneficiaries, as well, but not always.  I do not ALWAYS give this advice.  If the advice I have given YOU, usually in form of a funding chart or narrative instructions, or both, is different, then follow THAT advice, not this blog post, because the advice that I have given you is specifically tailored to your unique situation. 

After I have given the advice to name the trust as the primary beneficiary, then the spouse as secondary beneficiary, I sometimes end up fielding questions from the clients' financial advisor or from the clients themselves.  The purpose of this blog post is to explain that advice.  You are probably reading this because I sent you a link to this blog post and asked you to read it and then call or email me if you still have questions.

The reason for the advice (trust, then spouse, not the other way around) is the trust handles every conceivable circumstance, whereas naming the spouse first does not.  This is best illustrated by a few examples:

EXAMPLE 1:  David and Mary have a will-based estate plan (no trust).  The plans of distribution under their wills are very simple.  At the first death, all to spouse.  At the second death to children in equal shares.  (Note:  Not all estate plans are this simple.  If your estate plan is not this simple, that might be why I have given you different advice regarding naming beneficiaries.) 

David passes first.  At the time of his passing, David owned a traditional IRA.  At the time of his passing Mary is in a nursing home with severe dementia.  David named Mary as the primary beneficiary of his IRA.  Because Mary was alive when David passed, Mary inherited the IRA.  Upon learning of David's death, the plan custodian mailed paperwork to Mary inviting her to name a death beneficiary for the IRA.  Remember, the IRA is now HER IRA.  Mary either never receives the paperwork or she receives it but does nothing with it, being in the nursing home with severe dementia.  Mary passes a year later. 

I often ask clients what they think will happen in that situation.  The typical guess is that the children will inherit as contingent beneficiaries, but that is not true.  David's beneficiary designation was ONE TIME USE ONLY.  When David passed, his beneficiary designation WAS carried out, sending the IRA to Mary.  Once the IRA became Mary's there is no beneficiary designation in effect until Mary signs one.  But Mary did not sign one, so the IRA is now owned by her probate estate.  A probate (court) case will be required to push the IRA out to the beneficiaries under Mary's will.

Occasionally the plan documents do cover what happens in the absence of a signed beneficiary designation.  This is more common with employer-sponsored 401k accounts than with IRAs.  In this case, if it had been a 401k it is theoretically possible that Mary's inherited IRA would go to their children upon Mary's death PURSUANT TO THE PLAN DOCUMENTS.  However, it is rare for me to be able to assure my clients of this.  Why?  Because I do not have access to their 401k plan documents.  Often the client does not have a copy either, and they do not want to go through the brain damage of trying to pry a copy of the plan documents out of the hands of the (usually former) employer's HR department.

EXAMPLE 2:  David and Mary have created a joint revocable living trust.  The plan of distribution in that trust is very simple.  At the first death, all to spouse.  At the second death to children in equal shares, outright and free of trust.  (Note:  Not all estate plans are this simple.  If your estate plan is not this simple, that might be why I have given you different advice regarding naming beneficiaries.)  David passes first.  As of the date of his passing, David owned a traditional IRA.  At the time of his passing Mary is in a nursing home with dementia.  Contrary to my advice, David did NOT update his IRA beneficiary designation to name their joint trust as the primary beneficiary.  The outcome in this case is the same as Example 1, i.e. when Mary passes the IRA will be a probate asset.  A probate (court) case will be required to push the IRA out to their joint trust (pursuant to Mary's pour-over will) and then from the trust to their children.

EXAMPLE 3:  Same as Example 2 except in this case David DID follow my advice and name their joint trust as the primary beneficiary of his IRA.  When David passes the IRA will pass to the trust.  David having passed and Mary being incapacitated, a successor trustee is in place.  The trust claims the IRA and the successor trustee manages it for Mary's benefit while she is alive, and when Mary passes the successor trustee then distributes the IRA to the children in equal shares (usually an in kind distribution so as not to create a taxable event).

EXAMPLE 4:  Same as Example 3 (i.e. David DID follow my advice) except when David passes Mary is NOT in the nursing home with dementia.  Mary is actually quite well and 100% mentally competent.  Upon learning of David's death, the plan custodian mailed paperwork to Mary, as successor trustee of the trust, to claim the IRA as the primary beneficiary.  Mary remembered me telling her that when David passes she should contact an attorney for assistance with estate administration.   Mary calls me and asks what to do with the IRA paperwork.  I tell her that she could claim it on behalf of the trust (she is the successor trustee), but that because she is actually alive and well and competent, it would be easier on everyone all around if she disclaimed the trust's inheritance and take the IRA in her own name in her individual capacity.  If the plan custodian does not have a form for that, I create a letter for Mary to sign and mail in. 

The trust having having disclaimed, the plan custodian now sends paperwork to Mary, as the contingent beneficiary, to name her own beneficiaries.  I help Mary fill out that paperwork to, again, name the trust as primary beneficiary and the children as secondary beneficiaries. (Again, that is not ALWAYS my advice, but that would be typical.)

I hope these examples are sufficient answer this question for you.  If you still are uncertain, and if you are a client of mine, feel free to call me at 931-250-8585 or email me at [email protected] for further discussion. 

If you are a client's financial advisor, I would be happy to discuss this with you as well, but first I need my client to jot me an email message authorizing me to discuss their situation with you. (You might also need a note from them authorizing you to talk to me.)