Money Talk: Trust in the flexibility of living trusts

Dear Liz: Is naming a beneficiary for a nonretirement, “payable on death” account as effective as putting the account in a living trust? It seems easier than doing all the paperwork each time I open an account, but is it a good idea?
Answer: Both living trusts and payable on death accounts avoid probate, the court process that otherwise typically follows death. But living trusts offer more flexibility and control.
Let’s say you want to benefit two relatives equally, and are leaving a savings account to one and a brokerage account to the other. The balances of the two accounts may be roughly equal today, but could be dramatically different by the time you die. A trust allows you to divvy up your assets regardless of where the money is kept.
Trusts also allow you to put restrictions on how money is spent, which can be important if your heir is a minor child, a spendthrift or someone reliant on public benefits. Payable on death accounts don’t allow restrictions.
Should you become incapacitated, the successor trustee of your living trust could access trust assets to pay for your care. Beneficiaries of payable-on-death accounts can’t get to the funds until you die, so a court procedure may be necessary to provide for you.
After you die, the person settling your estate probably will need money to cover your burial and funeral expenses, pay your bills and final taxes and perhaps get your house ready for sale. If the needed funds have already been distributed to beneficiaries of payable on death accounts, this person might be faced with asking for funds to be returned or paying out of their own pocket, says Jennifer Sawday, an estate planning attorney in Long Beach.
There’s also the piecemeal nature of payable on death accounts. Keeping track of and updating beneficiaries can be a chore. If a beneficiary dies before you, that can create administrative problems as well.
Payable on death accounts can be a low-cost solution for people who don’t have much money and who can’t afford to pay for a trust. If you already have a trust, though, it makes sense to use it.
You typically don’t have to update your living trust every time you open a new account, by the way. Discuss the issue with your estate planning attorney, but typically all that’s needed is to add the account to the schedule of assets that’s usually at the end of your trust document.
Dear Liz: Twenty years ago, after 14 years of marriage, a friend divorced her husband. She says that as part of her divorce settlement, she signed a document agreeing not to collect divorced spousal benefits from Social Security. Is that even legal? She’s in her 60s and fears she can never retire because her own Social Security won’t be enough to live on.
Answer: Your friend may well have signed such an agreement, but it doesn’t matter. Federal law — specifically Section 407(a) of the Social Security Act — forbids including Social Security benefits as part of a divorce settlement. In a fact sheet titled “5 Things Every Woman Should Know About Social Security,” the agency notes that some women have signed divorce decrees giving up their rights to divorced spousal benefits, but says such clauses “are worthless and never enforced.”
So if she’s entitled to a bigger benefit from her ex’s record than from her own, she can claim it.
A divorced spousal benefit doesn’t decrease the ex’s benefit, or the benefit of any of the ex’s subsequent spouses. Trying to prevent someone from claiming a divorced spousal benefit is mean-spirited as well as pointless.
Dear Liz: I have a high-deductible insurance plan from my employer and I contribute to a Health Savings Account. I understand people on Medicare can’t contribute to an HSA. If I’m still working at full retirement age, can I start my Social Security benefit but avoid enrolling in Medicare?
Answer: No. Once you start Social Security, you’re automatically enrolled in Medicare if you’re 65 or older.
If you delay Social Security and don’t plan to enroll in Medicare at 65, you’ll want to make sure your employer-provided health insurance will allow you to avoid penalties for late enrollment. These penalties, which are permanent, result in higher premiums for Part B (which covers doctor visits) and Part D (which covers prescriptions). You can avoid those penalties if your employer has 20 or more employees and your health insurance provides at least as much coverage as Medicare. Check with your company’s human resources department.
Liz Weston, Certified Financial Planner®, is a personal finance columnist. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.