Clients have alerted me to a new problem in naming beneficiaries on brokerage accounts, both retail investment accounts and IRAs. Some brokerage companies (probably with more to come) now require beneficiaries’ social security numbers (SSNs). My clients’ brokers and financial planners are sympathetic, but report to my clients that company software has changed so that they cannot even put the beneficiary in the computer system if their SSN isn’t entered.
Yes, having SSNs already in the system makes things easier for brokerage companies when the account owner dies. It causes three problems, however. First, to minimize security risks, many people are uneasy about providing their SSN for any reason, even this one. Second, in explaining to their family member or friend why their SSN is needed, the account owner publicizes their estate plan. Keeping their plan private is better because in the future they may want to change beneficiaries. If the plan stays private, no one’s feelings get hurt when they no longer inherit. Third, I worry that some account owners will give up and decide they just won’t name beneficiaries, meaning those accounts must go through probate as estate assets.
The good news is that lawyers can offer two solutions, both involving trusts. If you name a trust as the sole beneficiary on the brokerage account form, you will avoid having to provide individuals’ SSNs. You will use your SSN as the trust’s tax ID number, which the brokerage company already has on file. After you die, the brokerage company pays the money to the trustee of the trust. The trustee will distribute the money the way the trust agreement (which is a private document) says, with no involvement by the brokerage company. A lawyer will not need individuals’ SSNs to prepare the trust agreement either. The trust agreement can include special instructions for the trustee, like managing funds for a child beneficiary until they are older.
How are these two solutions different?
1. If you just want to solve this problem because you are happy with the rest of your estate plan in your will, use a standalone trust. This kind of trust is used solely to name on beneficiary designation forms – like on brokerage accounts. It has no assets until after your death, so it has no tax ID number during your lifetime. Use your SSN as the trust’s tax ID number on the beneficiary form. You will name someone other than yourself as trustee, because they will have no duties until after you are gone. After your death, your trustee will distribute the trust assets like the trust agreement says.
2. A revocable living trust meets this need and may solve other planning issues as well. The goal is to transfer your real estate, financial accounts, vehicles, etc. into the trust as soon as the trust is set up so your assets do not have to be probated. During your life, you will be both the trustee and the beneficiary, meaning you use your SSN as the trust’s tax ID number. The retail brokerage account will be owned by the trust, so no beneficiary is necessary at all (with or without a SSN) since a trust can’t die. Note that, by law, IRAs must stay in your individual name. You will name the trust as the sole beneficiary of your IRAs, so no SSNs are involved. After your death, your successor trustee will follow the trust agreement instructions for all trust assets, including the brokerage accounts.
Both these solutions let you direct where your brokerage accounts go after your death, without having to go through probate, and without having to ask for or provide SSNs for the individuals you ultimately want to receive these funds.
As an aside, remember that you should never name a minor child (under 18) as a beneficiary on a beneficiary form, even if your brokerage company allows you to do that without the child’s SSN or even if you know the child’s SSN and don’t mind providing it. Naming a minor child by name creates a whole different set of problems since minors cannot take legal title to property. A trust is also the solution to this problem. My website contains a separate article with a more detailed discussion of this issue, if you’d like more information about it.