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Is a Relative Legally Bound to Follow Your Instructions When You Die?

Is a Relative Legally Bound to Follow Your Instructions When You Die?

Full question:

We have a living trust, and our trustee is my sister. We also have iras and 401ks, and life insurance with her as the beneficiary, my question is, how do I leave legal instructions to her what to do with our estate, what forms or wills to put the instructions on, and is she legally bound to do with the money what we instruct?

Category: Wills and Estates
Subcategory: Probate
Date: 04/07/2025
State: Arizona

Answer:

The sister will have a fiduciary duty as trustee to follow the instructions of the trust document regarding the trust assets, but any assets outside the trust would need to be covered by a will and have her named executor to be legally bound to follow the will instructions.

A letter of instruction will save the executor a lot of trouble and save on accountant and attorney fees in administering the estate, leaving more money for your loved ones.

A letter of instruction includes, but is not limited to, the following:

1. Locations of documents- A list of legal documents, such as wills, trust documents, and powers of attorney, etc., and their location. Be sure to include the location and instructions to computer programs (financial software) and file names where this information may be stored.
2. Contact list- A contact list of names and phone numbers of close family members.
3. Remains- Description of prepaid funeral arrangements, or an indication of a preference for one funeral home over another. A statement of the type of desired funeral and whether burial, cremation, or body donation is preferred. The location of a pre-purchased burial plot or preference.
4. Charities- A preference for charities to receive donations in your honor.
5. Hospitals- Preferences for certain hospitals.
6. Financial status- A relatively current list of assets and debts.
7. Insurance- A list of insurance policies including life, medical, disability, long-term care, and property insurance.
8. Investments- The location of all investment account statements.
9. Titles- The location of all deeds to property.
10. Taxes- The location of copies of tax returns.
11. Personal resources- The name, address and telephone number of the following people:

* The family doctor
* The family attorney
* The family accountant
* The family stock broker(s)
* The religious leader and house of worship.

This content is for informational purposes only and is not legal advice. Legal statutes mentioned reflect the law at the time the content was written and may no longer be current. Always verify the latest version of the law before relying on it.

FAQs

What is the problem with naming a trust as a beneficiary of an IRA?

Naming a trust as a beneficiary of an IRA can complicate the distribution of funds. Trusts may not qualify for the same tax benefits as individuals, which can lead to higher taxes on distributions. Additionally, the trust must meet specific requirements to stretch distributions over the beneficiary's life expectancy. If not structured properly, this could result in a lump-sum distribution, triggering immediate tax consequences. It's essential to consult with an estate planning attorney to ensure compliance with IRS rules and to optimize tax implications.

What happens when a living trust is the beneficiary of an IRA?

When a living trust is named as the beneficiary of an IRA, the IRA funds go to the trust upon the account holder's death. The trustee then manages the assets according to the terms of the trust. However, the trust must meet certain IRS requirements to avoid immediate taxation on the entire amount. If structured correctly, the trust can allow for distributions over time, potentially minimizing tax liabilities for beneficiaries. Consulting with an estate planning attorney is advisable to ensure proper setup.

How does a trust work with siblings?

A trust can help manage and distribute assets among siblings according to the grantor's wishes. It can specify how and when each sibling receives their share, which can prevent disputes. The trustee, who may be one of the siblings or an independent party, has a fiduciary duty to act in the best interest of all beneficiaries. This structure can provide clarity and reduce potential conflicts, especially in blended families or when assets are significant.

What happens if a trust is a beneficiary of an IRA?

If a trust is named as a beneficiary of an IRA, the IRA funds are transferred to the trust after the account holder's death. The trustee must then distribute the funds according to the trust's terms. It's crucial that the trust meets IRS requirements to avoid immediate taxation on the entire IRA amount. Properly structured, this can allow for distributions over time, which may help in managing tax implications for the beneficiaries.

What happens if a trust is the beneficiary of a 401k?

When a trust is designated as the beneficiary of a 401(k), the funds are transferred to the trust upon the account holder's death. The trustee is responsible for managing and distributing these funds according to the trust's terms. Similar to IRAs, it is essential for the trust to meet IRS requirements to avoid immediate taxation on the entire amount. Proper planning can help ensure that distributions are handled efficiently and tax implications are minimized.