A pension is funded to your revocable trust by changing the beneficiary designation to name the trust as either the primary or contingent beneficiary. Ownership of a pension can never be changed.
The term “Pension” is often confused with a other types qualified retirement plans. Qualified retirement plans such as IRAs, 401(k)s, 403(b)s, and the like are known as “defined contribution” plans. Funding these types of plans is discussed in the page preceeding this page, entitled “Retirement Plans”.
Like IRAs, 401(k)s, and 403(b)s, pensions are qualified retirement plan benefits provided by an employer. Pension plans are considered “defined benefit” retirement plans and have different funding considerations from IRAs, 401(k)s, and 403(b)s.
The procedures followed in funding pension plans may vary based on whether the employer is a private or public entity, and in some circumstances, whether the employee has made an irrevocable election as to how he or she wants to receive their pension benefits. Because of the legal intricacies of funding both public and private pensions, you should seek customized counsel from your estate planning attorney.
Public Pensions: When an employee works for a governmental entity, his or her pension is considered a public pension and a completely different set of rules apply when funding this type of a pension. Some examples of governmental entities would include both federal, state and local governmental offices and agencies, the U.S. post service, NASA, state government officials, police, firefighters, public school employees and teachers, and the like. PERS and STRS are public pension plans.
Public pensions typically become vested (guaranteed) to the employee after a period of time (i.e. five years). A public pension can be funded at any time regardless of whether the employee has begun to receive benefits.
Procedures For Funding Public Pensions: The first step in funding a public pension is to determine whether benefits have commenced (i.e. has the employee retired). Public pensions have different benefits that are extended based on whether the employee is retired.
Pre-Retirement: When an employee is covered by a public pension, a decision will need to be made as to whether the employee’s trust or the spouse should be named as the primary beneficiary. Many public pensions contain restrictions that require the employee’s spouse be named as the primary beneficiary.
It is not uncommon, however, for public pensions that permit a trust to be named as the primary beneficiary to contain provisions that result in a forfeiture of ancillary benefits if the spouse or family member is not named as the primary beneficiary. These ancillary benefits can include loss of medical, dental, and prescription drug insurance coverage, and the like.
If there are no minor or dependent children who would be entitled to benefits under the pension, the preferred approach would be to name the spouse as the primary beneficiary and the employee’s trust as the contingent beneficiary. This will enable the spouse to receive the full benefits provided under the pension. If this approach is adopted, a valid funding power of attorney should be in place to provide a means of funding the pension payments in the event of the spouse’s disability.
If there are minor children, naming the spouse as the primary beneficiary is still the recommended approach; however, who to name as the contingent beneficiary is a more difficult issue. A potential risk is involved if minor children are named as contingent beneficiaries. A “probate guardianship” may need to be initiated to manage and control the pension payments on behalf of minor children. However, the full benefits under the pension would still be available. Thus, you should decide whether you are more concerned with avoiding the probate or the loss of ancillary benefits under the pension plan. The answer to this question will determine who will be named as the contingent beneficiary.
Post-Retirement: Once an employee retires, he or she will need to make an election as to how they want to receive their pension benefits in a single life pay-out or joint life pay-out. If a single life pay-out option is selected, a death benefit will be provided. The death benefits under the single life pay-out option can be funded by naming the employee’s trust as the primary beneficiary and the spouse as the contingent beneficiary.
Naming a trust as the primary beneficiary of the death benefits under a single life pay-out option will generally not result in any loss of ancillary benefits to the employee or the employee’s spouse. Also note that if a joint life pay-out option is selected, no death benefits will be extended and the pension need not be funded to the trust. However, as a practical matter, it would be prudent to have an estate planning attorney review a copy of the pension plan agreement to verify that no penalty will result from naming a trust as a primary beneficiary.
Private Pensions: A private pension is offered by private employers. It typically provides the employee the option of receiving a monthly benefit for the life of the employee, or a smaller benefit for the joint lives of the employee and the employee’s spouse. Regardless of which type of payment option is selected by the employee, the pension benefits will terminate on the death of the employee, or on the death of the employee and their spouse, depending upon what payment option the employee selected. When a private pension terminates, there is no vested balance in the plan and no benefits are paid to any surviving beneficiary.
On its face, it would appear that there would be little value in naming a trust as a beneficiary of a private pension. However, it may still be advisable to name the employee’s trust as the beneficiary in order to maintain control of the pension benefits in the event of the employee’s disability.
Not all private pensions will allow a trust to be named as a beneficiary, however. Thus, it is important to make certain that a valid funding power of attorney is in place to provide a means for funding the pension proceeds in the event of the employee’s disability.
If the private pension employee has already started receiving benefits from the pension, the beneficiary designation cannot be changed and the pension cannot be funded to the trust.
