Question:

In answering a recent question about transferring assets into a revocable trust, you wrote:

Taking this step can cause it’s own difficulties. For instance, my mother recently moved her money market account into her revocable trust and Social Security stopped direct depositing her checks because the name on her account was changed to the name of her trust.

I was planning to transfer my bank account into my trust, but my Social Security is deposited into my bank account. The obvious question is: Can you have Social Security direct deposited into a bank account in the name of your living trust? I’ve tried to research this issue, but I’m completely confused. Below is a summary of what I found:

• The page linked below appears to be Social Security’s policy about this issue. But it’s confusing and I can’t figure out what it means. https://secure.ssa.gov/poms.nsf/lnx/0202402060
• I found several online sites that say you can’t use a trust bank account for Social Security deposits. One site says: The social security administration has taken the position that it cannot provide direct deposit to an account held in the name of a trust. Source: https://www.attorneyfee.com/blog/funding-a-living-trust-how-to-put-real-estate-property-and-other-assets-in-a-revocable-trust
• Another site says: Social Security must be paid directly to the beneficiary. It cannot be paid to a trust. If you are receiving Social Security by direct deposit, you should leave the account that receives the payments outside of your trust. Source: https://speedwelllaw.com/2020/07/12/understanding-funding-your-living-trust/
• Another site says: Some assets should not or cannot be owned by a trust. They include bank accounts that receive Social Security income deposits. These accounts cannot be re-titled in the name of the trust. Source: https://tuckerlegal-llc.com/how-to-fund-your-revocable-trust/

I also found sources that say you CAN use a trust bank account for Social Security. You might be familiar with Lee Phillips who is a prominent estate planner and author of the book: Protecting Your Financial Future. In his book and web site, he is a strong advocate of putting your bank account in a trust. He has never mentioned problems with Social Security and a trust bank account. So I wrote a message to him:

Hello Lee, If I put my bank account into my living trust, can I continue to have my Social Security deposited to the account? I Googled this issue but found conflicting answers. Some sources say no. Some sources say yes.

ANSWER FROM LEE: For three years, my wife had her SS disability deposited into her bank account held in the name of her trust. It had her SS number on it. A living revocable trust is by definition a “disregarded entity” according to the IRS and government in general. You shouldn’t have any trouble.

Harry, your Ducks in a Row book was very helpful but it does not discuss this issue. Do you have any information or advice about this issue? I would be very grateful to finally get a definitive answer about this.

Response:

That’s great research. Unfortunately, the POMS which govern the operation of the Social Security system are contradictory on this point. They start by saying that direct deposit payments may not go into “Trust Agreements in which the beneficiary does not retain legal ownership and control of benefits.” I read this to mean that you may not have your checks deposited into an irrevocable trust or into a revocable trust if you are not the trustee.

Unfortunately, this rule is followed by the following note: “IMPORTANT: Direct deposit cannot go directly to a Trust Agreement. A trust agreement account is a formal agreement between the beneficiary and the FI that describes how the FI manages the beneficiary’s funds. It is often in the name of the FI.” “FI” means financial institution.

It’s not clear whether this bars direct deposits to all trusts or only to those trusts where the financial institution serves as trustee. You can read the POMS yourself here and draw your own conclusions.

It seems that a lot of people have had trouble with trust accounts and Social Security payments, so it probably makes sense not to transfer such accounts to trusts. This can be problematic if it requires a probate administration just for a small account when the rest of the estate avoids probate. However, all states have simplified processes for small accounts making the process a lot easier it that’s all that must go through probate.

There are, fortunately, a couple of solutions. First, the POMS specifically permit direct deposits to “in trust for” accounts since the Social Security beneficiary maintains complete control over such accounts during life. It does not matter whether the beneficiary upon your death is a trust or an individual. In fact, the beneficiary may be an irrevocable trust since revocable trusts in fact almost always become irrevocable upon the death of the grantor. (This sometimes creates confusion since the title of the trust may still be “The John Doe Revocable Trust.”)

Another solution for many people is to add a family member or other trusted person as a joint owner of the account. This would give them access if needed both during the primary owner’s life and after death without the necessity of probate. This could also make it easier for that person to pay any necessary bills, including funeral expenses, when the time comes.

Key Takeaways:

• Social Security often declines payments to revocable trust bank accounts.
• If you want to avoid probate, to have your Social Security payable an “in trust for” account, allowing direct deposit while retaining control.
• These “ITF” accounts are permissible under Social Security rules and raise fewer obstacles.