FBO is an abbreviation for the common term “for the benefit of” and it is often used in estate planning. In a trust, the term conveys ownership and value to the trustee. The FBO legal language is there to protect the rights of the beneficiary of the trust. If you desire to leave your estate to one of your children, but you have a large extended family, including the FBO trust language may stop family squabbles when the proceeds of the trust are being distributed. If you have questions about what FBO means, it may be smart to talk to a financial advisor. Try using SmartAsset’s free advisor matching tool today to find a financial advisor.
What Is an “FBO in Trust?”
A trust is a common legal entity used in estate planning. It is used to maintain and protect assets on behalf of yourself or one or more beneficiaries. Creating a trust is one way of assuring that your property will be passed down according to your wishes to your heirs. A primary benefit of establishing a trust is to avoid probate court upon your death. You may also be able to avoid some taxation. There are many distinct types of trusts, each with a specific purpose and for a particular type of situation.
You may find the phrase “FBO in trust,” or “FBO trust” in the language of some trusts. That phrase means “for the benefit of ______.” In the blank, you insert the name of the beneficiary or beneficiaries, a company name or an organization’s name. For example, you may want the money from the trust to go to a stepchild instead of your own children upon your death. The stepchild’s name goes in the blank. Alternatively, you might want the trust money to go to a particular charity upon your death. The “for the benefit of” phrase is legal terminology specifying exactly who the trust proceeds are supposed to go to.
In many states, you are legally bound to put the FBO phrase in any trust that conveys value and ownership. If your trust is set up to manage itself or provide protection for assets, then the FBO designation is not necessary.
How to Establish an “FBO in Trust”
A trust with the FBO designation must be established as an irrevocable trust. An irrevocable trust cannot be revoked or modified. When you place an asset into an irrevocable trust, ownership transfers to the trustee unless you are the trustee, in which case it stays with you. Nevertheless, you can’t change the trust. There are benefits to irrevocable trust. It may shield part of your income from taxes and, usually, any creditors have no access to the cash value of the trust or any asset in it. In this way, you protect your beneficiaries after your death. An irrevocable trust also has its own tax identification number (EIN).
A trust with the FBO designation has three parties. They are the settlor, the trustee and the beneficiary. The settlor is the person who establishes the trust and deposits assets into it. They also create its purpose, and, with the help of an attorney, the legal language associated with it. If the trust conveys value and ownership to the beneficiaries, it must have the FBO language in it. The trustee takes ownership of the trust in an FBO trust and manages its assets. The trustee also makes sure that the beneficiaries receive what is due to them from the trust. The assets in the trust are eventually distributed to the beneficiaries as designated by the terms of the trust.
Uses for an FBO Trust
There are many ways to use an FBO trust. An example is skipping a generation and allowing your grandchildren to inherit instead of your children. Other ways to use this kind of FBO trust is to choose whether your beneficiaries inherit a lump sum or the assets in the trust or if they have income distributed to them from the trust after its establishment.
An inherited individual retirement account (IRA) must be renamed after it is inherited and can be designated as a FBO Trust. The language in the trust document would be something like this: John Smith 2/16/2022 inherited IRA FOB Patty Smith where John Smith is the settlor and Patty Smith is the beneficiary.
Filing Taxes on an FBO Trust
Filing taxes on an FBO Trust is best left to a tax accountant or financial advisor. The general procedure is to fill out and attach IRS Form 1041 and its associated schedules with your own federal income tax return, IRS Form 1040. You will probably need IRS Form 4797 for capital gains and losses, and IRS Form 4952 for interest. You must file taxes on the FBO Trust if it has generated more than $600 in income during that tax year.
Bottom Line
There are other financial documents that may use the FBO designation. Some of them are living trusts which are revocable, charitable contributions, electronic funds transfers and 401(k) rollovers. Any trust that conveys value and ownership must also have an FBO designation. Types and purposes of trust vary widely, so make sure you do your research.
Tips on Estate Planning
- Estate planning isn’t easy, and it can be useful to have a professional in your corner. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Going at estate planning on your own? Consider using SmartAsset’s comprehensive estate planning guide, which includes estate tax information for each state, when planning your estate.
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