“Jane Smith Living Trust UAD 02/17/18 FBO Jake and Joe Smith.” Here’s what this means. Jane Smith has created a living trust under an agreement dated February 17, 2018. The trust was created to own a life insurance policy and collect its eventual proceeds. The trust is for the benefit of her sons, Jake and Joe Smith. They will inherit the policy’s death benefits when she dies. The FBO designation effectively establishes the living trust’s purpose. Jake and Joe are the trust’s primary beneficiaries.
How Do FBO Designations Work?
FBO designations can also help set up the transfer of funds in other cases where there could be legal or tax issues. These cases include 401(k) rollovers, electronic funds transfers, and charitable donations.
FBO Designations on Retirement Plans
Let’s say that Jane Smith wants to roll over her 401(k) into her IRA. She makes all the proper arrangements and receives a check from the 401(k) plan administrator for her account balance. The check will most like be made out to the IRA plan administrator with the notation, “FBO Jane Smith.” It would look something like this: “Management Trust Group, FBO Jane Smith / Account #XXXXX” The funds have been directed to the new account. They’re payable to the plan administrator, but they’re for the benefit of Jane. Had the check been made out directly to Jane, it would have been counted as a 401(k) distribution. Jane would incur taxes and penalties if she didn’t deposit the money directly into another retirement account within 60 days. But with the FBO designation, the transfer is made without ever going through Jane’s hands. Because of this, it’s not taxed.
When Beneficiaries Are Minors
Children can’t legally hold their own money or property. So, an FBO designation will also sometimes appear on checks or other financial instruments directing funds to them. For instance, let’s say that a minor inherits $50,000 from a relative’s estate. In this case, the check might read “FBO Sally Smith,” after the name of Sally’s mother as the payee. If the parents have died, the designation would name the conservator or trustee who will be managing the child’s property and money until she reaches the age of majority. This might also be the case if the beneficiary of the funds is mentally incapacitated or otherwise unable to handle her own affairs so someone else has been appointed to do so for her.
Electronic Bank Transfers
An FBO designation might also appear on an electronic transfer of funds to a bank. The check might be made out to the bank, but it will immediately be transferred to the specified beneficiary’s account.
Charitable Donations
The FBO designation might also appear if you’re sending money to a named charity to raise money for a specific cause. For instance, it might read to “The Hospice Fund FBO Jane Smith.”
