When you create a living trust, it’s often tempting to try to shelter everything you own by putting all your most valuable assets in it. A revocable trust offers numerous benefits, protecting you from creditors while you live, giving you control over your assets, and offering flexibility in how you distribute your assets after death. It also protects your privacy and saves your beneficiaries from the probate process.
Despite these benefits, not all asset types belong in a revocable trust. Placing certain types within your trust can create complications, while others will end up costing you more money. So, what should you not put in a living trust? AmeriEstate works with you to evaluate your entire estate when creating your trust, but you should still review specific assets that don’t belong in your trust and why.
What You Should Not Put in a Living Trust
Creating a living trust offers significant control over your assets while you are still alive, allowing you access to whatever is in the trust should you need it and giving you the power to change your mind about what to include and who to pass the assets on to when you pass. You can also choose to dissolve your trust altogether. However, there are six types of assets that generally do not belong in your revocable trust.
1. Retirement Accounts Should Not Be in a Living Trust
A living trust is a financial vehicle and legal entity separate from the rest of your estate. Unlike an irrevocable trust, as the grantor, you can appoint yourself as trustee during your lifetime and assign someone else as the successor trustee to take over after you pass. Even if you are the trustee, the trust is not associated with the rest of your estate. Anything you put in the trust becomes the trust's property.
This arrangement has retirement account repercussions. Placing your 401(k) or IRA into a living trust transfers ownership of the account to the trust. As such, any portion of your retirement account you move into the trust is considered a withdrawal. Retirement account withdrawals are subject to state and federal taxes. Furthermore, if you have yet to reach the age of 59.5, then you will also incur a 10% penalty for early withdrawals. Though the Internal Revenue Service stipulates penalty exceptions, creating a living trust isn’t one of them.
Retirement accounts are one of the most significant assets that you should not put in a living trust, even though it may seem like a good idea. However, you can name the trust as a retirement account beneficiary, giving you more control over distribution after you pass. Doing so eliminates the penalty if you die before reaching 59.5 since the death of the account owner is one of the IRS exceptions.
2. Active Bank Accounts Do Not Belong in a Living Trust
Nothing prevents you from placing an active financial account in your trust. However, we don’t advise it. Any account you regularly use to pay bills and other living expenses does not belong in your trust. Though appointing yourself as trustee allows you to add or remove assets from the trust at will, keeping these accounts separate is easier and less complicated.
If you are concerned about the funds in the account going through probate after you pass, you can protect them by naming beneficiaries for the account. Talk to your bank about designating a primary and secondary payable-upon-death beneficiary. Taking this one step protects your financial account from probate.
3. Health Savings Accounts Should Not Be in a Living Trust
Health savings accounts provide tax savings for medical expenses. They allow you to move money into these accounts pre-tax. You then must use the money to pay for health-related expenses. As long as your expenses qualify, you don’t incur taxes. Additionally, the funds in the account grow tax-free. Money in the HSA is already protected while you are alive. If you move it to your living trust, you will lose the tax protection.
Just as you were able to name your living trust as the beneficiary of your retirement account, you can do the same with your HSA. Identifying the trust as the beneficiary allows you to establish the guidelines for distribution. You may already have a beneficiary named for your HSA. If you want to keep that person as the primary, you can add the trust as a secondary beneficiary.
4. Vehicles Do Not Belong in a Living Trust
Another asset that you should not put in a living trust is your vehicle. The only potential exception would be collectible cars. If you have a car that has a high value and is likely to increase, you might want to consider placing it in your revocable trust. However, your everyday vehicles generally don’t belong there.
Most people don’t keep their cars for long enough to place them in a trust. If you decide to sell your car or trade it in for another, removing the asset from your trust creates an unnecessary step and is more hassle than it's often worth. If you are worried about your vehicle going through the probate process if you pass before selling it, check with your state’s rules. Some states allow transfer-upon-death deeds for vehicles, while others don’t require probate if your vehicle is under a value threshold.
5. Life Insurance Policies Should Not Be in a Living Trust
You can place a life insurance policy in a revocable trust, but you might not want to. When you pass, the trustee is responsible for paying off your debts before distributing the assets in the trust according to the stipulations of the trust. As such, you lose the creditor protection you have while you live. Additionally, if you have a large enough policy and overall trust value, your beneficiaries may have to pay federal estate tax. Some states also levy estate taxes.
Instead, list those you wish to receive the payout from the life insurance policy as your beneficiaries. Another option is to set up an irrevocable trust for your life insurance policy. These protect the asset from creditors and may lower the amount your heirs must pay in estate taxes.
6. UTMA/UGMA Do Not Belong in a Living Trust
By their very nature, Uniform Transfer to Minor Act(UTMA) and Uniform Gift to Minor Act(UGMA) accounts are not revocable. When you set up a UTMA or UGMA account, your child, though a minor, is the account owner. As the account donor, you become the custodian and manager, but you no longer own the funds within the account. Not only should you not put these in a living trust, but you can’t, due to the differences in structure and rules between these types of accounts and living trusts.
A UTMA or UGMA account is a financial tool that allows you to pass on assets to minors. A living trust is another type of tool that can accomplish the same thing. They just can’t be combined. You should talk to an experienced AmeriEstate attorney to determine which tool better suits your needs or whether using both is a good option for you.
Do You Still Need Help Determining What You Should Not Put in a Living Trust?
If you still are uncertain about what you should not put in a living trust, AmeriEstate is here to assist you through the entire process. Every person’s situation is unique. We will review all your assets and financial goals to help you determine what to place in your trust and what to leave out. Contact us to learn more about creating a revocable trust that meets your needs and goals.
Sources:
https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
https://www.nerdwallet.com/article/investing/estate-planning/what-not-to-put-in-a-living-trust
https://www.lawinfo.com/resources/trusts/what-assets-can-you-not-put-in-a-trust.html
https://thomas-walters.com/what-should-you-not-put-in-a-living-trust/