Assets That Don't Belong in a Revocable Trust

The purpose of a revocable living trust is to commit to writing a legal document that will benefit you throughout your lifetime as well as your heirs because your assets will be safely held within it. But you will need to fund the trust with your assets. However, not all of your assets can or should go into such a trust. Make sure you go over these rules with your estate planner.

Qualified Retirement Accounts

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Qualified retirement accounts, including 401(k)s, 403(b)s, IRAs, and qualified annuities, shouldn't reside within your revocable living trust. The reason is the transfer would be treated as a complete withdrawal of funds from your account. Subsequently, 100 percent of the value would be subject to income tax in the year the transfer is made. What you should do is change the primary or secondary beneficiary of your account to your trust.  

Health Savings Accounts and Medical Savings Accounts

Health savings accounts (HSAs) and medical savings accounts (MSAs) are tax-exempt trusts or custodial accounts designed to pay medical expenses that qualify. Counterintuitive thinking applies here. As these accounts can't be retitled in the name of your trust, ​instead, the trust should be designated as the primary or secondary beneficiary of these accounts.

Uniform Transfers or Uniform Gifts to Minors

Uniform Transfers to Minor Accounts (UTMAs) or Uniform Gifts to Minor Accounts (UGMAs) are established to benefit a minor child. The child is then considered to be the sole owner of the account, rather than the person who established it or any custodian who has been named. In this case, a successor custodian should be designated to avoid going before the courts if the primary custodian dies before the minor reaches adulthood.

Life Insurance

The owner of a life insurance policy can be changed to the trustee of the insured's revocable living trust without suffering any income tax consequences. But make sure you check with your estate planning attorney before taking any action. Some states don't protect an individual for creditor protection purposes when it comes to a revocable living trust.

Motor Vehicles

Generally speaking, motor vehicles can be retitled into your trust—yes, cars, trucks, motorcycles, boats, scooters and even airplanes. However, some states take the stance that this transfer is a sale and charge a significant transfer tax for issuing a new title in the name of the trust.

If this applies to your state, then you may want to hold off and purchase your new vehicle in the name of the trust. Aside from this, in some states probate is not necessary to transfer ownership of a motor vehicle after the owner dies. Certain states now allow vehicle owners to designate a beneficiary after death. Check with your estate planning attorney to understand how to avoid probate of your vehicles in your state.

Be Clear on What You're Dealing With

The tricky thing here is that sometimes the lines get blurred. As always, check with your estate planning attorney to understand each of these individual matters. Invest in the time now to understand what you're dealing with to avoid potential catastrophe in the future.

Article Sources

  1. Consumer Financial Protection Bureau. "What Is a Revocable Living Trust?" Accessed June 3, 2020.

  2. Heritage Law. "Why You Should Not Fund Qualified Accounts Into Trust." Accessed June 3, 2020.

  3. Federal Deposit Insurance Corporation. "Health Savings Accounts," Pages 85-86. Accessed June 3, 2020.

  4. U.S. Social Security Administration. "SI BOS01120.205 Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA)." Accessed June 3, 2020.

  5. Haven Life. "Should You Name a Trust as a Life Insurance Beneficiary?" Accessed June 3, 2020.

  6. Superior Court of California, County of Santa Clara. "Living Trusts." Accessed June 3, 2020.

  7. North Carolina Department of Motor Vehicles. "Vehicles in a Trust." Accessed June 3, 2020.

  8. State of California Department of Motor Vehicles. "How To: Handle the DMV Matters of a Deceased Person (HTVR 2)." Accessed June 3, 2020.