What Not to Put Into a Revocable Living Trust
Assets That Don't Belong in a Revocable Trust
A revocable living trust is a legal document that names beneficiaries, creates trustees to act in your interest, and dictates how you'd like your assets divided if you're incapacitated or otherwise unable to make decisions.
Living trusts keep your assets out of probate court if you pass away, because the trust technically owns everything. The person you name as the trustee takes over your assets and acts according to the wishes you laid out in the trust.
However, not all of your assets can or should go into a living trust. Here are some items that you shouldn't include in a living trust. Everyone's financial situations and circumstances are different—make sure you talk with your estate planner to ensure that you include assets that you can legally leave to your beneficiaries.
Qualified Retirement Accounts
You can retitle qualified retirement accounts, such as 401(k)s, 403(b)s, IRAs, or qualified annuities to the name of the trust. However, this triggers income taxes on the entire amount in the year the transfer takes place.
If you want to use your trust to pass on and distribute your retirement funds, you can name the trust as your account's beneficiary and have the trust worded to structure the distributions among your heirs.
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 qualified medical expenses.
Your HSA or MSA funds may be subject to taxes after transferring them to the fund.
You can't retitle these accounts in the name of your trust. If you feel that you have to place your HSA or MSA into your trust, 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 minor children. The child named in the account is considered the sole owner of the account, rather than the person who established it or any custodian named.
In this case, a successor custodian (and maybe a third) should be designated. This keeps the trust from being sent back to probate court if the primary custodian dies before the minor reaches adulthood.
You could change your life insurance policy's ownership to be the trustee named in your trust without triggering any tax consequences. You could also assign your revocable trust as your life insurance beneficiary. However, creditors can access these funds. Revocable trusts are not able to protect assets from creditors if you die with debts.
If you have a life insurance policy, it is best to establish beneficiaries using the policy rather than retitle it to a revocable trust. If you feel that you must place the funds from your life insurance policy into a trust, check with your estate planning attorney before doing so.
Generally speaking, motor vehicles can be retitled into your trust—cars, trucks, motorcycles, boats, scooters, and even airplanes. However, some states maintain that this is a transfer of title, because the trust and the person are legal entities. They might charge title-transfer fees and taxes for issuing a new title in the name of the living trust.
Check with your estate planning attorney to understand how to avoid probate of your vehicles in your state.
If this applies in your state, then you may want to purchase your vehicle in the name of the trust. In some states, probate is not necessary to transfer ownership of a vehicle after the owner dies. Other states allow vehicle owners to designate a beneficiary.
When In Doubt, Ask a Professional
The problem when creating a trust, or any legally recognizable document, is that sometimes it isn't always clear what you can and can't do. Reputable estate planning attorneys understand these matters in the states they are licensed to practice in.
When you're getting your affairs in order, it saves your beneficiaries time and money to use an estate planning attorney—they won't have to hire another attorney to help them deal with legal proceedings after you're dead or incapacitated.