Estate planning provides for the smooth handling of your assets after death. However, only around 32% of American adults have a will, indicating that most people haven’t taken the appropriate steps to prepare for the management of their estate, according to LegalZoom.
One essential tool for estate planning is a living trust. It allows your assets to bypass the lengthy, costly probate process and maintains your financial privacy.
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Since a living trust can be amended or revoked at any point during your lifetime, it also serves as a flexible way to control your assets, avoid family disputes and ultimately provide peace of mind knowing that your estate will be managed according to your wishes.
However, not every type of asset belongs in a living trust. This article will cover the assets you should exclude from your living trust and why.
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Things To Leave Out of Your Living Trust
Including certain assets in a living trust can complicate estate management, trigger tax consequences or negatively impact the asset’s value.
While it’s always a good idea to consult an estate planning attorney for legal advice, consider excluding the following assets to maximize the benefits of your living trust:
1. Retirement Accounts
Retirement accounts like 401(k)s and IRAs can trigger tax consequences if you include them in your living will.
Since your living trust is a separate legal entity, any transfers you make from a retirement account count as a withdrawal. This makes transfers taxable and subject to penalties for early withdrawal.
One way to avoid this issue is to name the living trust as a beneficiary on the retirement account. Any funds in the account transfer to the trust upon your death and are distributed to other beneficiaries according to your will.
2. Health Savings Accounts and Medical Savings Accounts
Health savings accounts (HSAs) and medical savings accounts (MSAs) only offer tax-free growth if you use the money for medical expenses. Therefore, transferring an HSA or MSA to a living trust would cause you to lose this tax protection.
By keeping HSAs outside your trust and designating beneficiaries directly, you can continue to enjoy the tax benefits of your HSA or MSA.
3. Active Bank Accounts
You can include checking accounts or other active financial accounts into your living trust, but there are easier ways to transfer funds to your heirs and bypass the probate process.
For example, you can set up payable-on-death (POD) designated accounts through your bank with primary and secondary beneficiaries who will receive your funds when you die.
This method of transferring funds to your beneficiaries is especially relevant if the majority of your financial assets are in your checking account.
4. Vehicles
Since most people don’t own the same vehicle for a long time, it doesn’t make sense to include yours in your living trust. Doing so adds the hassle of removing it from the trust if you decide to sell the vehicle in the future.
Many states allow regular vehicles to bypass probate, and you can often register cars with a transfer-on-death (TOD) deed to pass on a car directly to a beneficiary.
However, if you own a high-value collectible car, you can consider putting it into a living trust.
5. Life Insurance Policies
Since living trusts are revocable, your policy’s benefits are exposed to creditors should you die with debt. A large policy payout could also trigger estate taxes.
Better alternatives include naming individuals as beneficiaries, or setting up an irrevocable life insurance trust that could better protect your assets and potentially reduce taxes.
6. Uniform Transfers/Gifts to Minors Accounts (UTMA/UGMA)
Uniform transfers (UTMA) and uniform gifts (UGMA) to minors accounts, which make a minor child the owner of the account, are irrevocable. Therefore, they can’t be transferred into a living trust.
While these accounts and living trusts can both be used to pass on your assets to minor children, they have different structures. Living trusts give you more control over your funds, while UTMA or UGMA accounts are fully accessible to the minor once they reach a certain age.
What Should Go in a Living Trust?
On the other hand, many types of assets are more appropriately managed when placed in a living trust. These include:
- Houses and other real estate.
- Financial assets, such as bond certificates, stock certificates, annuities, certificates of deposit (CDs), and safety deposit boxes.
- Valuable personal property, such as art, jewelry, collectible vehicles, and furniture.
- Ownership stakes in certain types of businesses like partnerships or LLCs.
- Patents and copyrights.
- Precious metals.
Putting these assets in a living trust can help save money on probate and streamline the process of distributing your assets to family members and other beneficiaries when you die.