What Assets Should You Put (or Not Put) in Your Trust?

A revocable living trust is an instrument created for the purpose of protecting your assets during your lifetime. It also creates an avenue to pass your assets with ease after your death. But what assets can go into a trust, and what should you not put in a living trust?

One of the largest financial planning misconceptions people hold is that having a will ensures their property will transfer quickly to their heirs. The truth is, whether you have a will or not, your assets will go through the probate process when you die.

Probate can be a rather lengthy and costly process for your heirs. The procedure can extend from a couple of months for a simple estate, to a couple of years for a more complex estate. For most people, ensuring their property is preserved and passed on at the lowest possible cost is essential to comprehensive estate planning.

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Advantages and Disadvantages of Revocable Living Trusts

Which brings us to revocable living trusts, which create an avenue to pass your assets with ease after your death. There are several benefits of creating a trust. The chief advantage is to avoid probate. Placing your important assets in a trust can offer you the peace of mind of knowing assets will be passed on to the beneficiary you designate, under the conditions you choose and without first undergoing a drawn-out legal process. A trust can also provide you with some level of privacy as to the information shared about your estate. Another feature is that placing your assets in a trust will help protect them should you become incapacitated.

The chief disadvantage of creating a trust is the initial cost. While it is true that attorneys generally charge more to draft a living trust than a will, the cost will likely be offset by other savings down the road, such as through the elimination of probate and legal fees, appraisals and associated costs.

Can I Avoid Probate With a Trust?

It is important to note that there is no way to completely bypass probate. While your most important assets may be transferred as part of your trust, there are some assets that will not fund your trust for a variety of reasons. These other assets will still go through the probate process. Though setting up a trust can be costly and complex, it can make the inheritance process easier on your beneficiaries. To ensure your trust performs as it was intended, timely and proper funding is vital.

What Type of Assets Can Go into a Trust?

Many people assume that once they sign the trust documents at their attorney’s office, they are ready to roll. Setting up a trust, however, is only half of the solution. For a revocable living trust to take effect, it should be funded by transferring certain assets into the trust. Often people fund a living trust with real estate, financial accounts, life insurance, annuity certificates, personal property, business interests and other assets. The most notable types are:

Real estate. Many people wonder whether it is a good idea to place their house in a trust. Considering that your home is potentially one of your largest assets, living trusts can be especially beneficial as they can transfer real estate quickly. Additionally, they help avoid the hassle of separate probate proceedings for land, commercial properties and homes that are owned out of state or held in different counties. Any property with a mortgage, however, would require retitling into the name of the trust, and some lenders may be reluctant to do this.

Financial accounts. There are several types of financial assets that can be owned by a trust, including:

• Bonds and stock certificates
• Shareholders stock from closely held corporations
• Non-retirement brokerage and mutual fund accounts
• Money market accounts, cash, checking and savings accounts
• Annuities
• Certificates of deposit (CDs) (However, retitling a CD can trigger early-withdrawal penalties depending on the financial institution.)
• Safe-deposit boxes

Additionally, while you may fund the trust with an annuity, these instruments already enjoy a preferential tax treatment, and transferring them may forfeit this benefit. With existing certificates of deposit, they are usually transferred to a trust by opening a new CD. When doing so, it is a good idea to see if your issuer will waive any penalties. Finally, safe-deposit boxes may be issued to the trust, or ownership may be transferred for an existing box.

Funding your trust with bank and brokerage accounts generally requires new account paperwork in the name of the trust as well as signed authorization to retitle or transfer the asset. Likewise, physical bond and stock certificates require a change of ownership to be completed with the stock transfer agent or bond issuer. You may also wish to fund the trust with a checking or savings account, though it is important to carefully consider any implications if these accounts require regular withdrawals or activity.

Life insurance. Many people ask if it is a good idea to put life insurance in a trust. The benefits include protecting it from creditors and making it easier for your loved ones to access the money by avoiding probate. Naming the living trust as a beneficiary of your life insurance may come with some risks. If you are the trustee of your revocable living trust, all assets in the trust are considered your property. In this instance, life insurance proceeds are counted as part of your estate’s worth and could create a taxable situation should you reach the IRS threshold for taxable estates. In 2023, the estate tax is $12.92 million for an individual and $25.84 million for couples. Funding a trust with life insurance and annuity contracts generally requires a change of ownership form submitted to the contract issuer.

Valuable personal property. Personal items, such as jewelry, art, collectibles and furniture, including pianos or other important pieces, may be placed in a trust. Personal property without any legal certificate or title is commonly listed on an accompanying schedule that is kept with your trust documents. Those assets with certificates or legal title often require the owner to quitclaim their ownership interest to the trust.

Mineral rights. Retitling gas, oil, water or other mineral rights to a trust may require an assignment to the trust or a new deed.

Collectible vehicles. Some cars retain their cash value for long periods of time and therefore may be worth transferring to your revocable living trust. It is worth considering the title transfers and taxes that may be imposed, so it is important to speak to a trusted financial adviser or lawyer before transferring such assets.

Can You Put a Business in a Living Trust?

There are a number of advantages of transferring your business interest into a revocable living trust. Benefits generally include providing relief to your family from carrying the burden of your business debts, as well as the potential to reduce the tax burden on your estate. Below are the effects of several types of business ownerships:

Sole proprietorships. Transferring a small business during the probate process can present a challenge and may require your executor to keep the business running for months under court supervision. Often, sole proprietors hold business assets in their own name, so transferring them to a trust would offer some protection for the family. For a sole proprietor, transfers to a trust behave generally the same as transferring any other type of personal assets you own, including your business name.

Partnerships. With partnerships, you may transfer your share in the partnership to a living trust. If you hold an ownership certificate, you will, however, need to have it modified to show the trust as the shareowner rather than yourself. It is important to note that some partnership agreements may prohibit transferring assets to living trusts, so you will want to consult a financial adviser or attorney.

Limited liability companies (LLCs). Depending upon your operating agreement, LLC business owners often need approval from the majority of owners before they can transfer the interests in the company to their living trust. Once transferred, the voting ability remains with you, but your ownership share will fall to the trust.

What Assets Cannot Be Placed in a Trust?

There are a variety of assets that you cannot or should not place in a living trust. These include:

Retirement accounts. Accounts such as a 401(k), IRA, 403(b) and certain qualified annuities should not be transferred into your living trust. Doing so would require a withdrawal and likely trigger income tax. In this instance, it is possible to name the trust as the primary or secondary beneficiary of the account, which would ensure the funds transfer to the trust upon your death.

Health savings accounts or medical savings accounts. Since these accounts already allow you to use the money tax-free for allowable medical expenses, they cannot be transferred to a living trust. Like retirement accounts, however, you can name the trust as the primary or secondary beneficiary.

Active financial accounts. It is not advisable to transfer accounts you use to actively pay your monthly bills unless you are the trustee and granted full control of the trust assets. For many people, it is simply easier to keep these accounts out of the trust. Clients are often concerned about keeping a working bank account separate from the trust because of the potential for lengthy probate and the inability to quickly convey these funds to heirs. This is where designating beneficiaries comes in handy. When you opened your checking or savings account, your financial institution or bank may not have asked you to select a beneficiary when you signed the signature card. Review these accounts for a payable-on-death (POD) option that allows you to add primary and secondary beneficiaries.

UGMA/UTMA accounts. Uniform Gifts or Transfers to Minors Accounts, or UTMA accounts, are established to benefit minor children. A trust could potentially be pulled into probate if the trustee were to predecease the minor. Consider instead utilizing a successor custodian on these accounts.

Vehicles. Generally, everyday vehicles like cars, boats, trucks, motorcycles, airplanes or even mules or snowmobiles are not placed in a trust because they often do not go through probate, and unlike collectible vehicles, they are not appreciable assets. Additionally, many states impose a tax when the vehicles are retitled, and some do not allow vehicle owners to name a beneficiary after death.

Other Types of Trusts

As part of your estate plan, there are several common types of trusts you might also consider, though some of these trusts are challenged in court more than others. Carefully consider the additional costs associated with creating multiple trusts and whether they are necessary.

Sub-trusts. There are a variety of trusts available to transfer your assets in the manner you choose. For example, sub-trusts can be created to cover the care of a disabled child, a family member with an alcohol or drug dependency and even loved family pets.

Funeral trust. Setting up funeral and cemetery arrangements by prepaying funeral and burial expenses can ensure your heirs do not have to immediately access their personal funds for funeral-related expenses such as a memorial service, transportation, burial, grave-site marker or even a mausoleum.

Children’s trust. Generally, this type of trust is used to take advantage of the annual gift exclusion so that funds allowable under the IRS gifting rules are transferred to minor children.

Generation-skipping trust. To minimize death taxes for children and grandchildren, this type of trust distributes only income to a child. Upon the grantor’s death, it distributes the trust funds to the child’s children.

Irrevocable trust. While the assets placed in an irrevocable trust are no longer vulnerable to creditors or subject to an estate tax, you forfeit ownership of the assets. Careful consideration should be made when using an irrevocable trust, and it is highly advised that you first consult your financial adviser or attorney.

A Word About Clauses

No-contest clause. It is also possible to create a no-contest clause, depending upon the state you live in. Such a clause can block a beneficiary from receiving some or all assets if they decide to contest it.

Mental competency clause. This clause is designed to avoid the public nature of holding a competency hearing when a trustee becomes incapacitated and allows for an easier transfer to the successor trustee.

Distributions to minors clause. This type of clause instructs the trustee on how to manage funds benefiting a minor and at what age they might receive a partial or full share.

Distributions to disabled persons clause. This clause takes into consideration the sensitive nature in which an inheritance might disqualify a disabled person from receiving government benefits by dripping funds.

While creating a living trust may be costly and require a lot of legwork to fund, there are many benefits to using it as an instrument to protect your assets. The flexibility these trusts offer helps to ensure that your assets are protected during your lifetime and pass easily to heirs after your death.

Estate laws vary from state to state. This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax adviser or lawyer.

Kris Maksimovich is a financial adviser located at Global Wealth Advisors 4400 State Hwy 121, Ste. 200, Lewisville, TX 75056. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Financial planning offered through Global Wealth Advisors are separate and unrelated to Commonwealth. He can be reached at (972) 930-1238 or at info@gwadvisors.net.

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