7 Surprising Assets You Should Keep Out of Your Living Trust

Understanding Living Trusts

Before diving into the specifics of what assets you should avoid placing in a living trust, it’s crucial to understand the basics of what a living trust is. A living trust is a legal entity created to hold and manage your assets during your lifetime and allocate them after your death. It helps avoid probate, offers privacy, and can expedite the distribution process.

However, not all assets should be included in a living trust despite its benefits. This article explores why certain assets are better managed outside of a living trust.

Why Not All Assets Belong in a Living Trust

While living trusts can be powerful estate planning tools, placing inappropriate assets within them can lead to complications, higher expenses, or even tax implications. Here are several key reasons why some assets should not be included:

• Complexity and Costs: Certain assets are complicated to manage within a trust and might lead to increased administrative and legal fees.
• Beneficiary Designations: Some assets, like retirement accounts, come with designated beneficiaries and may not need to bypass probate.
• Tax Implications: Placing certain assets in a trust could inadvertently create tax liabilities.

7 Assets You Should Never Put In a Living Trust

1. Retirement Accounts

Retirement accounts such as 401(k)s and IRAs should not be transferred to a living trust. This is due to the fact that retitling these accounts to a trust can be considered a withdrawal by the IRS, leading to possible taxes and penalties.

Instead, consider naming your trust as the beneficiary to ensure controlled asset distribution. This method offers the benefits of trust management without the tax complications.

2. Health Savings Accounts and Medical Savings Accounts

Similar to retirement accounts, transferring Health Savings Accounts (HSAs) or Medical Savings Accounts (MSAs) into a trust could result in them being considered fully distributed. This not only triggers taxes but potentially negates the tax-advantaged status these accounts offer.

3. Life Insurance

Although it might seem logical to place life insurance policies into a trust, doing so could place death benefits at risk of estate taxes if not structured carefully. Instead, as with retirement accounts, many individuals opt to name beneficiaries directly on the policy, sidestepping probate without involving the trust.

4. Cars and Other Vehicles

Vehicles are typically not ideal for living trusts. They tend to depreciate and can be transferred easily through more straightforward measures, such as a Transfer on Death (TOD) provision, which several states allow.

Maintaining vehicular registration and insurance in personal names also helps avoid potential administrative burdens associated with trust ownership.

5. Real Estate in Another State

For properties located outside of your home state, placing them in a living trust might not always be advantageous. The logistical complexity of managing such properties in different jurisdictions can sometimes negate the benefits of trust ownership. Consider consulting with an estate attorney to determine the best course of action, like a separate trust or LLC.

6. Business Interests

Business interests, such as shares in a partnership or an LLC, should be approached with caution. Transferring them into a trust may violate business operating agreements or tax provisions. It is imperative to review partnership or corporate agreements and consult with professionals to avoid unwanted consequences.

7. Cash

Holding cash in a living trust is generally unnecessary. Trust accounts can suffice for liquid asset management without the added complexity of placing everyday cash reserves into a trust structure. Additionally, individual or joint accounts with Payable on Death (POD) designations often suffice for quick and easy access to funds.

Conclusion

Living trusts are powerful tools for estate planning but are not one-size-fits-all. Every asset requires careful consideration of how it aligns with your broader financial goals and estate plans. By avoiding placing these seven assets into a living trust, you can simplify management, optimize tax outcomes, and avoid unnecessary legal entanglements.

For more specific advice tailored to your unique circumstances, it’s advisable to consult with a qualified estate planning attorney or financial advisor. They can provide guidance based on current laws and personal financial situations.

Resources and Further Reading

• Investopedia: How and Why to Set Up a Living Trust
• Nolo: What Assets You Should Not Put Into Your Living Trust
• The Balance: What Is a Living Trust and Why Use it?