Avoiding the costs and extensive time needed to settle an estate through probate is one reason people like to use revocable living trusts in estate planning. Typically, you would serve as the trustee in your lifetime, and then this type of trust allows you to designate a trustee to manage the assets in the trust after you have passed. This is especially important if heirs are minor children or adults who cannot manage an inheritance. A living trust, as explained in the article titled “The Lowdown on Living Trusts” from Kiplinger, is a great estate planning tool to manage the passing of your estate to the next generation of your family. However, there are some pitfalls to be cautious about, especially concerning transferring assets.
Certain assets do not belong in a living trust. Regardless of their size, some assets should never be placed in a living trust, including IRAs, 401(k)s, tax deferred annuities, health savings accounts, and medical savings accounts and others .
Placing these assets in a trust requires changing the ownership on the accounts. Don’t do it! The IRS will treat the transfer as a distribution. You will be required to pay income taxes and penalties, if any are triggered, on the entire value of the account.
You may be able to make the trust a beneficiary of the retirement accounts. However, it is not appropriate for everyone. Changes to IRA distribution rules from the SECURE Act may make this a dangerous move, since the trustee may be required to empty the IRA within ten years of your death.
For practical purposes, assets like cars, boats or motorcycles do not belong in a trust. To transfer ownership to the trust, you will need to retitle them. This would result in fees and taxes. You would also have to change the insurance, since the insurance company may not cover assets owned by trusts. The cost may outweigh the benefits.
Assets belonging in a trust include real estate, especially your primary residence. Placing your home in a trust will minimize the hassle of transferring the home to heirs, if this is your plan. If you own property in another state, transferring the title to a living trust allows your estate to avoid probate in more than one state. Remember to get a new deed to transfer ownership to the trust. If you refinance or take a home equity line of credit, you may need to transfer the property out of the trust and into your name to get the loan. You will then need to transfer the property back into the trust.
Financial assets can be placed in a trust. Stocks, bonds, mutual funds, CDs, money market funds, bank savings accounts and even safe deposit boxes can be placed in a trust. There may be a lot of paperwork, and in some cases, you may need to open a new account in the name of the trust.
Once the trust has been created, do not neglect to fund it by transferring assets. Retitling assets requires attention to detail to make sure all of the desired assets have been retitled. The trust needs to be reviewed every few years, just as your estate plan needs to be reviewed. But it is important to fund the trust. A primary reason for creating a trust is to avoid the cost, public nature, and length of the probate process. If you leave a significant assets outside the trust then you won't avoid probate, and the purpose of designing a trust in the first place would be defeated.
The level of control, avoidance of probate and protection of assets makes the living trust a powerful estate planning tool. If you live in the Madison, Wisconsin area, schedule a call to discuss your estate plan with Attorney Rick Coad.
Reference: Kiplinger (March 24, 2022) “The Lowdown on Living Trusts”