A revocable living trust is created for the purpose of protecting your assets and enjoying their benefits during your lifetime and then passing those assets to your heirs without having to go through probate. For a revocable living trust to take effect, it must first be funded by transferring those assets into it and care should be taken when transferring assets into the trust so as not to cause unnecessary complications. In fact, not all assets need to be transferred into a trust especially when such assets already have a “transfer-on-death” policy and as such, would definitely avoid probate.
In this article, we will be discussing what assets to put and what not to put in a revocable living trust.
It would save you a lot of cost transferring your real estate property into a trust because during probate, huge estate taxes may have been imposed upon the property. Transferring into a living trust becomes even more beneficial when you own property in other states or counties, as the trust would prevent having to go through separate probate proceedings in each different state. However, if there is a mortgage against the property, you would have to refinance it into the name of the trust, and this may prove to be quite difficult with some lenders.
It may not always be advisable transferring into your living trust those accounts from which you pay your monthly bills, but you could do so without creating any complications so long you are the trustee of the trust, thereby granting you full control of the trust assets and right to use the funds for the payment of bills. On the other hand, savings and investment accounts, bonds, stocks, safe deposit boxes, money markets, mutual funds as well as certificates of deposits, should all be transferred into the living trust since you do not frequently withdraw from these accounts.
Retirement accounts including IRA’s, 401(k)s, 403(b)s, and other qualified annuities should not be transferred into your living trust. This is because any transfer of such accounts would be seen as a complete withdrawal of the funds and as such, income taxes would be imposed on the transfer. Instead of transferring retirement accounts into the trust, simply name the trust as the primary or secondary beneficiary of the retirement account.
Medical savings accounts
Medical savings account and health savings account are used for paying medical expenses. These accounts are tax-free and therefore cannot be named under a living trust. If you must tie such accounts to the trust, simply name the trust as the primary or secondary beneficiary of the account.
Naming your living trust as a beneficiary of your life insurance policy should be done with care. Note that when you own a revocable trust and name yourself as the trustee, then all assets in the trust are still taken to be your property (as opposed to irrevocable trusts). This then follows that the value of your life insurance proceeds would be counted as part of your estate’s worth when you transfer your life insurance into your revocable trust. Since 2011, the federal government only impose taxes on estates valuing over $11.18 million (for an individual), with the tax reaching about 17% of the estate’s worth. Take for instance your estate’s worth is pushed beyond $11.18 million due to the proceeds from your insurance policy, then you would be doing yourself more harm than good since you would be heaping estate taxes on your estate when you normally would have avoided it. Kindly speak with a lawyer or tax professional before transferring your life insurance policy to the trust.
A vehicle often falls under this class. Cars, trucks, boats, airplanes, etc., could all be transferred into a revocable living trust but most some states often impose estate taxes when such property are retitled in the name of a trust, as they see this transfer as a sale of the property. Certain states do not even allow vehicle owners to name a beneficiary after death. Normally, vehicles don’t get probated before passing on to a beneficiary.
There may be more harm than good transferring a vehicle into a trust. It’s a fact that vehicles depreciate over time, and the car may even have a loan against it. More so if your car develops a fault or is involved in a little collision, and the other party may sue if this car is owned by your trust.
However, some cars retain their cash value to a large extent for a long period of time and it would be beneficial transferring into your trust. To be on the safer side, speak with a highly experienced professional or lawyer before transferring such questionable assets into your revocable living trust.