A trust is a wonderful tool for estate planning. Knowing what the many things are that do and should go into your Trust is of course important but, knowing what not to put in your Trust may be even more important:
Qualified Retirement Accounts
Accounts such as 401(k)s, 403(b)s, IRAs, and annuities, should not be put in a living trust. The reason is that doing so would be considered a complete withdrawal of those funds, subjecting the entire value of the account to income tax in the year you made the transfer. That would defeat the purpose of the retirement account.
Although retirement accounts should not be transferred to your trust during your lifetime, it may make sense to name a trust as the beneficiary of your retirement accounts to receive the account proceeds upon your death. That should only be done on the advice of your estate planning attorney, however, because there may be unintended income tax consequences affecting the trust beneficiaries if the trust is not drafted with the appropriate provisions to hold retirement accounts. Then, even if the trust has the appropriate provisions to hold retirement accounts, it is important to ensure that all beneficiaries are natural persons to be sure the trust can qualify as a designated beneficiary by the IRS. Including charities or someone's estate as a trust beneficiary, for instance, will forfeit the ability to manage and stretch the payouts of the retirement accounts to the maximum amount available under the law.
A recent addition to the law known as the SECURE Act has recently been enacted and significantly changes the way retirement accounts will be taxed when inherited by someone other than a surviving spouse (with a few exceptions). Retirement accounts inherited by the account owner's child, for instance, will have to be fully paid out to the child within 10 years. That is a major change from current law, which allows the child to stretch the distributions over the child's life expectancy.
It is wise when addressing these types of accounts to talk with your Plan Administrator to understand the nuances and effects of each option.
Uniform Transfers Or
Uniform Gifts to Minors Accounts (UTMA or UGMA)
UTMA or UGMA accounts are accounts established to benefit a minor child, with a custodian named on the account to look after the property for the minor child until the child reaches a stated age (up to 25 in California). These accounts are legally considered to belong to the minor child at the time the account is established, and therefore should not be transferred to your living trust. It is wise, however, to name a successor custodian on the account (probably the same person as your successor trustee) in case the primary custodian dies or becomes incapacitated before the minor reaches the stated age.
Because life insurance death benefits pass to the beneficiary named on the policy, it is not necessary to change the ownership of the policy to your living trust during your lifetime in order to avoid probate of the proceeds. So long as you have a valid general power of attorney in place that authorizes someone to deal with the policy in the event of your incapacity, there is little benefit in changing ownership over to your living trust.
That being said, it may be a wise idea to make your living trust the beneficiary of the life insurance proceeds. That is particularly the case if the living trust has been drafted to provide asset protection to your beneficiaries upon your death. In other words, if the trust provides asset protection to your beneficiaries (through a spendthrift clause and discretionary distribution language), it is a great idea to have those proceeds paid out to the trust so they can be protected from the beneficiary's lawsuits, divorces, or over spending.
Those with considerable assets who are approaching the estate tax exemption amount should consider having a different type of trust, known as an irrevocable life insurance trust, own their life insurance policies. This is different than an ordinary revocable living trust, and is created in order to keep life insurance death benefits outside of their taxable estate and to provide a guaranteed source of funds to pay estate or other taxes that may become due upon their death.
The process to change title of your vehicles to your living trust during your lifetime is unnecessarily tedious. Proper DMV paperwork must be filled out and submitted, and you need to follow the procedures carefully in order to avoid any additional use tax or required smog re-certification.
On the other hand, the DMV has simple processes in place to transfer the car after death and without going through probate.
Therefore, and particularly given how frequently people change vehicles, it really isn't worth it in most cases to transfer title of a vehicle to your living trust during your lifetime. In our office, we simply have clients sign an assignment document transferring their interest in all vehicles currently owned or acquired in the future to their living trust.
Health Savings Accounts (HSAs) and
Medical Savings Accounts (MSAs)
HSAs and MSAs are tax exempt accounts that are designed to pay for qualifying medical expenses. They are technically already a trust arrangement of their own, and therefore cannot be transferred to your revocable living trust during your lifetime. As with many accounts, however, you can name your living trust as the beneficiary of these accounts, which allows the trust beneficiaries to use the finds remaining in the account at the time of your death.
The process of funding a living trust is a critical, ongoing process to ensure that everything works as intended when you pass away. As you can see, however, not all assets belong in your trust. These are not steps to be taken lightly or without expert help as too many pitfalls can undercut your intentions and leave your estate in disarray and far from your intended wishes.