Assets You Probably Want in Your Living Trust
• Real property (home, land, other real estate)*
• Bank/credit union accounts, safe deposit boxes
• Investments (CDs, stocks, mutual funds, etc.)
• Notes payable (money owed to you)
• Life insurance (or use irrevocable trust)
• Business interests, intellectual property
• Oil and gas interests, foreign assets
• Personal untitled property
Assets You May Not Want in Your Living Trust
• IRA and other tax-deferred retirement accounts
• Incentive stock options and Section 1244 stock
• Interests in professional corporations
Find out if you can take the title initially as trustee of your trust. If not, transfer the title right away. If you’re not sure how to transfer it, contact your attorney for instructions.
Personal property (artwork, clothing, jewelry, cameras, sporting equipment, books and other household goods) typically does not have a formal title. Your attorney will prepare an assignment to transfer these items to your trust.
If you live in an noncommunity property state and have owned an asset jointly with your spouse since before 1976, transferring the asset to your living trust could cause your surviving spouse to pay more in capital gains tax if he or she decides to sell the asset after you die.
If the asset is your personal residence, this would not be a problem unless the gain is more than $500,000. But it could be a problem for other assets like farmland, commercial real estate or stocks. If you think this might apply to your situation, be sure to check with your tax advisor or attorney before you change the title to your trust.
Other assets that should probably not be transferred to your trust are incentive stock options, Section 1244 stock and professional corporations. If you unsure whether or not to transfer an asset to your trust, check with your attorney.
Do not change the ownership of these to your living trust. You can name your trust as the beneficiary, but be sure to consider all your options which could include your spouse; children, grandchildren or other individuals; a trust; a charity; or a combination of these. Whom you name as beneficiary will determine the amount of tax-deferred growth that can continue on this money after you die.
Most married couples name their spouse as beneficiary because 1) the money will be available to provide for the surviving spouse and 2) the spousal rollover option can provide for many more years of tax-deferred growth. After you die, your spouse can “roll over” your tax-deferred account into his/her own IRA and name a new beneficiary.
In 2020, The Secure Act eliminated the “stretch IRA” provision which previously had permitted non-spouse beneficiaries of qualified retirement accounts (e.g., IRAs and 401(k) plans) to establish and inherited IRA and keep the account tax-deferred based on the beneficiary’s life expectancy. Under the new rules, a non-spouse beneficiary must withdraw all of the money from an inherited account within 10 years. The new law does not apply to inherited IRAs established prior to 2020 nor does it apply to spouses or to disabled beneficiaries (provided the disabled beneficiary is not more than 10 years younger than the original account holder). Minor children are also exempt until they reach the age of majority, at which time the child will have 10 years to completely withdraw the assets in an inherited IRA. The new rules will result in most non-spouse beneficiaries paying more in taxes than they would have under the old rule.
Another thing to consider when choosing a beneficiary for your retirement accounts is that any time you name an individual as beneficiary, you lose control. After you die, the beneficiary can do whatever he or she wants with this money, including cashing out the account and destroying your carefully made plans for long-term growth. The money could also be available to creditors, spouses and ex-spouses, and there is the risk of court interference at incapacity.
Naming a trust as beneficiary will give you maximum control because the distributions will be paid not to an individual, but into a trust that contains your written instructions stating who will receive this money and when.
It is still easy to make a costly mistake when naming a beneficiary of qualified retirement accounts and since there is often a lot of money at risk, be sure to get expert advice.
Unless the car is valuable and substantially increases your estate, you will probably not want it in your trust. The reason is if you are at fault in an auto accident and the injured party sees that your car is owned by a trust, he or she may think “deep pockets” and be more likely to sue you.
All states allow a small amount of assets to transfer outside of probate; the value of your car may be within this limit. Some states let you name a beneficiary; in some, cars do not even go through probate. Your attorney will know the laws and procedures in your state and will be able to advise you.
That depends on the size of your estate. Federal estate taxes must be paid if the net value of your estate when you die is more than the amount exempt at that time. Some states have their own estate/inheritance tax, and it is possible your estate could be exempt from federal tax and still have to pay state tax.
Your taxable estate includes benefits from life insurance policies you can borrow against, assign or cancel, or for which you can revoke an assignment, or name or change a beneficiary.
If your estate will not have to pay estate taxes, naming your living trust as owner and beneficiary of the policies will give your trustee maximum control over them and the proceeds.
If your estate will be subject to estate taxes, it would be better to set up an irrevocable life insurance trust and have it own your policies for you. This will remove the value of the insurance from your estate, reduce estate taxes and let you leave more to your loved ones.
There are some restrictions on transferring existing policies to an irrevocable life insurance trust. If you die within three years of the transfer date, the IRS will consider the transfer invalid and the insurance will be back in your estate. There may also be a gift tax. These restrictions, however, do not apply to new policies purchased by the trustee of this trust. If you have a sizeable estate, your attorney will be able to advise you on this and other ways to reduce estate taxes.
Community property status can be continued inside your living trust. Also, if you live in a community property state, your attorney may suggest that jointly-owned assets, especially real estate, be retitled as community property before they are put in your living trust. This can reduce capital gains tax if the asset is sold after one spouse dies.
Property that has been contaminated (for example, from a gas station with underground tanks or by a printing facility that used chemicals) can be placed in your living trust, but the trustee can be held personally responsible for any clean up. If you are your own trustee, this is a moot point because, as the owner, you are already responsible. But if clean up is not complete by the time your successor trustee steps in, your successor and, ultimately, your beneficiaries can also be liable. If you suspect this may apply to you, tell your attorney before you transfer the property to your trust.
If you own property in another state, transferring it to your living trust will prevent a conservatorship and/or probate in that state. Your attorney can contact a title company or an attorney in that state to handle the transfer for you.