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What Should You Not Put in a Living Trust?

 

What Should You Not Put in a Living Trust?

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Creating a living trust can be a wise decision for effectively managing your estate. It offers numerous advantages, such as asset protection from creditors, control over your assets, and privacy from the probate process. While the benefits are appealing, it’s crucial to understand that not every asset is suitable for placement in a revocable trust.

In this post, I’ll outline which assets you should steer clear of including in your living trust, and I’ll explain the potential complications they can create.

1. Retirement Accounts

Why Not?

Placing retirement accounts, such as a 401(k) or IRA, in a trust can trigger unintended tax consequences.

Key Point:

  • Tax Implications: Moving these assets into a trust may mean losing the unique tax benefits associated with them.

2. Life Insurance Policies

Why Not?

Life insurance policies typically have their own designated beneficiaries, making it unnecessary to include them in your living trust.

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Key Point:

  • Beneficiary Designation: Should the insured pass away, the policy proceeds go directly to the beneficiaries, bypassing the probate process.

3. Health Savings Accounts (HSAs)

Why Not?

Health Savings Accounts can also have specific beneficiary designations, and putting them in a living trust can complicate their management.

Key Point:

  • Plan Limitations: Like retirement accounts, HSAs come with their own rules and tax benefits that may not align with trust assets.

4. Vehicles

Why Not?

Although it’s often tempting to place vehicles in a living trust for ease of transfer, there are better alternatives.

Key Point:

  • State Regulations: Transferring vehicles to a trust can require additional documentation and may vary from state to state, complicating the process.

5. Personal Property with Low Value

Why Not?

Including personal property with minimal monetary value in your living trust can create unnecessary complications.

Key Point:

  • Cost vs. Value: The administrative costs of managing these items in a trust often exceed their worth.

6. Rental Properties in Certain Locations

Why Not?

If you own rental properties, consider whether they should be in a living trust or held individually.

Key Point:

  • Tax Consequences: Some states have specific tax implications regarding rental properties in trusts.

7. Assets with Specific Ownership Agreements

Why Not?

Certain assets, such as business partnerships or co-owned properties, often have specific legal requirements for ownership.

Key Point:

  • Complications in Transfer: Placing these assets in a trust may violate agreements or complicate management.

Conclusion

While a living trust offers many benefits, it’s essential to approach asset inclusion with caution.

Before you put all your eggs in one basket, consult with an experienced estate planning attorney to ensure that your trust is structured correctly.

In summary, here’s a quick reference table for assets that should not be included in a living trust:

Asset Type Reason
Retirement Accounts Tax consequences; lose benefits
Life Insurance Policies Already have designated beneficiaries
Health Savings Accounts (HSAs) Specific rules and benefits that don’t align with trusts
Vehicles Complicated state regulations and documentation
Personal Property with Low Value Administrative costs may exceed value
Rental Properties in Certain Locations Potential state tax implications
Assets with Specific Ownership Agreements Violates agreements or complicates management

By knowing what not to include in your living trust, you can maximize its benefits and set your estate up for future success.

Estate Planning Attorney Eric Ridley