What Should You NOT Put Into Your Living Trust?

Funding a trust means deciding asset by asset where each one belongs. Most things go in. A handful stay out, or go in only after you check the rules that come with them.

Law verified against Prob. Code §§850, 5000, 6300, 13100 and 18200, Civ. Code §§683 and 683.2, Veh. Code §§4150.7 and 5910, Rev. & Tax. Code §62, 26 U.S.C. §§223, 408, 422, 676 and 1361, and 42 U.S.C. §1396p, 2026. This is general information, not legal advice for your situation.

Why do retirement accounts stay out of the trust?

Federal law defines an IRA as a trust for the exclusive benefit of an individual or that individual’s beneficiaries (26 U.S.C. §408(a)). You stay the owner for life. The account passes at death through its beneficiary designation, and California treats that designation as valid even though it isn’t signed like a will (Prob. Code §5000(a)).

So the question for a retirement account is who you name as beneficiary. Usually that’s your spouse or your children directly. Sometimes it’s the trust itself, when a beneficiary is a minor or shouldn’t receive a lump sum. A trust named as a retirement account beneficiary needs language written for that job, so review the choice account by account rather than default to it. The beneficiary designation audit page explains how I check these.

What about a health savings account?

An HSA also stays in your name with a beneficiary. If your spouse is the named beneficiary, the account continues as your spouse’s HSA (26 U.S.C. §223(f)(8)(A)). If anyone else inherits it, the account stops being an HSA on the date of death and its value becomes taxable income to that person, or to your final return if your estate is the recipient (26 U.S.C. §223(f)(8)(B)). A trust as beneficiary doesn’t avoid that result. For most married couples, the spouse is the right first beneficiary.

Should life insurance name the trust as owner or as beneficiary?

Usually neither change of ownership is needed. The policy’s beneficiary designation controls the payout and is valid outside probate (Prob. Code §5000(a)). Transferring ownership of a policy to your revocable trust accomplishes nothing for probate, since the designation already avoids it.

Naming the trust as beneficiary makes sense when the proceeds need management, for a minor child or a beneficiary who shouldn’t get a lump sum. California expressly allows a pour-over to a trust that includes a funded or unfunded life insurance trust (Prob. Code §6300(a)). Large policies may call for an irrevocable life insurance trust instead, which is a separate estate tax decision.

Should I put my car in the trust?

Usually not. California lets a single owner register a vehicle with a transfer-on-death beneficiary, limited to one owner and one beneficiary (Veh. Code §4150.7(a)). Even without that, when there’s no other property that needs probate, heirs or will beneficiaries can transfer a vehicle through the DMV by affidavit regardless of its value (Veh. Code §5910(a)). With a funded trust holding everything else, the car rarely causes a problem.

What about joint tenancy property?

Joint tenancy already has a right of survivorship built in (Civ. Code §683). A joint tenant who deeds their interest to a third person, including a trust, severs the joint tenancy as to that interest (Civ. Code §683.2(a)). That may be what you want, or it may undo a survivorship arrangement the co-owners were counting on.

Joint tenancy also only solves the first death. When the last owner dies, the property is back in that person’s sole name with no plan behind it. For a married couple’s home, moving title into the trust is the usual approach. The comparison is laid out in joint tenancy versus a trust.

What other assets need a closer look?

• S-corporation stock. A revocable trust can hold it. A grantor trust is a permitted shareholder during your life (26 U.S.C. §1361(c)(2)(A)(i)), but after death only for two years (26 U.S.C. §1361(c)(2)(A)(ii)). The trust needs language that lets the trustee keep the S election alive after that.
• Incentive stock options. To keep ISO treatment, the option can’t be transferable other than by will or the laws of descent (26 U.S.C. §422(b)(5)). Check the plan before trying to assign options to a trust.
• Interests in an LLC or closely held company. The operating or shareholder agreement may require consent before a transfer. Read it first.
• Firearms. They carry their own transfer rules. See transferring firearms in California probate.
• A small everyday checking account. Many clients keep one bill-paying account outside the trust with a payable-on-death beneficiary. It’s a practical choice, not a legal requirement.

Does a living trust save taxes or protect assets?

No. A revocable trust is ignored for income tax. Because you can take the property back, the IRS treats you as the owner (26 U.S.C. §676(a)). Moving your home into your own revocable trust isn’t a change in ownership for property tax purposes (Rev. & Tax. Code §62(d)), so your assessment doesn’t change, but it doesn’t drop either.

Your creditors can reach revocable trust property during your life to the extent of your power to revoke (Prob. Code §18200). For Medi-Cal and other Medicaid eligibility, the corpus of a revocable trust is counted as a resource available to you (42 U.S.C. §1396p(d)(3)(A)(i)). If your goal is nursing home planning or creditor protection, a revocable trust isn’t the tool. The Medi-Cal side is covered in Medi-Cal and living trusts.

What if an asset that belongs in the trust gets left out?

A pour-over gift from your will to your trust is valid (Prob. Code §6300), but the will may have to go through probate first. California’s small estate procedure only covers estates up to $208,850 for deaths on or after April 1, 2025 (Prob. Code §13100, as adjusted under §890). When property the trust claims is still titled in someone else’s name, including the decedent’s, the trustee can petition the court for an order transferring it (Prob. Code §850). Both are fixes after the fact. It’s cheaper to fund the trust correctly the first time.

What should you do next?

Pull your beneficiary designations, account titles and vehicle registrations and compare each one with your living trust. When I prepare a plan, I record the deed moving your house into the trust and give you a map showing how each account should be titled or designated. The details are on my trust funding page and the main estate planning page.