Which Assets Should Really NOT Be In a Trust? – Avoid This Mistake + FAQs

In estate planning, certain assets generally should not be placed into a living trust (especially a revocable trust) due to legal or financial drawbacks. Below is a quick overview of assets best kept out of your trust and why:

In short: assets that are either non-transferable by law, tax-advantaged in a way that doesn’t mesh with trust ownership, or already have a built-in probate avoidance mechanism are usually better kept out of your living trust. Instead, use beneficiary designations, joint ownership, or specialized trusts to handle those assets. For most other assets (real estate, non-retirement investments, valuable personal property, business interests, etc.), a trust can be an excellent tool to avoid probate and manage your estate.

Why Some Assets Don’t Belong in a Trust

Not all assets play nicely with trusts. Typically, assets to avoid placing in a trust share one or more of the following characteristics:

• 🏛️ Federal Law Restrictions: Certain accounts are governed by federal laws or regulations that prohibit transferring ownership to a trust without consequences. For example, IRS rules treat a transfer of a 401(k) or IRA to a trust as a full distribution (with taxes and penalties), and Social Security laws don’t permit assignment of benefits to anyone (or anything) else. In short, if an asset’s ownership is restricted under federal law to an individual, you can’t simply retitle it in the name of a trust.

• 💰 Tax-Deferred Status: Assets like retirement funds and HSAs enjoy tax-deferred or tax-free growth for as long as they’re held by the original owner. Moving them to a trust breaks this status – it’s seen as cashing out. This can accelerate income taxes or penalties, undermining the very tax benefits those accounts provide. Trusts themselves have no special income tax deferral for these transfers, so the IRS will want its share immediately.

• 🤝 Contractual Beneficiaries: Many financial products pass to named beneficiaries outside of probate by contract. Life insurance policies and retirement accounts are prime examples – they let you designate who gets the money when you die. Since these assets already sidestep probate, putting them in a trust isn’t just unnecessary; it can actually be counterproductive. You’d be swapping a simple beneficiary process for a more complex trust administration with no added benefit (and possibly added cost or delay).

• ⚠️ Potential Loss of Protections: Some assets come with built-in protections or benefits that could be lost or reduced if owned by a trust. For example, 401(k) plans (under ERISA law) are generally shielded from creditors – if you withdraw those funds to put into a trust, you might lose that protection. Similarly, life insurance payouts to a named individual are often protected from the deceased’s creditors under state laws, but if those proceeds go into a revocable trust (which then becomes part of the estate), creditors might claim them. In community property states, transferring assets to a trust without careful drafting could even alter how marital property is treated (though usually spouses create trusts together to preserve those benefits).

• Alternate Efficient Transfer Methods: For some assets, simple tools like POD designations, TOD registrations, or joint ownership achieve the goal of passing property to heirs without needing a trust. A trust might be overkill. Everyday bank accounts or vehicles, for instance, can often be handled with a beneficiary form or a small estate affidavit. If an asset will transfer swiftly and outside probate by other legal means, placing it in a trust might complicate matters with no real upside.

• Administrative Hassles and Costs: Placing certain things in trust can be impractical. Consider a personal checking account you use to pay bills – if it’s in your trust’s name, the bank may require all checks and transactions under the trust name, and your trustee (if it’s not you) might need to step in for routine payments if you become incapacitated. Or think of a car – selling or trading it in might require extra steps to show the trustee’s authority. These practical issues make some assets more trouble than they’re worth to park in a trust, especially if they aren’t high in value.

In essence, trusts are powerful, but they’re not one-size-fits-all. They work best for assets that don’t have their own easy transfer mechanisms and that benefit from ongoing management or probate avoidance. To illustrate these principles, let’s examine each major asset category you should usually keep out of your trust, and the reasoning (grounded in federal rules, state laws, and financial logic) behind it.

Retirement Accounts (IRA, 401(k), 403(b), etc.): A Tax Trap in a Trust

Should you put your retirement accounts into a living trust? In nearly all cases, no – doing so is a classic estate planning mistake. Tax-deferred retirement plans like 401(k)s, 403(b)s, traditional IRAs, and Roth IRAs come with strict rules set by the IRS and federal law (the Internal Revenue Code and ERISA) that prevent you from simply transferring ownership of the account to a trust during your lifetime. If you attempt to retitle a retirement account in the name of your trust, the IRS treats that action as if you withdrew the entire account balance in cash.

That means if you moved a $500,000 IRA into “The Smith Family Trust,” it’s as though you took a $500,000 distribution all at once. The result? You’d owe income taxes on that amount in the current year – potentially tens of thousands of dollars – and if you’re under age 59½, you’d typically face a 10% early withdrawal penalty on top of it. Instead of a savvy move, it becomes a tax nightmare 💸.

Why this harsh outcome? Retirement accounts are intended for an individual’s retirement; by law they cannot have a non-individual “current” owner besides the original account holder. Even your spouse can’t co-own your IRA – and a trust is likewise not allowed to own it while you’re alive. The account must remain in your personal name until death. (One small exception: some employer plans can be put into a trust in rare cases of court-ordered trusts or for certain legal trusts, but those are very specialized situations. Generally, it’s off-limits.)

What’s the alternative? Rather than trying to fund your trust with your 401(k) or IRA itself, use beneficiary designations to your advantage. You can name your trust as a primary or contingent beneficiary of the account. For example, ✅ Better solution: name your living trust as the beneficiary of your IRA upon death (especially if your goal is to have the trust manage the funds for your heirs). This way, the money flows into the trust at your death without ever triggering a premature withdrawal during your life. You keep the tax advantages while you’re alive, and the trust only receives the funds when it’s legally allowed to – at your passing.

However, even naming a trust as beneficiary comes with considerations. Under the federal SECURE Act (2019), most non-spouse beneficiaries (including trusts) who inherit an IRA or 401(k) must withdraw all funds within 10 years. A properly drafted “look-through” trust (also known as a see-through trust) can stretch that 10-year payout, but it can no longer extend distributions over a lifetime except for certain eligible beneficiaries (like a disabled beneficiary or a minor child, who can still stretch until adulthood, then 10-year rule). In practical terms, a trust inheriting a retirement account usually cannot defer taxes as long as, say, a surviving spouse could. A spouse beneficiary can roll over an IRA to their own and stretch distributions over their life; a trust can’t do that unless the spouse is the sole beneficiary and some complex requirements are met.

Real-world example: John, fifty-five, thought putting his IRA into his revocable trust would simplify things for his family. Instead, it resulted in a $100,000 tax bill and early withdrawal penalties, draining a chunk of his retirement savings in one year. Had John simply left the IRA in his name and named his trust as the beneficiary, the IRA would have remained intact and continued growing tax-deferred. Upon John’s death, the trust could then distribute the IRA funds to his heirs over the allowed timeframe. This example shows how critical it is to keep qualified retirement assets out of your trust during your lifetime.

In summary, leave your 401(k)s and IRAs in your own name. Use beneficiary forms to link them to your estate plan. Your living trust can be a beneficiary if you need the trust to control or protect those funds for your loved ones (for instance, if you have young children, or beneficiaries with special needs or poor financial habits). Otherwise, naming your spouse or children directly might offer more flexibility. The key point is: don’t change the ownership now – plan for transfer at death. Your retirement nest egg will thank you, and you’ll avoid a hefty tax bill. 🏦

Health and Medical Savings Accounts (HSA/MSA): Individual Accounts Only

Health Savings Accounts (HSAs) and Medical Savings Accounts (MSAs) are another class of asset that shouldn’t go into a trust. These accounts are governed by federal tax law to help individuals save for medical expenses using pre-tax dollars. By design, an HSA or Archer MSA is tied to an individual (usually in conjunction with a high-deductible health insurance plan) and cannot be jointly owned or owned by an entity like a trust during your lifetime.

If you tried to transfer an HSA into a trust, it would be treated much like the retirement accounts above – essentially as if you closed the HSA and distributed all its funds. That would make previously tax-free medical savings subject to income tax (since contributions and growth in an HSA are taxable if not used for qualified medical expenses). Moreover, you’d lose the ability to use those funds tax-free for your health needs.

HSAs also have a unique rule at death: if your spouse is the beneficiary, they can take over the HSA as their own (maintaining its tax-advantaged status). But if someone else (or a trust) is the beneficiary, the HSA ceases to be an HSA and the assets become taxable income to the beneficiary in the year of the original owner’s death. In other words, the entire HSA value (except any part that goes to a charity) is taxable when you die, unless a spouse inherits it. This is important when considering naming a trust as beneficiary – the trust would have to include that HSA amount in its taxable income, likely all at once.

Bottom line: You cannot retitle your HSA/MSA to a trust while you’re alive, and there’s no benefit in trying. The better approach ✅ is similar to retirement accounts: name a beneficiary. If you’re married, typically you’d name your spouse (so they can continue the HSA). If you want the funds to ultimately go into your trust for further distribution (say, to cover healthcare or education for your children), you could name the trust as a contingent beneficiary (secondary) after your spouse, or primary if no spouse. The trust would then receive the funds upon your death (paying the necessary taxes at that time).

However, be aware that because any non-spouse inherits the HSA as taxable dollars, some people choose to simply spend down their HSA during retirement on health needs or leave it to a charity (charities can be HSA beneficiaries and the distribution would avoid taxes). If your trust is beneficiary, it might be immediately distributing those funds to named heirs or handling them per your instructions – essentially treating it like any other cash asset, since the tax benefit can’t be preserved past your death except for a spouse.

In short, HSAs and MSAs should stay in your name. Enjoy the tax-free medical spending while you can. For estate planning, list a beneficiary on the account. Don’t try to fund these accounts into your living trust – the law simply doesn’t allow it without ending the account. 🏥 It’s another instance where trusts must yield to specialized federal rules on accounts.

Life Insurance Policies: Use Caution with Trusts (Consider ILITs for Large Policies)

Life insurance is a critical estate planning tool, but placing a life insurance policy in your revocable trust or naming the trust as the policy’s beneficiary requires careful thought. While it’s technically possible to name your living trust as the beneficiary (or even the owner) of a life insurance policy, there are some hidden pitfalls that often make it less advantageous than people assume.

Firstly, revocable living trusts do NOT provide asset protection or tax sheltering. If you are the insured and you either own the policy or your revocable trust (which you control) owns it, the death benefit will be counted as part of your taxable estate. For most people, this isn’t an issue because their total estate (including life insurance) is under the federal estate tax exemption (which is in the millions of dollars – $12.92 million per individual in 2023, for example). But if you have a large policy and a large estate, routing the insurance payout to your revocable trust could contribute to an estate tax hit. In contrast, if the policy is owned by an Irrevocable Life Insurance Trust (ILIT) or someone else, the death benefit can be kept outside of your estate for tax purposes. Simply naming a person (like your spouse or child) as beneficiary also keeps the insurance proceeds out of your estate for tax, because ownership is key – it’s the fact that you owned the policy that pulls it into the estate calculation, not who receives the money. (However, if your revocable trust is beneficiary, that signals you likely owned the policy as well, so either way it’s in the estate.)

Secondly, creditor protection: In many states, life insurance proceeds paid directly to a named beneficiary are protected from the deceased’s creditors. But if those proceeds are funneled into your revocable trust, they may be accessible to creditors, especially if your estate has debts or final expenses that can’t be paid. A trust is often required to settle those obligations if your estate’s funds are insufficient. Essentially, naming a trust as beneficiary could delay your family’s access to the money and subject it to claims that otherwise might have been avoided. If instead the policy named your spouse or children outright, the insurance company typically cuts a check to them within weeks of receiving a death certificate – bypassing probate entirely and not commingling with estate assets.

Why might someone still involve a trust with life insurance? There are valid reasons:

• You might want the insurance proceeds to be managed for a beneficiary (for example, if you have young children, you don’t want an 18-year-old suddenly getting a huge lump sum; the trust can dole it out over time for their benefit).
• You might have a blended family or complex wishes that a trust can enforce (like providing income to a second spouse but leaving the remainder to kids from a first marriage).
• You might be concerned about estate taxes at the state level (some states have lower estate tax thresholds than the federal level) or just want to ensure proceeds are used to pay any taxes and then distribute systematically.
• Or you might establish an ILIT (Irrevocable Life Insurance Trust). An ILIT is a separate trust specifically designed to own life insurance policies. If set up properly, an ILIT removes the policy from your estate (avoiding estate tax on the payout) and can provide creditor protection for the beneficiaries. The catch is that you must give up control of the policy to the ILIT (it’s irrevocable), and if you’re transferring an existing policy into an ILIT, you need to live at least 3 years after the transfer or the death benefit gets pulled back into your estate (a federal rule to prevent deathbed transfers).

For most people with modest policies, the simplest path is: Name your beneficiaries directly on the policy (spouse, kids, etc.), not your revocable trust. That ensures fast, direct payment. The beneficiaries receive the funds free of income tax (life insurance payouts are not income-taxable) and can use the money immediately. ✅ If you do need more control or tax planning, consider an ILIT rather than a standard living trust. An ILIT can hold the policy and be the beneficiary; then upon your death the ILIT’s trustee will follow the instructions you set (e.g., invest the proceeds and pay income to X for so many years, then transfer principal to Y, etc.). This approach shields the insurance from estate taxes and creditors, unlike a revocable trust.

Beware of naming your estate as beneficiary: As an aside, sometimes people name “my estate” as the life insurance beneficiary (or forget to update after all named beneficiaries predecease them). This is generally worst-case because it forces the payout into probate and subjects it to estate creditors. Naming a revocable trust is slightly better than estate, since at least the trust can manage the money for beneficiaries, but it still might not avoid creditors or taxes.

Key takeaway: Don’t reflexively put life insurance in your trust. Unless you have a clear strategy (like using an ILIT or needing the trust to manage the money), it’s usually best to keep life insurance out of your living trust. Let it pass via beneficiary designation. This way, your loved ones get the funds promptly and privately. If you do have a large estate or special circumstances, use the appropriate type of trust (often irrevocable) tailored for life insurance, rather than a general living trust, to own or receive that policy. 🔐

Bank Accounts (Cash Accounts): Checking, Savings, and CDs

Many bank accounts can be placed into a trust, but not all accounts should be, particularly everyday cash accounts that you use for regular expenses. Let’s break down which accounts to reconsider including in your trust:

• Everyday Checking Accounts: If you have a checking account that you use to pay bills, make debit card purchases, or receive your paycheck, putting it in a trust can be more hassle than help. While you (as trustee of your own living trust) technically can still write checks and manage the account, some people find it cumbersome to deal with the bank’s extra requirements. For instance, the account will be under the trust’s name; if someone else becomes successor trustee (say, if you become incapacitated), the bank will require trust documents to prove that person has authority. Many folks decide it’s simpler to keep a working checking account outside the trust for convenience. After all, if it’s a modest amount of money that you constantly use, it’s not likely to get stuck in probate for long (and there are other ways to make it transfer quickly, which we’ll mention in a moment).

• Joint Accounts with Spouse: If your bank account is joint with rights of survivorship with your spouse, it will automatically belong to the surviving spouse when one of you dies. Putting that account into a trust isn’t necessary to avoid probate at the first death – there wouldn’t be probate anyway. In fact, transferring a jointly owned account into a trust might require both owners to act and could convert the legal nature of the account (for example, both of you might become grantors of the trust for that asset). Many couples instead keep their joint account as is; upon the first death the survivor continues owning it, and only upon the survivor’s death does it need to pass via will or trust. Some estate planners do transfer joint accounts to a joint revocable trust (a trust that both spouses establish together) which can work smoothly as well. The key is, it’s not vital to put it in trust for probate reasons while both are alive and on the account.

• Accounts with Payable on Death (POD) designations: Most banks offer a POD or “Totten trust” designation. Despite the name, a Totten trust isn’t really a trust you manage; it’s just a beneficiary naming on a bank account. If you designate, for example, your daughter as POD on your savings account, that account will transfer directly to her upon your death, outside of probate. Because of this feature, you might choose not to retitle that account into your living trust. It already has a built-in mechanism to go to the right person. Similarly, many brokerage accounts or credit unions allow a Transfer on Death (TOD) beneficiary. Utilizing POD/TOD on accounts is a quick, inexpensive way to ensure the asset passes to your heir without court interference. It can sometimes be simpler than transferring the account into the trust and then having the trust pay it out to the same person.

• Savings Accounts, Money Market Accounts, CDs: These can generally be owned by a trust without negative consequences if you want. If avoiding probate is a priority and you don’t want to rely on POD designations, you can retitle such accounts to your trust. One caution: some certificates of deposit (CDs) may consider retitling as an early withdrawal, which could incur a penalty (loss of a few months’ interest, for example). Check with your bank—often they will waive the penalty if you inform them you’re doing estate planning, but it’s good to confirm. If a penalty applies, you might wait until maturity or use a POD as a workaround.

• Cash at home or in safes: While not a bank account, it’s worth noting that physical cash or valuables not formally titled (jewelry, collections, etc.) generally can’t be “titled” in a trust name unless you physically transfer them to a trustee’s possession. For cash in a bank, you have clear ownership records; for cash under the mattress, your will or trust can only reference it. Most people will just let their pour-over will (a will that accompanies a trust) handle any miscellaneous cash by pouring it into the trust at death if it wasn’t already accounted for. It’s wise, however, to keep most money in a bank or financial account that can be tracked and transferred.

Alternatives and best practices: If you decide to keep a particular bank account out of your trust, make sure you’ve taken steps so that account doesn’t get stuck. ✅ Add a POD beneficiary to each account (you can even name your trust as the POD beneficiary, which accomplishes nearly the same thing as having it in trust, but only upon death). Or, if the account is joint, that covers the first death – just ensure the survivor has an estate plan for the second death. Another tactic: keep only a small amount in the external checking (for liquidity) and move the bulk of cash into a trust-owned savings/investment account where probate avoidance matters more. This way, you minimize probate assets but keep convenience in daily life.

One more reason to sometimes exclude a bank account: If you worry that after your death, the successor trustee might not be able to immediately access funds to pay for funeral or urgent expenses, having a joint account with a trusted family member or a POD account gives them quick access to cash, whereas a trust account might be frozen until they show trust papers. Of course, a well-prepared trustee with copies of the trust can get access fairly quickly, but it’s something to consider.

In summary, most financial accounts can go into a trust, but you should avoid placing accounts in trust that are heavily used for day-to-day transactions or already set up to transfer on death. Always ensure any account not in your trust has direct beneficiaries or is jointly held, so it won’t languish in probate. This approach gives you the best of both worlds: convenience now, and smooth transfer later. 🏦💳

Jointly Owned Assets with Right of Survivorship

Joint ownership is a built-in estate planning device. If you own property jointly with rights of survivorship, such as a joint bank account or real estate held as Joint Tenants with Right of Survivorship (JTWROS), that asset will automatically transfer to the surviving owner when one owner dies. Because of this automatic transfer feature, you generally do not need to put such assets in a trust to avoid probate (at least not until the survivor’s death). In fact, attempting to fund a joint asset into a trust may either be impossible without both owners’ consent or could undo the survivorship feature.

Example: Joint bank account: A father and daughter might share a joint bank account. If the father dies, the daughter (as surviving joint owner) becomes the sole owner immediately, and the account doesn’t go through probate. If the father had instead transferred that account into his revocable trust, the daughter wouldn’t be a joint owner anymore – the trust would own it. That could actually disinherit the daughter from that account until the trust distributes it, and it defeats the original convenience purpose. Additionally, the daughter would lose access to the funds until the trustee sorted it out. Clearly, that’s counterproductive if the joint account was meant to allow the daughter to help manage funds or avoid probate.

Example: Joint real estate (spouses): Married couples in many states hold title to their home as Joint Tenants or in community property states, as community property with right of survivorship. If one spouse dies, the house instantly belongs wholly to the surviving spouse. No court process is required aside from recording a death certificate. Now, many couples do place their home into a joint revocable trust for other reasons (such as incapacity planning or to ensure it goes to certain beneficiaries after the second death). That’s fine if done together. But there is no need for each spouse to, say, have a separate trust for the joint home during their joint lifetimes – the joint tenancy already handles the first transfer. In fact, transferring a jointly-owned home into one person’s trust (instead of a joint trust) could sever the joint tenancy, converting it into a tenancy in common, which would then require probate for the deceased’s share. That would be an unintended consequence of a poorly executed trust funding.

So the rule of thumb is: if an asset is jointly owned with survivorship, don’t unilaterally move it into a trust without considering the implications for the other owner. Usually, both owners would create a joint trust or both would consent to moving it, preserving the fact that it’s for their mutual benefit.

One scenario to watch out for: If you have a joint account with a non-spouse (like an adult child) solely for convenience (they help you pay bills), know that legally that money becomes entirely the child’s at your death – regardless of what your will or trust says. Some people do this not realizing it overrides their estate plan. In such cases, instead of joint ownership, you might prefer to keep the account in your name and use a power of attorney to let the child help, or use a POD beneficiary. Joint ownership with non-spouses can be seen as an immediate half-gift, and it exposes the account to the co-owner’s creditors while you’re alive. It’s a bit beyond our scope, but it’s worth mentioning: joint ownership is powerful but can be a double-edged sword. Make sure it’s truly what you want before relying on it as an estate planning shortcut.

When to involve a trust: Once the final owner of a joint asset is alive (e.g., the second spouse), that asset should then be considered for trust placement because now there’s no survivorship left – when that person dies, probate could occur if no further plan. At that point, retitling the asset to a trust or adding a TOD/POD beneficiary becomes important. For instance, a widow might put the house and sole accounts into her revocable trust so that her children avoid probate later.

In sum, do not put joint survivorship assets into a trust just to avoid probate for the first death – it’s unnecessary. Let them pass by survivorship. Coordinate with co-owners if you decide to move them into a shared trust arrangement. And always double-check the ownership status after any change; you don’t want to accidentally forfeit the very benefit (no probate, quick transfer) that joint ownership gives. 🤝

UTMA/UGMA Accounts for Minors: Don’t Disrupt a Good Thing

If you’ve set aside money or investments for a minor child using a UTMA (Uniform Transfers to Minors Act) or UGMA (Uniform Gifts to Minors Act) account, you should not transfer that account into a trust. By law, UTMA/UGMA accounts are a special kind of custodial account where the minor is the beneficial owner and a designated adult custodian manages it until the child reaches the age of majority (typically 18 or 21, depending on the state and the type of transfer). These accounts are essentially a trust-like arrangement created by statute: the custodian has a fiduciary duty to use the assets for the minor’s benefit, and at adulthood the property must be turned over to the child outright.

Trying to move a UTMA or UGMA asset into another trust is problematic for a few reasons:

• Legal ownership conflict: The funds legally belong to the child (although they can’t control it yet). The custodian is just a manager. If you attempt to retitle those funds to a different trust, you’re effectively taking the child’s property and putting it in a new legal entity. The custodian doesn’t have authority to change the beneficiary of the account – they can only hold and invest it until the child is of age.
• Probate concerns: Some might think, “What if the custodian (often a parent or grandparent) dies before the child is grown? Will that account get stuck in probate?” The answer is no, it shouldn’t – the account doesn’t belong to the custodian’s estate. If a custodian dies, the court or the original transfer document can appoint a successor custodian to take over. Many states let you name a successor custodian in your will or in the UTMA setup paperwork. That way, if you (as custodian) pass away, the named successor can step in and continue managing the account without any interruption in the child’s ownership.
• Trust duplication: Using a trust to hold a minor’s assets is often done when you want more control than UTMA offers. (UTMA forces a handover at a young age, which some find too early if large sums are involved.) But if you already chose UTMA/UGMA for a smaller gift, it likely means you were comfortable with the child getting it at 18 or 21. Converting to a trust to perhaps delay that distribution would usually violate the original gift terms – you’d essentially be revoking the gift’s condition of release at majority. Legally, you cannot do that without court approval because the money isn’t yours anymore; it’s the child’s, locked until their birthday as set by UTMA law.

Therefore, let UTMA or UGMA accounts be – don’t include them in your living trust. Instead, you should coordinate your estate plan around them. For example, you might state in your will or trust that any remaining UTMA accounts you set up for your child are intended to count toward that child’s share of the estate (so things stay fair if that matters to you). Or if you worry about what happens if you (the custodian) die, simply ensure a successor custodian is named. This is typically done in your will: “I nominate Jane Doe as successor custodian for any UTMA accounts established for my son, under [State] law.” That way, there’s no gap – Jane can take over the custodianship seamlessly. The actual asset never goes through probate or your trust; it goes to the child via the custodianship rules.

Once the child is an adult and receives the UTMA funds, they can, of course, do whatever (including put it in their own trust if they have one). But up until that age, the UTMA account stands apart from your trust. Think of it as the child’s mini-trust that’s already set up. The best practice is to keep it separate and not muddy the waters.

In summary, UTMA/UGMA accounts should stay in their own lane. Don’t try to fold them into your revocable trust. Just make provisions for management if you’re not around. This ensures the child gets what was intended, and you stay compliant with the law that granted those tax and legal benefits in the first place. 🧒💰

Vehicles: Put the Brakes on Placing Them in Your Trust (Unless Collectible)

When it comes to cars, trucks, boats, motorcycles, or other vehicles, the general advice is not to bother putting them in your living trust, unless a vehicle is of high value or collectible. Vehicles often depreciate over time (they lose value as they age), and they typically don’t present the same probate challenges that, say, real estate does. Here’s why vehicles usually should stay out of the trust:

• Simplified Transfer Options: Many states have simplified processes for transferring vehicles upon death that don’t require a trust or formal probate. For example, some states allow a Transfer-on-Death registration for vehicles 🏎️ – you can designate a beneficiary on your car title, similar to a TOD on a bank account. If your state offers this (and quite a few do, such as Arizona, Indiana, Ohio, California, and others), then upon your death the vehicle can go directly to your named beneficiary by operation of law. Even in states without a specific TOD title law, vehicles are often covered under small estate affidavit procedures. Typically, if the total value of the estate or the vehicle is under a certain threshold (which could be, say, $5,000, $10,000, or more depending on state), the DMV will allow the heirs to retitle the car by providing a death certificate and an affidavit, rather than requiring probate. Some states explicitly exempt one vehicle or a certain value of vehicles from probate entirely.

• Cost and Hassle of Trust Ownership: Transferring a vehicle to a trust means you have to retitle the vehicle with the DMV in the trust’s name. This often involves a title transfer fee, and in some states it could trigger a form of sales tax or use tax (though usually transfers to a revocable trust are tax-exempt as estate planning transfers, but you’d need to check state rules or use specific transfer codes on the title form). Moreover, your insurance company needs to be notified to ensure coverage extends to the trust (usually you list the trust as an additional insured). If you later want to sell or trade in the car, the trust (through you as trustee) has to sign the paperwork. It’s not terribly difficult, but it’s an extra layer of formality for a common transaction. If you forget the car is in the trust and you sign personally on a sale, that could complicate things.

• Vehicles Often Avoid Probate Anyway: If a vehicle is the only asset that would require probate (say, you put everything else in your trust or have beneficiaries on accounts), many states let the executor transfer a vehicle with minimal procedure. Even without explicit TOD, an executor can usually sign over a car title to the heir named in a will without going through a full probate, as long as all parties agree and it’s a small asset. The key point is that courts and DMVs recognize that a car is a necessity that families may need to use or sell quickly, so they provide streamlined paths.

• Low value (usually): Aside from classic cars or valuable boats, most vehicles drop in value each year. By the time the owner passes away, a car might be worth $5k, $10k, etc. Such amounts are often under small estate limits. Because of that, even if technically it should be probated, it’s easy to deal with informally or with a short form affidavit. There’s little to gain by placing a $10k car in a trust when your $300k house and $200k in investments are the bigger ticket items that you do want to protect from probate.

When might you put a vehicle in a trust?

• If you have a collector car, antique, or any vehicle expected to appreciate or hold significant value, that vehicle is more akin to an investment. For instance, a vintage sports car worth $100,000 might be something you include in your trust, especially if you have specific wishes on its disposition (e.g., to be kept in the family or sold and money divided). In that case, the value justifies formalizing its transfer via the trust. Additionally, collectible vehicles can attract estate taxes if your estate is large, so you want them handled in the most efficient way.
• If you own a mobile home or RV that is titled as a vehicle but functions like real property, and it’s of substantial value, you might consider putting it in trust (or using a TOD if available).
• If you simply want to avoid any extra paperwork for your heirs and you don’t mind doing it now, you could put even regular vehicles in trust. Just weigh the benefits: you’d be going above and beyond what’s usually necessary.

Insurance note: One subtle issue – if a car is in your trust and someone other than you (the trustee) drives it after your death or during incapacity, ensure the insurance covers that scenario. Typically, policies cover permissive drivers and would cover a successor trustee driving it, but it’s wise to confirm. If the car is not in trust, after your death, technically nobody is the owner until transfer, but insurance usually continues for a short period. These are fine points, but some people worry a trust might complicate an insurance claim if the car is still titled in decedent’s name versus trust name. In practice, as long as the trust is properly listed, insurance is fine.

Conclusion for vehicles: For most people, keep your car titles in your own name. If you want to be thorough, use your state’s TOD vehicle title option to name a beneficiary (many DMV websites have a simple form for this now). If not available, instruct in your will who gets the car; your executor can usually handle it without fuss. Save the trust for the assets that truly need it. As a result, you avoid unnecessary DMV trips now, and your heirs can still receive your vehicles quickly later. 🚗🔑

Non-Transferable Benefits (Social Security and Other Government/Personal Benefits)

Certain assets aren’t really “assets” you own in a way you can transfer at all – chief among them is Social Security benefits. By law, your Social Security retirement or disability benefits end at your death. You cannot assign them to a trust or anyone else. The Social Security Administration will not pay a deceased person’s monthly benefit to a trust; payments stop (and any post-death payments that were made in error must be returned). The only benefits that continue are those to eligible survivors (like a surviving spouse’s benefit or minor children’s benefits), and those are paid directly to the survivors (or their representative payee), not to your estate or trust.

So if you were thinking you could funnel your Social Security checks into a trust or leave your remaining benefit “to” someone – that’s not how it works. By federal law, Social Security is a personal, non-transmissible benefit. The same goes for similar government benefits like Supplemental Security Income (SSI), which is needs-based and cannot be transferred (in fact, if an SSI recipient has a trust, it must be a very specific type like a special needs trust to not disqualify them – but that’s about receiving, not giving).

What about other benefits or rights?

• Pensions and Annuities: Many pension plans offer a survivor annuity to a spouse or a lump sum death benefit. These typically must be set up through the plan’s forms, and often by law the spouse has a default right (ERISA rules require a spouse’s consent to naming someone else). If you have a pension, you generally can’t name your trust as the beneficiary of your monthly pension – you either take a joint-and-survivor payout or nothing. Some pensions might offer a posthumous payout that could be directed to a trust if no living beneficiary, but usually it’s to your estate if at all. Annuities (non-retirement) often allow a beneficiary, which could be a trust. But if it’s an annuity that pays out over someone’s lifetime (like a lifetime income annuity), once again that stream ends at death (unless a guaranteed period or joint annuitant exists). So there’s nothing to put in trust except perhaps a remaining guaranteed amount.
• Qualified Tuition Plans (529 Plans): A 529 college savings plan is technically owned by the account holder (often a parent) for a beneficiary (student). You can name a successor owner for a 529 in many cases, and you could name a trust as successor owner. But you wouldn’t retitle a 529 into a generic trust without checking plan rules – some plans might allow a trust to own an account (especially if you establish a trust for education). This is a nuanced area: trust-owned 529s are possible and sometimes used in advanced planning, but not common. The main point: education accounts have their own rules and should be handled carefully with expert advice if considering trust ownership.
• Personal rights or licenses: Things like personal licenses (professional licenses, driving license), or memberships, even some digital assets (like social media accounts) can’t just be put in a trust. They either expire at death or are governed by contract terms. For instance, you cannot transfer your CPA license or medical license to a trust (or to anyone) – it’s personal. Similarly, airline miles or credit card reward points often cannot be transferred except as allowed by the program (some allow gifting at death, many do not or have limits).

In summary, for non-transferable benefits and rights, there’s no decision to make – you simply cannot place them in a trust, and you won’t need to because they die with you or have their own survivor provisions. For estate planning, focus on assets that exist after you’re gone (property, money, investments). The income you were receiving (like Social Security or a pension) stops or goes directly to someone else by rule.

If you are concerned about ensuring, say, your last Social Security check (which might arrive after death) gets handled, that typically falls to the executor of your estate to return or deal with, not the trust. And if you want to support a dependent who relies on your Social Security, you’d need to arrange other assets (maybe life insurance or savings) to fund a trust or account for them, because Social Security itself won’t continue to them except via the SSA’s rules for survivors.

Always remember: if a law or contract says an asset is non-transferable or ends at death, a trust cannot override that. Trusts are powerful estate tools, but they can only control things you legally own and can transfer. ⚖️

State-Specific Nuances: How State Laws Affect Trust Funding Decisions

So far, we’ve discussed assets in general terms, emphasizing federal law and common practices. Now let’s turn to state-specific nuances – the ways your particular state’s laws might influence what you do or don’t put in a trust. While federal rules set the groundwork (especially for taxes and things like retirement accounts), state laws govern property, probate, and contracts in crucial ways. Here are some key state-level considerations:

• Probate Thresholds and Small Estate Procedures: Each state sets its own rules for when an estate requires formal probate. Many states have an estate size threshold under which you can use simplified affidavits to collect assets without court supervision. For example, as of this writing, California has a threshold around $184,500 for the total value of probatable assets (this excludes non-probate transfers like joint or beneficiary accounts) – below that, no formal probate is needed to transfer assets; an affidavit will do. Texas allows small estate affidavits if the estate (excluding homestead) is under $75,000. New York has a voluntary administration (small estate) if under $50,000 and no real property. Why does this matter? If your estate is modest and under your state’s threshold, you might not need a living trust at all for probate avoidance. Or, more specifically, an asset like a vehicle or some personal property might fall under those limits even if outside the trust. On the flip side, if your estate is over the threshold, that’s when avoiding probate by using a trust is more critical. Knowing your state’s cutoff can help determine how essential it is to include certain assets. For instance, maybe your only probate asset outside the trust is a $20,000 boat – in many states that alone could be transferred with a small estate affidavit, so not having it in trust wouldn’t hurt.

• State Estate and Inheritance Taxes: A dozen or so states impose their own estate tax or inheritance tax, with thresholds often far lower than the federal exemption. For example, Massachusetts and Oregon have a state estate tax starting at just $1 million in estate value. New York’s estate tax kicks in around $6.58 million (lower than the federal $12.9M). If you live (or own property) in one of these states, the inclusion of certain assets in your estate can have tax consequences for your heirs. Recall our discussion on life insurance: federally, most folks won’t owe estate tax on a life policy unless very large, but in a state like Massachusetts, a $2 million life policy would create a state estate tax bill if you owned it when you died. Using an ILIT to keep that policy out of your estate could save significant state tax. However, simply naming a trust as beneficiary won’t avoid state estate tax if the trust is grantor’s revocable trust (because that’s still in your estate). The takeaway: if you’re in a state with an estate tax, be mindful that assets like life insurance or retirement accounts (which are part of the taxable estate even if passing outside probate) might need special planning (like trusts or gifting) beyond just a living trust. Also, inheritance taxes (in states like Pennsylvania, New Jersey, etc.) tax the recipient of assets, often exempting close kin. Leaving assets via a trust doesn’t change inheritance tax; it’s based on who gets it and their relationship. So that doesn’t affect what you put in trust, but keep it on the radar for your overall plan.

• Homestead and Real Estate Laws: Some states have unique laws regarding homestead property (primary residence) that can affect trust planning. For instance, Florida’s homestead law provides both creditor protection and restrictions on devise (who you can leave it to) if you have a spouse or minor children. Floridians often use a trust to avoid probate on homestead, but they must be careful: the Florida Constitution and statutes require that homestead, if put in a trust, still passes in line with those restrictions (you generally can’t override the spouse/minor child protection by using a trust). Additionally, Florida homestead in a revocable trust retains creditor protection (since you still effectively own it), but if put in an irrevocable trust or a trust not structured properly, it could lose that shield. In Texas, the homestead has protections and also, for estate administration, the homestead might not count towards probate estate in some ways. The point is, know your state’s homestead treatment – in most cases a revocable trust is fine and commonly used, but ensure compliance with any spousal consent or specific language requirements your state might have.

• Community Property vs. Common Law Property: If you live in a community property state (like California, Texas, Arizona, etc.), assets acquired during marriage are generally jointly owned by spouses. Placing community property into a trust requires careful drafting to maintain the community property character (which has a tax benefit: a full step-up in basis at first spouse’s death, not just half). Most estate attorneys in these states create either joint trusts for spouses or mirrored individual trusts that preserve the community property nature of assets. If done correctly, you still get the step-up and all benefits. However, one should avoid inadvertently transmuting community property into separate property by titling it incorrectly. For example, if one spouse individually transfers a community asset to their sole trust, that could raise questions. State law nuance: Idaho and Wisconsin allow community property agreements or trusts to clarify this. Alaska and others even allow opt-in community property trusts for tax benefits. For our purposes, just remember: if married in a community state, consult counsel so that putting assets in trust doesn’t accidentally alter property rights. In common law states, this is less of an issue, but you still consider joint vs separate ownership as discussed earlier.

• State Variations in TOD/POD Laws: We mentioned transfer-on-death options for accounts and vehicles. Not every state has identical provisions. For example, real estate TOD deeds (beneficiary deeds) are allowed in over half the states. If your state allows you to record a TOD deed for your house to name who gets it at death, that’s an alternative to a trust for that asset. Some people in those states skip a trust and use TOD deeds and beneficiary forms to transfer everything. But TOD deeds have their own pros/cons and might not handle contingencies as gracefully as a trust. Still, in planning, it’s good to know if you have that tool. For vehicles, as noted, a majority of states now offer TOD registration for vehicles as well. Check your state’s DMV – a simple form could name your trust or a person to get your car, which makes putting the car in trust even more unnecessary.

• Medicaid and Asset Protection Trust Nuances: If you are trying to plan for Medicaid (for nursing home care) or creditor protection, which assets to put in a trust becomes a different analysis. A revocable trust does nothing for Medicaid or creditors (since you still control the assets, they count as yours). An irrevocable trust might shield assets after a 5-year Medicaid lookback period, but you have to be very selective and careful about what you transfer. For instance, you might put your paid-off house or a chunk of savings into an irrevocable trust to start the clock on Medicaid eligibility, but you wouldn’t put your IRA in there (because withdrawing it would incur tax and likely disqualify you for Medicaid during spend-down anyway). You also wouldn’t put personal income like a pension or Social Security into an irrevocable trust because you can’t – those are income streams, not assets, and diverting them would violate program rules. Each state’s Medicaid program has quirks: some states exempt one vehicle, a personal residence (up to a value), etc., during your lifetime, but they may recover against the estate after death. Using certain trusts can avoid estate recovery in some states. This is a very state-specific and complex area, beyond general estate planning. The key point: if asset protection or Medicaid planning is your goal, talk to an attorney in your state about specialized trusts. The “what not to put” might differ in that context (for example, you might actually put a home into an irrevocable trust intentionally, whereas in normal planning a home is usually just in a revocable trust or kept with the owner). Always follow state law closely here, because one misstep can disqualify you from benefits.

• Quirky Assets: Some states have unique property types. Water rights, mining claims, gun trusts (for NFA firearms), etc., could all be treated specially. If you have something unusual, check local law if a trust can own it and if any special trust language is needed (like a firearm compliance trust for certain guns).

In summary, state laws shape the finer details of your trust planning:

• They determine how easy it is to transfer an asset without a trust (small estate limits, TOD laws).
• They impose their own taxes that might make certain trust strategies (like ILITs or gifting) more relevant.
• They influence how marital property is handled in trusts.
• They may offer alternative or complementary tools (like TOD deeds).
• And they govern benefits like Medicaid that intersect with trust decisions.

Always consider consulting an estate planning attorney in your state to navigate these nuances. What’s a smart move in one state could be unnecessary or even problematic in another. The federal principles (like don’t trigger tax on an IRA by trust funding) remain constant, but the state context will fine-tune your plan. ⚖️🌐

FAQs

Q: Can I put my IRA or 401(k) in my living trust while I’m alive?

A: No. Transferring a retirement account to a living trust would be treated as a full withdrawal – triggering income taxes (and penalties if under age 59½). Instead, keep it in your name and name the trust (or individuals) as beneficiaries.

Q: Should I name my trust as the beneficiary of my retirement accounts?

A: It depends. If you want trust control for heirs (e.g., minor children or special provisions), yes, you can name a trust as beneficiary. Otherwise, naming a spouse or children directly is simpler and preserves maximum flexibility (a spouse can roll it over; a non-spouse or trust generally must withdraw within 10 years under current law).

Q: Do I need to put my bank accounts in a trust?

A: Only certain ones. Long-term savings or investment accounts are often put in a trust to avoid probate. But your day-to-day checking or any joint account might be left out for convenience – instead, use a payable-on-death form to ensure it transfers to your heirs outside probate.

Q: What happens if I inadvertently put a “wrong” asset in my trust?

A: If you mistakenly transfer something like an IRA or HSA into a trust, the law treats it as if you cashed it out – you’d owe taxes (and possibly penalties) for that year. If you assign something non-transferable (like Social Security), the transfer simply won’t be recognized. It’s crucial to consult with a professional if you think an improper transfer was made; sometimes steps can be taken to minimize damage (like rolling funds back within a short window, in limited cases).

Q: Can a trust own my life insurance policy, and is it a good idea?

A: A revocable living trust can own or be beneficiary of your life insurance, but it’s usually not necessary unless you have special instructions for the payout. If your goal is estate tax avoidance for a large policy or protecting the payout from creditors, an irrevocable life insurance trust (ILIT) is the better tool. For most people, naming individual beneficiaries (spouse, kids) on the policy works fine and gets the money to them fastest.

Q: Which assets should typically be in a trust?

A: Generally, include assets that would otherwise go through probate or that you want managed if you become incapacitated. Common examples: your real estate (home and other property), non-retirement investment accounts, stocks and bonds, valuable personal property or collectibles, and business interests (LLCs, stock in a private company). These benefit from being in a trust for seamless transfer and management. Assets that have their own beneficiary designations (retirement accounts, life insurance, etc.) or trivial items usually don’t need to be in the trust.

Q: Does a revocable living trust protect my assets from creditors or Medicaid?

A: No. Assets in a revocable trust are still considered yours during your lifetime. Creditors can reach them, and they count for Medicaid eligibility. Only certain irrevocable trusts can offer protection, and those come with trade-offs (you lose control/ownership). So don’t put assets in a revocable trust expecting creditor or Medicaid sheltering – that’s not its purpose.