What Should be Included in a Living Trust?

Wondering what assets should fund a living trust? Our guide helps you determine which are beneficial and which should be skipped and why.

By Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC®:

One of the largest financial planning misconceptions people hold is that having a will ensures their property will transfer quickly to their heirs. The truth is, whether you have a will or not, your assets will go through the probate process when you die.

Probate can be a rather lengthy and costly process for your heirs. The procedure can extend from a couple of months for a simple estate, to a couple of years for a more complex estate. For most people, ensuring their property is preserved and passed on at the lowest possible cost is essential to a comprehensive estate plan.

Advantages of Revocable Living Trusts

A revocable living trust is an instrument created for the purpose of protecting your assets during your lifetime. It also creates an avenue to pass your assets with ease after your death. There are several benefits of creating a trust. The chief advantage is to avoid probate. Placing your important assets in a trust can offer you the peace of mind knowing ownership of assets will be passed onto the beneficiary you designate, under the conditions you choose, and without first undergoing a drawn-out legal process. A trust can also provide you with some level of privacy as to the information shared about your estate. Another feature is that placing your assets in a trust will help protect them should you become incapacitated.

Can I Avoid Probate with a Trust?

It is important to note that there is no way to completely bypass probate. While your most important assets may be transferred as part of your trust, there are some assets that will not fund your trust for a variety of reasons. These other assets will still go through the probate process. Though setting up a trust can be costly and complex, it can make the inheritance process easier on your beneficiaries. To ensure your trust performs as it was intended, timely and proper funding is vital.

What Type of Assets Go into a Trust?

Many people assume that once they sign the trust documents at their attorney’s office, they are ready to roll. Setting up a trust, however, is only half of the solution. For a revocable living trust to take effect, it should be funded by transferring certain assets into the trust. Often people fund a living trust with real estate, financial accounts, life insurance, annuity certificates, personal property, business interests, and other assets. The most notable types are outlined below:

Real Estate. Many people wonder whether it is a good idea to place their house in a trust. Considering that your home is potentially one of your largest assets owned, living trusts can be especially beneficial for transferring real estate quickly. Additionally, they help avoid the hassle of separate probate proceedings for land, commercial properties, and second homes that are owned out of state or held in different counties. Any property with a mortgage, however, would require retitling into the name of the trust and some lenders may be reluctant to do this.

Financial Accounts. There are several types of financial assets that can be owned by a trust including:

• Physical bonds and stock certificates
• Shareholders stock from closely held corporations
• Non-retirement brokerage and mutual fund accounts
• Money market accounts, cash and liquid securities, checking, and savings accounts
• Nonqualified Annuities
• Certificates of deposit (CD)
• Safe deposit boxes
• Notes and other debt instruments

Life Insurance. Many people ask if it is a good idea to put life insurance in a trust. The benefits include protecting it from creditors and making it easier for your loved ones to access the money by avoiding probate. Naming the living trust as a beneficiary of your life insurance may come with some risks. If you are the trustee of your revocable living trust, all assets in the trust are considered your property. In this instance, life insurance proceeds are counted as part of your estate’s worth and could create a taxable situation should you reach the IRS threshold for taxable estates. In 2022, that amount is $12.06 million for an individual and $24.12 million for couples. Funding a trust with life insurance and annuity contracts generally requires a change of ownership form submitted to the contract issuer.

Valuable Personal Property. Personal items such as jewelry, art, collectibles, and furniture, including pianos or other important pieces, may be placed in a trust. Personal property without any legal certificate or title is commonly listed on an accompanying schedule that is kept with your trust documents. Those assets with certificates or legal title often require the owner to quitclaim their ownership interest to the trust.

Collectible Vehicles. Some cars retain their cash value for long periods of time and therefore may be worth transferring to your revocable living trust. It is worth considering the title transfers and taxes that may be imposed so it is important to speak to a trusted financial advisor or lawyer before transferring such assets.

Can You Put a Business in a Living Trust?

There are a number of advantages of transferring your business interest into a revocable living trust. Benefits generally include providing relief to your family from carrying the burden of your business debts, as well as the potential to reduce the tax burden on your estate. Below are the effects of several types of business ownerships:

Sole Proprietorships. Transferring a small business during the probate process can present a challenge and may require your executor to keep the business running for months under court supervision. Often sole proprietors hold business assets in their own name so transferring them to a trust would offer some protection for the family. For a sole proprietor, transfers to a trust behave generally the same as transferring any other type of personal assets you own, including your business name.

Partnerships. With partnerships, you may transfer your share in the partnership to a living trust. If you hold an ownership certificate, you will, however, need to have it modified to show the trust as the shareowner rather than yourself. It is important to note that some partnership agreements may prohibit transferring assets to living trusts so you will want to consult a financial advisor or attorney.

Limited Liability Companies (LLC). Depending upon your operating agreement, LLC business owners often need approval from the majority of owners before they can transfer the interests in the company to their living trust. Once transferred, the voting ability remains with you, but your ownership share will fall to the trust.

What Assets Cannot Be Placed in a Trust?

There are a variety of assets that you cannot or should not place in a living trust. These include:

Retirement Accounts. Accounts such as a 401(k), IRA, 403(b), and certain qualified annuities should not be transferred into your living trust. Doing so would require a withdrawal and likely trigger income tax. In this instance, it is possible to name the trust as the primary or secondary beneficiary of the account, which would ensure the funds transfer to the trust upon your death.

Health Savings Accounts or Medical Savings Accounts. Since HSA accounts already allow you to use the money tax-free for allowable medical expenses, they cannot be transferred to a living trust. Like retirement accounts, however, you can name the trust as the primary or secondary beneficiary.

Active Financial Accounts. It is not advisable to transfer accounts you use to actively pay your monthly bills unless you are the trustee and granted full control of the trust assets. For many people, it is simply easier to keep these accounts out of the trust.

Vehicles. Generally, vehicles like cars, boats, trucks, motorcycles, airplanes, or even mules or snowmobiles are not placed in a trust because they often do not go through probate. Additionally, many states impose a tax when the vehicles are retitled, and some do not allow vehicle owners to name a beneficiary after death.

How do you transfer ownership of property to a trust?

For most assets, transferring ownership is relatively simple:

• Bank and brokerage accounts. Typically these types of accounts generally require new account paperwork in the name of the trust as well as signed authorization to retitle or transfer the asset. It is, however, important to carefully consider any implications if these accounts require regular withdrawals or activity.
• Physical stock and bond certificates. These require a change of ownership to be completed with the stock transfer agent or bond issuer.
• Life insurance and annuity contracts. These typically require the submission of a change of ownership form to the contract issuer.
• Annuities. While you may fund the trust with an annuity, these instruments already enjoy a preferential tax treatment and transferring them may forfeit this benefit.
• Existing certificates of deposit. These are usually transferred to a trust by opening a new CD. When doing so, it is a good idea to see if your issuer will waive any penalties.
• Safe Deposit Boxes. Safe deposit boxes may be issued to the trust, or ownership may be transferred for an existing box.

Some assets require more effort to properly change title:

• Personal property without a legal certificate of title. This is commonly listed on a schedule accompanying the trust to reflect that the trust owns those assets.
• Assets with certificates of legal title. This type of asset requires that the owner quitclaim ownership interest in the asset to the trust. The attorney who drafts the trust should help you with the quitclaim process.

A Word About Irrevocable Trusts

While the assets placed in an irrevocable trust are no longer vulnerable to creditors or subject to an estate tax, you forfeit ownership of the assets. Careful consideration should be made when using an irrevocable trust and it is highly advised that you first consult your financial advisor or attorney.

While creating a living trust may be costly and require a lot of legwork to fund, there are many benefits to using it as an instrument to protect your assets. The flexibility these trusts offer helps to ensure that your assets are protected during your lifetime and pass easily to heirs after your death.

Estate laws vary from state to state. This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

Kris Maksimovich is a financial advisor located at Global Wealth Advisors 4400 State Hwy 121, Ste. 200, Lewisville, TX 75056. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network^®, Member FINRA/SIPC, a Registered Investment Adviser. Financial planning services offered through Global Wealth Advisors are separate and unrelated to Commonwealth. He can be reached at (972) 930-1238 or at info@gwadvisors.net.

Look for additional articles on using trusts as part of estate planning.

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