Setting up a revocable (living) trust has many benefits, among them shielding assets included in the trust from the lengthy, costly, and potentially acrimonious probate process. It’s no wonder countless high net worth individuals and families entrust financial services firm Asiaciti Trust and its ilk to develop customized trust structures appropriate for their long-range planning needs.
Such vehicles aren’t only for the very wealthy, of course. If you have assets of any significant import, it may be in your interest to include them in your family trust. These four asset classes, in particular, are generally appropriate for inclusion.
1. Taxable Securities Accounts
Even if you’ve designated a beneficiary on your taxable securities account, including it in your trust may help protect it from squabbling heirs and estate taxes. As we’ll see, it’s not appropriate to include tax-advantaged securities accounts, such as employer-sponsored 401(k)s and Individual Retirement Accounts (IRAs).
2. Liquid Cash Accounts (Like Savings and Checking Accounts)
If you have substantial balances in cash accounts — at least $75,000 across all accounts in your name — then it may be in your interest to transfer those accounts into your living trust. Consult your financial advisor for the potential tax implications of doing so.
3. Valuable Personal Property (Like Jewelry and Art)
If it requires a property insurance rider, it probably belongs in your trust. The technical term for such items is “tangible personal property,” and the most common instances include jewelry and artwork.
4. Real Estate
Your primary residence and any secondary residences or investment properties, including those held by business entities controlled in whole or part by you, should be titled to your living trust. Holding real estate in your trust may reduce transaction fees after your death and ensures timely transfer to your heirs.
These Assets Should Never End Up in Your Living Trust
As we’ve seen, it’s appropriate — and recommended, in many cases — to place a wide range of assets in a living trust.
Certain assets are not appropriate for inclusion in a living trust, however. Personal finance expert Julie Garber identifies five classes of asset that should never wind up in your living trust, regardless of the circumstances. They are:
- Qualified retirement plans, including “401(k)s, 403(b)s, IRAs, and qualified annuities.” The IRS treats qualified plan transfers as withdrawals subject to income tax — meaning you’ll have to pay federal income tax on the full value of your plan in the year you make the transfer. Talk about a hefty tax bill.
- Motor vehicles. In certain states, motor vehicle transfers to trusts are treated as sales subject to sales tax — potentially hundreds or thousands of dollars in out-of-pocket expenses, depending on the car’s value. Instead, you may be able to designate a beneficiary to receive your motor vehicle upon your death.
- Insurance policies. Certain insurance policies, notably whole and permanent life, may lose key creditor protections when transferred into a revocable trust. While this may never come into play, it’s best not to tempt fate.
- Uniform Transfers to Minor Accounts (UTMAs) or Uniform Gifts to Minor Accounts (UGMAs), which are considered the property of the minor beneficiary. To avoid complication, designate a successor custodian to assume control of the account if you die before the beneficiary reaches legal age.
- Health savings accounts (HSAs) and medical savings accounts (MSAs), which can’t legally be transferred to trusts. Instead, designate your trust as an account beneficiary.
Before setting up your family trust, be sure to consult with a licensed financial advisor for advice about your specific situation. You’ll be glad you made the call, and so will your heirs.