- Hey, there's a lot of videos out there talking about funding your living trust and I have a few myself, but no one talks about what types of assets you should not put into your living trust. Well, in this video, I'm going to break that down for you. All right, let's get started. All right, so as I stated, when it comes to funding the living trust, we have this preconceived notion that we have to put all of our assets into our trust so they can bypass probate. However, there are some specific assets you definitely do not want to try to place into your living trust because it can cause negative tax ramifications, or worse yet, it could bring liability to you.
So what is the first asset that you should not be placing into your living trust? Well, that is vehicles. And I mean things like cars, boats, equipment, mules, I dunno, I'm joking there. But the fact of the matter is is that anything that's a title asset that is a vehicle, there's no point in putting it into a living trust because when you pass away, it's very simple to transfer those assets to a beneficiary.
Meaning that all you need typically is a copy of a death certificate in order to transfer that item to another individual.
So maybe you put it in your final instructions in your trust that you want your vehicle, your truck for instance, to go to your son when you pass away, just write it down there. And then, your successor trustee would then see that and then contact the DMV, get a copy of your death certificate, and then transfer that asset or that vehicle over to the beneficiary. So that's the main reason why we're not putting vehicles in the trust or the number one reason why is that you don't need to 'cause you can transfer 'em without having to go through probate. Now, the second reason why I would not put my vehicles into the living trust is basically lawsuits, asset protection.
You see, when you retitle your vehicle into the name of your living trust, you're just exposing the fact that you have a trust to a potential creditor.
So let's assume that there's a car accident and the vehicle is titled in the trust name. I can guarantee you the plaintiff's attorney, if you're the one that's at fault or the person driving your car is the one at fault, they are going to name your trust as a defendant in a potential lawsuit. So if you want to keep your trust out of lawsuits that are related to vehicle-type accidents or boating accidents, do not put those types of vehicles in the name of your living trust. Keep them in your own name. Now, the other reason, third reason why you don't want to put vehicles into a living trust has to do with insurance.
You know, it just comes down to this, that insurance companies, they seem to get really confused when it comes to figuring out, how do you insure a vehicle that's in a trust name? And so I tend to avoid placing vehicles of any sort into a trust because people just can't figure it out.
Now, there are certain instances where, "Hey, you have to go around, you have to shop for insurer, and you want to definitely put it into a trust if you're looking for anonymity because you've had problems with people in the past and you just don't want that vehicle in your name," I get it, that would make sense. But keep in mind that insurance can be problematic when you're putting a vehicle into a trust. Okay, now, what other types of assets should not go into a living trust?
Well, annuities, right? So annuities are like 401k's or IRAs. These types of assets stay outside of your living trust. In fact, they are trust agreements themselves.
Most people are not aware of this.
And so if you were to try to take that asset and change it over to your living trust and make that the owner of these assets, what you could be doing is creating a taxable event for yourself, basically a liquidation of the asset. And then all of a sudden, you would have immediate tax consequences or you would invalidate the special nature of that particular investment that you're holding. So you want to keep your IRAs, your 401k's, your annuities, do not place them in a living trust. What you'll do with those types of assets though is you'll list your trust as the beneficiary. So when you pass away, then those assets would automatically be paid over to the trustee of your trust or they'll continue on under the control of your trustee to be paid over to the beneficiaries of the trust.
Now, when it comes to 401k's and IRAs and holding those in your trust after you've passed away, it's very important that you set up your trust with explicit provisions on how you can stretch out the control of those assets after you've passed through your trust.
And this comes into play when you have younger beneficiaries, for instance, and you don't intend to leave them the asset outright. So this is a huge mistake that I find with a lot of individuals that we work with on the estate planning side is that they have their 401k or their IRA. And when they opened up the account, they were asked to designate a beneficiary. And many times what they'll do is you'll list your spouse as your initial beneficiary.
And then, there'll be another line for you to list, an alternative or contingent beneficiary if your spouse is no longer living. So people will think, all right, well, I want it to go to my kids.
And so they'll list their children's name down as the contingent beneficiaries, not thinking about the fact that maybe in your estate plan, your kids are not going to receive your estate assets until they hit 45 years of age or some age maturity. But if you were to pass away and your children were 23 and 24 and you have IRAs and 401k's with $600,000 in total value, the children would receive those assets outright if your spouse was no longer living. Maybe you and your spouse are both killed in a car accident, for example.
Then, these assets would pass outside of your estate plan. So with IRAs and 401k plans and annuities, yes, they operate outside of the estate plan but we make the estate plan, the living trust the beneficiary and we give that control over to the trustee to ensure that those assets gets distributed out in a responsible manner per the terms of your trust.
Now, another asset that I would keep outside of my living trust is my life insurance. So this is another example where life insurance, you can name beneficiary, does not have to go through probate. And so that's one of the things that we always look at when we're thinking of assets that we either place or not place into a living trust.
It's that if you can bypass probate, then there's no need to put that life insurance into the trust. What you could do, of course, is name your spouse, just like you did with your 401k, as your primary beneficiary if you're married. And then, have your trust named as the contingent beneficiary. So then, it would receive the life insurance proceeds if your spouse was no longer living. And so I think that's a preferable way to do it or if you might want to consider this, if you have life insurance and it's of considerable value and you live in a state that has a very low estate tax, meaning that if the value of your state maybe is over $2 million and you have a $2 million life insurance policy, maybe you ought to consider setting up an irrevocable life insurance trust.
Actually putting that life insurance policy into a trust to make sure it's not included in your estate. So it would not go into your living trust, but it would go into its own separate trust that is to avoid being included in your estate for estate tax purposes. So those are the main assets when it comes to funding the living trust that you should keep out of your living trust. Put everything else in, of course. It's important you get your trust fully funded.
Otherwise, you will or your state will end up in probate for those assets that are not in there. But the ones that I went through easily pass outside of probate. You just want to make sure you have the proper beneficiary designation so that your estate plan goals are carried out appropriately.
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J. Amoros
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