Legacy planning can often leave individuals feeling overwhelmed, especially when it comes to setting up a living trust. Living trusts offer numerous benefits, ensuring that your loved ones or businesses are protected.
While a living trust is an effective way to manage assets, not all of your properties should or can be included in it. Deciding which assets should be part of a living trust and which should be handled differently is crucial.
A living trust can assist in planning for affairs after your passing and comes in two different forms: revocable trust and irrevocable trust.
With a revocable trust, the grantor (the person establishing the trust and providing assets to it) can make changes, such as adding or removing assets.
On the other hand, making changes to an irrevocable trust requires consent from all beneficiaries and potentially court approval.
Therefore, understanding what you wish to include in an irrevocable trust is essential, and only specific assets should be placed within it.
Certain assets should not or do not need to be placed in a living trust. In fact, having these assets in the trust when you pass away could complicate matters further.
In most states, vehicles valued below a certain threshold do not require probate, and therefore, do not need to be put into a trust. Removing a vehicle from a trust, especially if you plan to sell it, can be a complicated process.
For a high-value collectible car expected to appreciate, placing it in a living trust may be a suitable option. However, for regular vehicles, a Transfer on Death (TOD) contract would suffice. Register a TOD with your state’s Department of Motor Vehicles.
Many believe that putting a vehicle in a trust provides asset protection. However, a living trust does not offer asset protection, and the grantor remains liable in the event of an accident, similar to owning the vehicle in their individual name.
Irrevocable trusts indeed provide some level of asset protection. Once a vehicle is in an irrevocable trust, however, the grantor cannot make changes (such as selling it).
If you do decide to include a vehicle in a trust, most states will charge fees for transferring ownership from your name to the trust.
Additionally, updating vehicle insurance to reflect the trust as the new owner is crucial, ensuring there are no insurance issues.
While you can transfer a 401(k) into a living trust, remember that a trust is a separate legal entity, and the transfer is treated as a withdrawal from the account.
Withdrawals incur taxes, meaning you would need to pay taxes if transferring funds into the trust. Also, if you’re under 59 and a half years old, you may face penalties for early withdrawal.
Individual Retirement Accounts (IRAs) cannot be placed in a trust as per IRS regulations since only individuals can have personal retirement accounts.
There are various ways to manage your retirement accounts, such as naming beneficiaries on the account to bypass the need for a trust.
An alternative for your 401(k) or IRA is designating the trust as a beneficiary post your passing. The trust can then distribute the assets to beneficiaries, providing a safeguard if concerns arise about funds being depleted or taxes not being paid.
Health Savings Accounts allow for pre-tax income to cover medical expenses, with withdrawals being tax-free. However, since these are individual accounts, they cannot be transferred to a trust with shared ownership.
Similarly to retirement accounts, designating your living trust as a beneficiary can be optimal. If your spouse is already a beneficiary, designate the trust as the secondary beneficiary.
Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA) accounts are irrevocable trusts where minors are the owners, with funds managed by donors or guardians.
Living trusts, being revocable and managed by trustees, cannot house these accounts due to their permanent and ownership distinctions.
Maintaining the independence of these accounts by utilizing UGMA or UTMA for minors, or a living trust, is essential. Keep in mind that a living trust provides more control over fund distribution. You can specify when funds are disbursed, whereas UTMA or UGMA grants full access once a minor reaches legal age.
Living trusts offer numerous advantages for both you and beneficiaries, safeguarding them from enduring lengthy probate processes.
Understanding what can and cannot be placed in a trust is critical, as including the wrong items in a living trust could lead to consequences, like taxes and penalties in the case of a 401(k) plan.
Ultimately, proper estate planning and asset management are vital components of securing your legacy and ensuring a smooth transition for your loved ones.