When it comes to estate planning, it's important to understand what assets can and cannot be placed in a trust. A revocable trust is a legal document that allows you to transfer ownership of your assets to a trustee, who will manage them according to your wishes. Assets that can be placed in a trust include real estate, non-retirement brokerage and investment accounts, life insurance policies, and certain types of personal property. However, there are some assets that cannot be placed in a trust, such as retirement accounts, partnership agreements, and sole proprietorships.
Real estate is one of the most common assets that can be placed in a trust. You can change the title of qualifying retirement accounts, such as 401(k)s, 403(b)s, IRAs, or qualifying annuities to the trust name. However, this triggers income tax on the total amount in the year the transfer is made. Non-retirement brokerage and investment accounts include assets held in an account in your name, as well as in joint names with others or as common tenants.
Life insurance policies do not need to be transferred to a living trust because death benefits from life insurance pass to the beneficiary named on the policy. However, it may be a good idea to make your living trust the beneficiary of the life insurance product if it provides asset protection to its beneficiaries through a waste clause and discretionary distribution language. Very wealthy individuals who are approaching the amount of the estate tax exemption should consider having an irrevocable life insurance trust that owns their policy. You can put your real estate in your living trust even if you owe money for it.
A loan on the property, such as a mortgage or deed of trust, will follow the property to the trust and will also follow the property to the beneficiary. It's important to inform the lender about the transfer to reduce confusion in the future. If you are already co-owner of real estate with someone else, you may not need a living trust right now. And in some states, you can prepare a transfer deed in case of death now, but make it only take effect on your death.
However, if you have valuable vintage cars or a mobile home that is permanently attached to land and is considered real estate under your state law, you may want to transfer the ownership to your living trust. Retirement accounts definitely do not belong in your revocable trust. Putting any of these assets in your trust would mean that you are removing them from your name to re-title them in your trust's name. This could have disastrous fiscal ramifications so it's important to check with your bank before attempting to transfer an account or savings certificate. Sometimes there are early withdrawal penalties and sometimes banks require you to open a new account instead of changing the name of the existing account. In any case, you will need to have a new savings book (and a certificate, if any) issued in the name of your trustee.
For corporate stocks, bonds or mutual fund shares that are held in street name by a broker or on an accounting registration form, you must change the account name to reflect the trustee's ownership. Any new bond purchased after the revocable trust has been established must be purchased in the name of the trustee and the confirmation or other proof of purchase must be retained with the instrument to prove ownership of the trust. Other types of assets such as gold bars, silver coins, art objects etc., can be handled using a transfer instrument similar to how you handle bearer bonds or by using a sales invoice without consideration. For a sole proprietor, transfers to a trust generally behave in the same way as transferring any other type of personal assets owned by him including his company's name. In addition, having a living trust allows for faster transfer of assets to its beneficiaries and those assets will be distributed privately. It's important to note that some partnership agreements may prohibit transferring assets into living trusts so it's important to consult with a financial advisor or lawyer before doing so. Trust capital may change over time due to appreciation or depreciation of assets as well as any expenses needed for maintaining it. Everyone's financial situations and circumstances are different so it's important to talk with an estate planner before transferring any assets so that they can legally go to their beneficiaries.
