What Doesn’t Belong in a Trust?
Some assets work well in a trust, but others don’t. We’re going to help you outline what doesn’t belong in a trust and give you a quick breakdown on how revocable living trusts work. After getting your feet wet here, you can dive even further into the topic at the Phelps LaClair education center. Our experts can answer all of your questions about trusts, wills, and other estate planning tools.
What Is a Revocable Living Trust?
To many people, a revocable living trust looks a lot like a will. It includes the details and instructions for how you want your estate to be handled upon your death, and it appoints a successor who will be in charge of your estate.
To put it in basic terms: a revocable living trust is a substitute for a will—and yet it’s also much more! Unlike a will, which is subject to Arizona’s Probate Court after you die, a living trust is a private agreement that allows your loved ones to administer your estate quietly, around the kitchen table. It keeps them out of fights in a courtroom.
Because living trusts are not supervised by a probate court, your loved ones can carry out your wishes without the frustration of court costs, mandatory waiting periods, public notices to creditors and frivolous contests from disgruntled heirs.
How Does a Revocable Living Trust Work?
In order for the trust to be effective, it has to own title to properties and other assets. (That’s why certain assets, such as retirement accounts, don’t belong in a trust.) The process of transferring titles of your assets to the name of the trust is called “funding” your trust.
The trust gives the person named trustee the right to manage all assets on your behalf, per your directions which will be detailed in the trust. Since the assets are now controlled by the trustee, there is no need for the state to get involved after death.
What Assets Should Not Be Placed in a Trust?
401(k)s, 403(b)s, IRAs
Retirement accounts would be heavily taxed if they were retitled to the name of the trust, making them an asset that should not be included in a living trust. Undergoing the process of retitling them to the trust would force you to pay income tax on the entire amount.
Cashing out your 401(k) or other retirement account early will also bring about harsh tax consequences. If these accounts go unused after the holder passes, then it may make sense to transfer the assets to a beneficiary through a trust. Chat with us at Phelps LaClair and we can help you decide what is best.
HSAs or MSAs
Health Savings Accounts and Medical Savings Accounts can not be re-titled in the name of a trust. If they were to be contained in a trust, the funds would have to be withdrawn from the account and placed in the trust.
Life Insurance Policies
It’s simple with this one: leave it out of your trust and just change your policy’s ownership to the person who is also named as trustee. Done! You’ll avoid all tax penalties.
UTMAs or UGMAs
Uniform Transfers (or Uniform Gifts to Minors Accounts) legally belong to the minor—it’s their property upon the creation of the account. For this reason, there is no need to transfer the property to your living trust.
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