Wednesday , 21 February 2024

Living (aka revocable) Trusts: What You Need To Know

Having a living, also known as revocable, trust enables the assets placed in the trust to avoid going through probate, a time-consuming and potentially costly process…[and] allows you to designate a trustee to manage your estate after you’re gone…but, although living trusts can streamline the disposition of your estate, there are plenty of opportunities to make costly missteps, particularly when it comes to transferring your assets to a trust. [This article address the ins and outs of setting up a living trust.]

What Not to Put in a Living Trust

Some types of accounts should never go into a trust…[such as]:

  • assets in your retirement accounts, such as your 401(k) plan, IRAs and tax-deferred annuities;
  • health savings accounts
  • and the less-common medical savings accounts, which allow you to take tax-free withdrawals for medical expenses…

#$$4$ If you transfer any of the above accounts to your trust, the IRS will treat the transaction as a distribution and you’ll have to pay income taxes on the entire amount…

You can make your trust a beneficiary of your retirement accounts…[By] naming your trust as a beneficiary [it] allows you to determine how the assets will be distributed to your heirs and could also protect the funds from creditors. However, the 2019 Setting Every Community Up for Retirement Enhancement (SECURE) Act, which requires non-spouse beneficiaries to deplete inherited IRAs in 10 years, created some uncertainty with respect to how long a trustee has to deplete an IRA that’s left in a trust, so consult with an attorney before naming the trust as beneficiary.

Most other assets can be placed in a trust, but some should probably be excluded for practical reasons. For example, in order to transfer a vehicle to a trust, it must be retitled, which can trigger taxes and fees, depending on where you live. In addition, cars and other vehicles, such as boats and motorcycles, typically don’t go through probate, so you don’t need to transfer them to a trust.

Also, although most accounts with financial institutions belong in your trust, you should exclude accounts used to pay your monthly bills as some entities, such as your utility company, may not accept payments unless they’re in your name… In addition, your bank may require you to close the account and open a new one in the name of the trust. For those reasons, it’s simply easier to keep those accounts outside the trust.

What Assets That Belong in a Trust

Another common misstep is to set up a trust and then fail to fund it. Funding a trust typically involves retitling property and financial accounts. You and your attorney should come up with a detailed inventory of assets that belong in the trust, such as:

  • real estate, including your home
    • It may be your largest asset, and it’s an appropriate one to place in your trust. Doing so will decrease the time required to transfer the home to your heirs and, if you own property in another state…transferring the title to a living trust will enable you to avoid going through probate in more than one state. You’ll need to create a new deed that transfers ownership of the property to your trust.
    • Transferring your home to a trust won’t affect your ability to sell it…however, if you want to refinance your mortgage or obtain a home equity line of credit, your lender may require you to transfer the property out of the trust and back to your name in order to get the loan. Once you’ve completed the transaction, you can transfer the property back to the trust but, because this process can be cumbersome, you may want to postpone transferring your home to a trust until after you’ve refinanced or closed on a HELOC or home-equity loan.
  • financial accounts
    • Financial accounts that can be transferred to a trust include:
      • stocks, bonds, mutual funds and other investments in nonretirement accounts; certificates of deposit;
      • money market funds; and bank savings accounts that aren’t being actively used to write checks; and
      • your safe deposit box.
    • This process requires some paperwork. For bank and brokerage accounts, you’ll need to open a new account in the name of the trust. If you have any physical stock and bond certificates, you may need to work with a stock transfer agent or bond issuer to change ownership to the trust. You may need to open a new CD to fulfill the transfer, so ask your financial institution if it will waive penalties before making the switch.
    • If this seems like a lot of work, consider it a gift to your heirs. Transferring inherited shares of stock or mutual funds to an estate (outside of a trust) can take months, during which time your heirs will be required to fill out lots of documents and probably make a few phone calls, all of which can delay probate.
  • personal property, like collectibles, jewelry and art
    • You can use the trust to designate who should receive these items…[but], while the car you drive around town probably doesn’t belong in a trust, you may want to include any collectible vehicles you own, particularly if you think the vehicle will retain its value or appreciate over time.
    • Once you’ve transferred and retitled assets that belong in your trust, you should review it periodically to make sure it’s up to date….[especially] after a major life change, such as the sale of your home, the birth of a child or grandchild, or a marriage or divorce.

Do You Really Need a Trust?

…Funding a living trust requires some legwork, and there is also the issue of cost. Depending on where you live, expect to pay $1,000 to $1,500 in legal fees, compared with $200 to $500 for a basic will [but] a living trust may be worth the cost if it reduces the hassles of going through probate….

The above version of the original article by Sandra Block ( was edited [ ] and abridged (…) to provide you with a faster and easier read. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

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