What Assets Should Not Be In A Trust?

assets in a trust

There are indeed compelling reasons for placing one’s assets into a trust. Firstly, trusts can effectively circumvent the time-consuming and often costly probate process, ensuring a seamless asset transition to beneficiaries. Secondly, trusts provide unparalleled control over the distribution of your assets, even after your demise.

Despite the manifold advantages of trusts, certain assets might be ill-suited for inclusion. For example, retirement bank accounts, such as Individual Retirement Accounts (IRAs) or 401(k)s, provide certain tax benefits that can be compromised when transferred into a trust.

The administrative hassle of updating the trust each time may outweigh the benefits. Moreover, certain property types, such as those with mortgages subject to a ‘due-on-sale’ clause, may trigger unintended consequences if transferred into a trust. Lastly, Professional-practice assets, like medical practices, can bring complications due to legal restrictions on ownership.

Each individual’s circumstances are unique and thus necessitate tailored advice from a competent professional. Pace & Associates CPAs, LLP is a firm that specializes in providing sophisticated and personalized financial guidance to high-net-worth individuals. This Blog post will explain the key considerations for establishing trust and highlight potential pitfalls to avoid. Let’s get started.

Trust | A Basic Intro

In its most fundamental essence, a trust is a fiduciary relationship in which one party, known as a trustor, bestows upon another party, the trustee, the right to hold title to property or assets for the benefit of a third party, termed the beneficiary. Trusts are established to provide legal protection for the trustor’s assets, to ensure that those assets are distributed according to the trustor’s wishes, and to save time, reduce paperwork, and sometimes bypass or reduce inheritance or estate taxes.

In essence, trust is a powerful estate plan tool that can ensure a lasting legacy when utilized judiciously. Trusts have been used for centuries to safeguard and manage assets. They are legal arrangements in which one party (the trustor or grantor) transfers ownership of property to another party (the successor trustee) for the benefit of a third party (the beneficiary).

Trusts can be established during the trustor’s lifetime, known as living trusts, or upon death, as specified in a will. They can serve various purposes, including asset protection, tax planning, and providing for minor children or individuals with special needs.

Types Of Trust

There are several main types of trusts that individuals can establish to meet their specific needs and goals. These include revocable trusts, which allow flexibility and control over assets during the grantor’s lifetime, and irrevocable trusts, which provide asset protection and potential tax advantages. Other types of trusts include charitable, special needs, and testamentary trusts.

  1. Revocable Trusts

Revocable trusts, often called living trusts, are flexible legal entities that allow the trustor to alter or terminate the trust during their lifetime, should their circumstances or intentions change. One of the major advantages of a revocable trust is its capacity to bypass probate, the legal process of validating a will, thus ensuring a swift and private transfer of assets upon the trustor’s demise.

Moreover, while the assets in a revocable trust are subject to estate taxes, the trustor retains control and can continue to benefit from the assets during their lifetime.

  1. Irrevocable Trusts

In contrast, an irrevocable trust cannot be altered or terminated without the beneficiary’s permission once created. The assets placed in an irrevocable trust are no longer owned by the trustor, thereby removing them from the trustor’s taxable estate.

This characteristic makes irrevocable trusts a favored tool for estate and tax planning, as they can significantly reduce potential estate taxes and safeguard assets from creditors. However, the trustor relinquishes control over these assets, a potential disadvantage worth careful consideration.

  1. Charitable Trusts

Charitable trusts allow individuals to contribute to a charitable organization while receiving tax benefits. Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs) are common. CRTs provide a stream of income for the donor or other non-charitable beneficiaries for a term, with the remaining assets going to the charity.

Conversely, CLTs provide charity income for a term, with the remaining assets going to non-charitable beneficiaries. The unique structure of charitable trusts allows for impactful philanthropy and beneficial tax strategies.

  1. Special Needs Trusts

Special needs trusts are established to support individuals with disabilities. They ensure beneficiaries can utilize the trust assets for extra care, equipment, or services while preserving their eligibility for governmental assistance programs. These trusts require careful financial planning and should be set up in consultation with an expert legal advisor.

Each type of trust carries unique benefits tailored to specific circumstances and objectives. However, a trust should be set up in consultation with an experienced financial advisor or estate planning attorney, ensuring that the chosen trust aligns with the trustor’s comprehensive estate and financial plan. It’s a meticulous process requiring nuance, precision, and foresight, but the rewards, when well-orchestrated, are undeniably profound.

How To Avoid Probate With A Trust?

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Probate refers to the legal process of validating a will and distributing assets after the death of an individual. This process can be tedious, time-consuming, and often takes several months or even years to complete. Moreover, probate records are public documents, meaning the details of your estate would be accessible to anyone who wishes to view them. Therefore, avoiding probate can provide an expedited, private method of transferring assets to the beneficiaries.

  1. The Role Of Trusts In Probate Avoidance

Trusts, specifically revocable living trusts, can be an effective instrument in dodging the probate process. A revocable living trust permits the grantor – the person creating the trust- to maintain control over their assets during their lifetime. Upon their demise, the assets are transferred directly to the designated beneficiaries under the terms stipulated by the trust, bypassing the probate process altogether.

  1. The Process Of Setting Up A Trust

Establishing a trust involves the creation of a trust document, akin to a will, outlining the details of the trust. This includes specifying the trustee, who will manage the trust, and the beneficiaries, who will receive the assets. Once the document is prepared, the grantor must transfer ownership of the relevant assets into the trust. It’s crucial to remember that only the assets within the trust are exempt from probate; any assets outside the trust will still be subject to the process.

  1. Pitfalls To Avoid When Establishing A Trust

While a trust can effectively avoid probate, one must tread carefully to avoid potential pitfalls. An improperly established trust could fail to achieve its purpose, leaving your estate subject to probate. Also, remember that a revocable living trust does not confer tax benefits or protect assets from creditors. For these benefits, one must consider creating irrevocable trusts that come with their own complexities.

What Assets To Include In A Trust

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Below are some important assets you should consider including in your trust to ensure their direct transfer to your beneficiaries without the probate process. By including these assets in your trust, you can provide a clear roadmap for the distribution of your estate, minimize potential disputes, and ensure a smoother and more efficient transfer of your assets to your loved ones.

A Wide Spectrum Of Trust Assets

Virtually any asset of economic value can be placed into a trust, allowing for intricate and highly personalized estate planning.

Tangible Personal Property

Tangible personal property encompasses items of worth, such as jewelry, artwork, antiques, and collectibles. Often laden with monetary and sentimental value, these assets can be placed into a trust, thereby ensuring their secure transition to chosen beneficiaries.

Real Estate

Real estate, whether residential, commercial, or investment property, can be incorporated into a trust. This encompasses not just the primary residence of the grantor but also vacation homes, rental properties, and land. Including real estate in a trust can mitigate potential disputes among beneficiaries while circumventing probate.

Financial Investments

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Financial investments spanning stocks, bonds, mutual funds, and exchange-traded funds (ETFs) can be entrusted. The ability to include these assets in a trust extends the benefits of trust-based estate planning to the financial market, making it a versatile tool for affluent individuals with diverse portfolios.

Business Interests

Owners of businesses, whether small enterprises or large corporations, can place their business interests into a trust. This not only helps in evading probate but also provides a seamless transition of control and ownership, ensuring the uninterrupted operation of the business.

Intangible Personal Property

Intangible personal property refers to non-physical assets such as patents, copyrights, royalties, and digital assets like domain names or digital currencies. As the value of such assets can be significant, incorporating them into a trust can be a crucial aspect of estate planning.

Life Insurance Policies

A life insurance policy can be made payable to a trust. This approach, often implemented through an irrevocable life insurance trust (ILIT), can offer multiple benefits, including potential estate tax savings and providing a measure of control over the policy proceeds.

Choosing The Right Trust For Your Assets

The type of trust suitable for your assets largely depends on your objectives – avoiding probate, reducing estate taxes, protecting assets from creditors, or controlling how your assets are used or distributed after you’re gone. Consulting with an experienced estate planning attorney is crucial in determining the best trust structure for your needs.

The Imperative Of Correct Asset Transfer

Regardless of the type of asset you’re placing into a trust, it’s important to remember that the asset must be correctly transferred, which typically involves changing the title to the name of the trust. An asset not properly retitled to the trust could inadvertently be left subject to probate, undermining the advantages of having a trust in the first place.

Assets | To Exclude From A Trust

While the utility and versatility of trusts in estate planning are indisputable, it is important to acknowledge that not all assets are ideally suited for placement in a trust structure. A reasonable understanding of which assets to exclude can play a critical role in maximizing estate value and ensuring the seamless transition of wealth.

Retirement Accounts

Retirement accounts such as Individual Retirement Accounts (IRAs), 401(k)s, and other qualified plans are generally not recommended for trust inclusion due to their intricate tax rules. The funds in these accounts grow tax-deferred, and withdrawals are taxed as income. However, if these assets are transferred into a trust, the entire account may become subject to immediate income tax, potentially negating the tax-deferred benefit.

Health And Medical Savings Accounts

Health Savings Accounts (HSAs) and Medical Savings Accounts (MSAs) are designed to be owned by individuals and are incompatible with trust structures. Transferring an HSA or an MSA to a trust can trigger tax consequences and may even result in losing the account’s tax-exempt status.

Motor Vehicles

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Including motor vehicles in a trust can often lead to practical challenges. Insurance issues might arise as some companies hesitate to insure a vehicle owned by a trust. Furthermore, transferring the title of a vehicle after the original owner’s death can be a straightforward process in many jurisdictions, rendering the inclusion in a trust unnecessary.

Personal Effects

Personal items such as clothing, furniture, and other household items may have more sentimental value than monetary worth. Consequently, the effort and cost to transfer these assets into a trust may outweigh the benefits. Instead, a simple will or a memorandum of personal property can be used to pass on these items according to your wishes.

While trusts offer many benefits for estate planning, their application should be pursued with discernment. The decision to exclude certain assets from a trust can often be as significant as including others. Pace & Associates CPAs can assist you in determining the most effective and efficient way to distribute your assets, considering both tax implications and practical considerations.

Wrap Up

In conclusion, trusts serve as a crucial tool in estate planning, offering a structured and efficient approach to the distribution of assets. Their utility, however, hinges on a discerning selection of assets. Real estate often constitutes a top choice when considering which assets to include in a trust.

Certain possessions, such as Health and Medical Savings Accounts, are best left outside the trust structure due to potential tax repercussions and other complexities. Similarly, including motor vehicles and personal effects may invite unnecessary complications. Trusts, while invaluable, are not a one-size-fits-all solution.

Pace & Associates CPAs understand the intricacies of trusts and estate planning, providing tailored solutions to meet your needs. Contact us today to learn more about how we can assist you in securing a prosperous financial future through strategic trust management.


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