6 Things You Should Never Put in a Living Trust
6 Things You Should Never Put in a Living Trust
Preston Hartwick Tue, November 12, 2024 GOBankingRates
Estate planning provides for the smooth handling of your assets after death. However, only around 32% of American adults have a will, indicating that most people haven’t taken the appropriate steps to prepare for the management of their estate, according to LegalZoom.
One essential tool for estate planning is a living trust. It allows your assets to bypass the lengthy, costly probate process and maintains your financial privacy.
Since a living trust can be amended or revoked at any point during your lifetime, it also serves as a flexible way to control your assets, avoid family disputes and ultimately provide peace of mind knowing that your estate will be managed according to your wishes.
However, not every type of asset belongs in a living trust. This article will cover the assets you should exclude from your living trust and why.
Things To Leave Out of Your Living Trust
Including certain assets in a living trust can complicate estate management, trigger tax consequences or negatively impact the asset’s value.
While it’s always a good idea to consult an estate planning attorney for legal advice, consider excluding the following assets to maximize the benefits of your living trust:
1. Retirement Accounts
Retirement accounts like 401(k)s and IRAs can trigger tax consequences if you include them in your living will.
Since your living trust is a separate legal entity, any transfers you make from a retirement account count as a withdrawal. This makes transfers taxable and subject to penalties for early withdrawal.
One way to avoid this issue is to name the living trust as a beneficiary on the retirement account. Any funds in the account transfer to the trust upon your death and are distributed to other beneficiaries according to your will.
2. Health Savings Accounts and Medical Savings Accounts
Health savings accounts (HSAs) and medical savings accounts (MSAs) only offer tax-free growth if you use the money for medical expenses. Therefore, transferring an HSA or MSA to a living trust would cause you to lose this tax protection.
By keeping HSAs outside your trust and designating beneficiaries directly, you can continue to enjoy the tax benefits of your HSA or MSA.
3. Active Bank Accounts
You can include checking accounts or other active financial accounts into your living trust, but there are easier ways to transfer funds to your heirs and bypass the probate process.