What Should You Not Put In A Living Trust?

Aug 11, 2023Estate Planning, Trusts

Leslie Thomas, Attorney

A living trust is an important instrument for estate planning. In fact, anyone who wants to avoid the probate process and maintain privacy should consider a living trust.

Why? Because the probate process can take a long time and can cost a lot. This is money you will have to pay. A living trust will allow you to avoid probate and ensure the smooth transition of trust assets after death. 

Most of your assets can and should go into the trust. But there are a few assets that shouldn’t be placed into a trust. That’s what we are going to cover here.

Because understanding what you should not put in a living trust can be just as important as knowing what to include. 

In this article, we’ll focus on the assets that are best left out of your revocable trust. We’ll also discuss why retirement accounts may not be suitable for inclusion in your living trust. 

Last, we’ll shed light on the complexities surrounding jointly owned assets when considering them for a revocable trust. 

With legal advice from an experienced estate planning attorney in Fort Worth, these insights will help you make informed decisions.

This includes managing your financial accounts and life insurance policies, minimizing estate taxes, and maximizing the benefits of having a well-structured revocable living trust.

That said, this post does not replace personalized legal advice. If you need a legal opinion on your situation, reach out to schedule a complimentary consultation

Before going into the details, watch this video to get a general idea of what a trust is and how it is different from a will:

1. You Should Not Place Retirement Accounts in a Living Trust

Retirement accounts, like 401(k)s and IRAs, are accounts that already have built-in protections against creditors. They also allow you to name beneficiaries directly on the account to aid in transfer upon your death.

It’s generally advised not to put retirement accounts into your trust due to potential tax implications. When you pass away, your heirs can take distributions from these accounts over a period of time, spreading out the tax burden. 

This way, you don’t pay income tax on the whole amount all at once.

The amount of time those payments can be spread out depends on a number of factors. That is why you need to consult with a lawyer who specializes in trusts.  

Upon passing away, if the retirement assets were moved into a trust, they could be liable to taxation without delay, leading to an immense financial strain on your beneficiaries.

Why Retirement Accounts Should Not Be Included in Living Trusts

  • Retirement accounts already have built-in protections against creditors
  • Transferring retirement accounts into a trust upon your death could result in immediate taxation 
  • Placing retirement funds into a living trust might trigger early withdrawal penalties

If you need more guidance about managing estate planning with regard to specific asset classes like retirement funds, Thomas-Walters PLLC, is an experienced Estate Planning Attorney based out of Fort Worth, Texas. 

We can provide valuable advice tailored specifically towards preserving wealth while minimizing potential liabilities associated with inheritance taxes and probate fees.

Key Takeaway: 

Retirement accounts, such as 401(k)s and IRAs, should not be placed in a living trust due to built-in creditor protections and potential tax implications. It’s best to name direct beneficiaries on each individual account instead of including them within the parameters of your living trust. 

2. You Should Not Put Health Savings Accounts in a Living Trust

You shouldn’t include health savings accounts (HSA) and medical savings accounts (MSA) in a living trust, either. These are tax-free assets that can’t be transferred to a trust.

As HSA’s are individually owned trusts, they are already protected and have a named beneficiary designated by the owner of the trust.

You might consider having your trust as the beneficiary. This will give you flexibility in distributing these assets after you pass on. Again, we suggest you get specific advice by a qualified attorney on this.

3. Your Bank Account Should Not Be Put Into a Living Trust

You can place your bank account(s) into a trust. However, we usually don’t recommend this. Instead, have your trust be the named payable upon death beneficiary instead. 

Recap of What Should You Not Put In A Living Trust

Don’t let your living trust become a liability – A retirement account, like 401(k)s and IRAs, should be kept out of your living trust to avoid tax complications.

Real estate titles should be excluded as well, as they can be transferred through other means like joint tenancy or a transfer-on-death deed.

Are There Downsides to a Living Trust?

There is no downside to a living trust. A trust will avoid probate, simplifying the transfer of assets, all while ensuring privacy. And it will reduce the time it takes for all this to be resolved. 

The benefit if a living trust is that you do all of the preplanning for your heirs, leaving nothing to chance inside of the probate system. They also preserve privacy of your assets and liabilities, keeping these out of the public eye. 

By being mindful of what you should or should not include in your living trust, you can ensure that your estate planning is effective and secure.

This estate planning guide will help you with this process.

As a living trust document can be complicated to approach on your own. You’ll need to find an experienced estate planning lawyer to make sure your assets are correctly protected and administered. 

Reach out for a free, no-obligation phone consultation: 817-258-5908

FAQs About What Should You Not Put in a Living Trust

Should my bank account be in my trust?

Placing your bank account into your living trust can make managing your assets easier upon death, however, it’s not recommended. It depends on various aspects, including the size of your estate and individual circumstances, as to whether or not placing a bank account into a living trust is appropriate. It’s always best to consult with an experienced estate planning attorney.

What is the average trust balance?

Trusts don’t have “balances” per se, as they hold assets. The average asset balance of a trust can vary greatly depending on individual wealth levels and goals for asset distribution. Trusts aren’t just for millionaires – they’re practical tools for many people looking to manage their estates effectively. 

How much money should you have before considering a trust?

There is no set dollar amount you should have before considering a trust. Establishing a trust is more of a mindset. Do you want to do preplanning with a trust or just use a will and let your loved ones deal with everything when you are gone? This is a more important question. 

Why should you not put an IRA in a living trust?

An IRA should not be placed in a living trust because it could trigger immediate taxation due to IRS rules on retirement account distributions. 

We are here to help you with all of your estate planning needs.


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