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Know what goes into your trust - and what doesn't belong

by Legacy Plan
November 12, 2015

Proper funding of revocable living trusts is essential to the success of estate plans that include trusts. It is vital to know which assets should, and which should not, be funded into a living trust. With certain assets, transferring them into a living trust can have very damaging tax consequences. With other assets, transferring them into a trust may not be necessary to gain the advantages of probate avoidance, but depending on your circumstances, you might have other goals that dictate funding that asset into the trust anyway.

You've taken most of the steps to completing the process of getting an estate plan in place. You decided to get started. You reached out to an attorney. You decided on your executors, trustees, power of attorney agents, as well as who will receive your wealth. You've signed the documents to put that plan in place. If your plan includes a revocable living trust, though, you have one more essential step: funding your trust.

One of the keys to the success of your estate plan is knowing what assets should go into your trust, and which ones you should leave in your own name. Its important to know what to transfer and what to avoid transferring, because in some cases, the results can be very harmful, such as triggering negative tax consequences or exposure to creditors.

Generally speaking, your assets that have a pay-on-death or transfer-on-death beneficiary designation on them are assets you need not fund into your trust. Those death beneficiary designations mean that those assets already avoid probate, so they already avoid the probate administration process.

For some assets, transferring them into a trust can be quite damaging to your wealth. For example, if you transfer ownership of your life insurance from your name to the name of the trustee of your living trust, that may increase the exposure to creditors that policy will have. Qualified retirement accounts (like 401(k)s, IRAs or qualified annuities) and health savings accounts definitely should not be transferred into your living trust. Health savings accounts cannot be funded into a trust, and transferring a qualified retirement account to a trust counts as a total withdrawal of the account funds, which carries with it potentially very harmful tax consequences.

Depending on what state you live in, there may be other assets that do not require probate to pass to your loved ones when you die. For example, in some states, the transfer of your car, truck or boat upon your death does not require probate. If you live in one of these states, you would not need to fund your vehicle into your trust in order for it to avoid probate.

In each of the above discussions, the focus is on whether or not you need to fund an asset in order to gain the benefit of probate avoidance. However, you might potentially choose to transfer an asset into trust anyway, based on your circumstances. Trusts offer their creators many benefits other than just probate avoidance, and for some people, placing assets into a trust may satisfy another goal they're seeking to accomplish. Your estate planning attorney can help you differentiate between assets that can be funded into a trust and those that should not be funded.

How do I create an estate plan?

There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life's contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at

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