What Assets Should Not Be Placed in a Revocable Trust?

Are you fine-tuning your estate planning and wondering what assets should not be placed in a revocable trust? A revocable trust is a great tool for protecting your assets, but not everything belongs in one.

As Arizona’s experienced trust lawyer, Lincoln & Wenk can help you understand the benefits of a revocable trust and which assets you should avoid placing in it. We work tirelessly to advocate on your behalf and offer you informed and experienced advice.

What Is a Revocable Trust?

A legal trust is a way of placing certain assets in the hands of a third-party entity that manages them on your behalf during your incapacitation or after death. It protects your assets and ensures your executor distributes your assets to your beneficiaries according to your wishes.

Whereas you can’t remove the assets you place in an irrevocable trust, you can add and remove assets from a revocable trust at will. Popular assets people place in a revocable trust include:

• Paid-off real estate properties
• Bank accounts
• Non-retirement investment accounts
• Stocks and bonds
• Personal property
• Shares of ownership in a business

Benefits of a Revocable Trust

What assets should not be placed in a revocable trust? Before you decide what to place in the trust, consider the benefits of starting a revocable trust.

Probate Avoidance

If you want to avoid the lengthy and convoluted process of probate, you’ll appreciate a revocable trust. This means your beneficiaries spend less time arguing and can move through the grieving process with the knowledge you care for them and have helped secure their future.

Incapacitation Management

While a will won’t manage your assets while you’re incapacitated, such as in a coma, with a revocable trust you can make arrangements to distribute or control your assets before death. This means you don’t lose access to essential financial management due to events beyond your control.

Flexibility

Compared to an irrevocable trust, a revocable trust offers increased flexibility. You can change beneficiaries, add and remove assets, and don’t need permission.

Assets You Should Avoid Putting in a Revocable Trust

Certain assets you can’t or shouldn’t place in a revocable trust for various reasons.

Cash

You can’t place physical cash in a revocable trust. However, you can open a bank account, deposit the cash, and place the bank account in the trust.

When you place an asset into a trust, the ownership transfers to the executor of the account. Managing the ownership of paper money becomes difficult, but if you have it deposited in a bank account, the process becomes routine.

Retirement Accounts

What assets should not be placed in a revocable trust? You should never place a retirement account in a revocable trust for several reasons.

Under retirement account exclusion, also known as the rule of 55, withdrawing money from your retirement account before you’re 55 and without leaving your job can subject you to significant tax penalties. Placing your retirement account in a trust can count as a withdrawal.

The 401(k) and IRA trust limitations also determine how much you can contribute to your retirement account each year. Because you forfeit ownership when you transfer your retirement account into a trust, you’ll no longer have the ability to add funds to your retirement account. Instead of adding your retirement account, consider changing the beneficiaries.

Health Savings Accounts

Health savings account (HSA) considerations resemble those of transferring a retirement account. They remain subject to various tax penalties, especially when it comes to withdrawals.

You don’t need to add these accounts to a trust because you already have an easier option. Change the beneficiary of the accounts so you can still leave the assets to your loved one.

Life Insurance Policies

While you can legally place a life insurance policy in a trust, you have better options. One common method includes changing the life insurance beneficiary designations to the trust.

It seems like a small distinction but by transferring the life insurance policy to the trust before it cashes out, you could experience problems if the tax law changes. By transferring the funds directly to the trust upon death, you avoid tax issues and still keep your money out of probate.

Transfer-On-Death Assets

You can designate certain assets as “transfer on death,” which means the ownership of these assets switches to the designated beneficiary only after the end of your life. You shouldn’t put these assets into a trust because they already have many of the same benefits. TOD assets avoid probate and your beneficiaries can’t control them while you’re still alive.

You can only designate certain assets as TOD, including:

• Brokerage accounts: These investment accounts allow you to buy stocks, bonds, mutual funds, and ETFs.
• Stocks: Stocks are shares of ownership in a company that often pay dividends.
• Bonds: Bonds represent a loan you make to the government or a corporation that earns interest throughout its lifetime.

Mortgaged Property

Placing mortgaged property in a revocable trust can cause complications. You can legally place the properties in the trust, but you’ll have to inform your lender. Some lenders have their regulations concerning mortgaged properties and trusts.

What assets should not be placed in a revocable trust? If you talk with both your lender and your lawyer and they both determine you won’t experience any adverse consequences or complications from transferring your mortgaged property, you can then move forward with placing it in your trust. As a general rule, you should always consult your attorney before placing any asset in a trust.

Vehicles

You can include a vehicle in a revocable trust, but many advisors will caution you and point out why doing so isn’t practical. Transferring your vehicle’s registration often doesn’t provide any significant benefits and can leave you vulnerable to complications.

Annuities

An annuity consists of an insurance contract that provides an income stream to the owner. Some annuities offer immediate benefits whereas others only provide benefits in the future. You’ll often see them as part of retirement planning.

The qualified annuities trust issues include restrictions on transfers and penalties or tax impositions. Because they function similarly to a retirement account, you’ll experience better advantages if you name a beneficiary of the annuity.

How To Place Assets Into a Trust

Now that you know which assets you shouldn’t place into a trust, how do you transfer appropriate assets into the legal entity?

1. Create the Trust

Work with your real estate attorney to draft the document that establishes the trust. The document discusses the terms, who manages the assets, and how to distribute your estate after death.

2. Transfer Titles

Placing certain assets in your trust, like real estate and bank accounts, requires you to re-title them in your new trust’s name. Remember that while you transfer ownership of these assets, when you establish a revocable trust, you still maintain a certain level of control over them, such as when to add or remove them from the entity.

3. Update Beneficiaries

For items you can’t place in the trust, such as retirement accounts, update who benefits from the asset upon your death. In general, you should designate the trust as the beneficiary to avoid probate and ensure the executor manages the money according to your wishes.

4. Transfer Personal Property

Transferring personal property may require you to fill out additional documents. You should keep all documents associated with your trust in a secure place.

5. Notify Financial Institutions

Your financial institutions may have additional requirements for transferring accounts to a trust. Provide them with a copy of your trust document and consult your lawyer about any additional needs.

Alternatives to a Revocable Trust

What assets should not be placed in a revocable trust? If you’re looking for a way to manage those assets you can’t place in a trust, consider the following alternatives:

• Naming beneficiaries: You can have your trust inherit the payout directly, or if you’re not concerned about how your children or another beneficiary will use the money, you can have certain policies designate them as the direct beneficiary.
• Pre-death transfer: Whether through power of attorney or your own decision from a sound mind, you can transfer your property and other assets to your children or family before you die. However, this requires some precise timing, and you remain subject to tax implications.
• Establishing a will: While a will has several benefits, such as a lower expense and the fact you maintain ownership, it also comes with challenges. For example, you won’t avoid probate.
• Irrevocable trust: You can’t change an irrevocable trust, but it provides stronger protection from both creditors and taxes.

Lincoln & Wenk Can Help You Create a Revocable Trust

What assets should not be placed in a revocable trust? Now that you know the details, you can approach the estate attorneys at Lincoln & Wenk about establishing a trust. Whether you’re wondering about the difference between trustee and executor or need more tips to help avoid probate, our experienced team can answer all your questions and address all your concerns.

To schedule a consultation, call 623-294-2464. Learn more now.