415-558-7700 [email protected]

What Assets Go in a Trust and What Assets Stay Out?

When planning your estate, understanding which assets should be placed in a trust and which should remain outside is crucial. This decision can impact the management, taxation, and distribution of your assets after your death. While there are general guidelines, the specifics can vary based on individual circumstances. This post provides an overview of common practices regarding asset placement in trusts and highlights considerations for different types of assets.

Assets Commonly Placed in a Trust

  1. Real Estate:
    • Primary Residences: Often placed in a trust to avoid probate and ensure smooth transfer of ownership.
    • Investment Properties: Including rental properties and vacation homes, to manage and distribute income and ownership efficiently.
  2. Bank Accounts:
    • Checking and Savings Accounts: To provide the trustee with easy access to funds for managing the estate.
    • Certificates of Deposit (CDs): To ensure these funds are part of the trust’s management and distribution plan.
  3. Non-Retirement Investment Accounts:
    • Brokerage Accounts: Including stocks, bonds, and mutual funds, to simplify the transfer and management of these assets.
  4. Personal Property:
    • Valuable Personal Items: Such as jewelry, art, antiques, and collectibles, to ensure these items are distributed according to your wishes.
  5. Business Interests:
    • Privately Held Business Interests: Including shares in privately held companies, to facilitate continued management and transition of business interests.

Assets Typically Left Out of a Trust

  1. Retirement Accounts:
    • 401(k) Plans and IRAs: These accounts are usually not placed in a trust because of tax implications. Naming a designated beneficiary allows the account to be transferred directly to the beneficiary, who can then manage withdrawals in a tax-efficient manner.
      • Tax Considerations: Placing a pre-tax retirement account in a trust often leads to the account being liquidated upon death, resulting in a large tax bill as the entire account balance is treated as income in the year of death.
  2. Life Insurance Policies:
    • Beneficiary Designations: Life insurance policies typically name beneficiaries directly, bypassing the need for inclusion in a trust. This ensures the proceeds are distributed quickly and without the need for probate.
      • Trust as Beneficiary: In some cases, especially if the policy is intended to provide liquidity for the trust, the trust itself may be named as the beneficiary.
  3. Payable-on-Death (POD) and Transfer-on-Death (TOD) Accounts:
    • Bank and Investment Accounts: These accounts allow for the direct transfer of assets to named beneficiaries upon death, making them unnecessary to include in a trust.
  4. Health Savings Accounts (HSAs) and Medical Savings Accounts (MSAs):
    • Beneficiary Designations: These accounts also typically have beneficiary designations and are not included in a trust.

Special Considerations

  1. Blended Families: For individuals with children from previous marriages, trusts can be used strategically to ensure that all children are provided for according to specific wishes.
  2. Special Needs Beneficiaries: Trusts can include provisions for special needs beneficiaries to ensure they receive appropriate care without jeopardizing eligibility for government benefits.
  3. Charitable Giving: Trusts can be designed to include charitable donations, ensuring that specific philanthropic goals are met.

Why Some Assets Should Stay Out of a Trust

  • Tax Efficiency: For assets like retirement accounts, keeping them out of the trust and naming a beneficiary directly allows for more flexible and tax-efficient withdrawals.
  • Simplicity and Speed: Direct beneficiary designations can speed up the distribution process, allowing beneficiaries to access funds more quickly without going through the trust administration process.
  • Legal and Financial Considerations: Some assets may have legal or financial restrictions that make including them in a trust impractical or unnecessary.

Conclusion

Deciding which assets to place in a trust and which to leave out is a crucial aspect of estate planning. While real estate, non-retirement investment accounts, and valuable personal property are commonly included in trusts, retirement accounts and life insurance policies are typically handled through direct beneficiary designations to maximize tax efficiency and streamline the distribution process.
It’s important to consult with an estate planning attorney to tailor your plan to your specific circumstances and ensure that your assets are managed and distributed according to your wishes. Proper planning can provide peace of mind, knowing that your estate will be handled smoothly and efficiently after your passing.