Which Assets You Shouldn’t Put in a Living Trust

Estate planning can feel overwhelming. This is especially true if you’re setting up a living trust. Monkey Business Images/Shutterstock

Estate planning can feel overwhelming. This is especially true if you’re setting up a living trust. Living trusts have many benefits. They can ensure that the people or causes you love are provided for.

Living trusts are a great way to manage your assets. But not everything you own should or can go into a living trust. What goes into a living trust, and which assets should go somewhere else?

Revocable and Irrevocable Trusts

A living trust helps you plan for what happens after you die. It can be set up in two different ways: a revocable trust and an irrevocable trust.

A revocable trust can be changed by the grantor, the person who established the trust and contributes assets to it. The grantor can add or remove assets to their trust.

To change an irrevocable trust, you’ll need the consent of all the beneficiaries and possibly court approval.

So, it’s important to know exactly what you want in an irrevocable trust and that only certain assets are placed in it.

Assets That Do Not Go Into a Living Trust

There are several assets that shouldn’t go or don’t need to go into a living trust. In fact, they can complicate matters if they’re in the trust when you pass.

Don’t Put a Vehicle Into a Living Trust

Vehicles under a certain value will not have to go through probate in most states and, therefore, do not need to go into a trust. If you plan to sell the vehicle, removing it from the trust can be complicated.

If it’s a high-value, collectible car and is predicted to increase in value, it may be a good fit for a living trust. But if your car is just a regular vehicle, a transfer-on-death (TOD) deed is all you need. Register it with a TOD at your state’s Department of Motor Vehicles.

Many think that if a vehicle is placed in a trust, it will have asset protection. But a living trust doesn’t provide asset protection. The grantor still has the liability if there is an accident. It’s the same as owning it in your name.

An irrevocable trust does provide some asset protection. However, once the vehicle is in the irrevocable trust, the grantor can no longer change (sell) it.

If you decide to place your vehicle in a trust, most states will charge you to transfer it from your name to the trust’s name.

You'll also need to update your insurance carrier as the new owner (trust) and ensure that there are no concerns about coverage.

Don’t Put Retirement Accounts in a Living Trust

You can transfer a 401(k) into a living trust. However, a trust is a separate legal entity, so the transfer will count as a withdrawal from the account.

Withdrawals are taxable, meaning you'll have a tax bill if you move it into a trust. And remember, if you’re not at least 59½, you’ll probably pay penalties for early withdrawal.

According to the Internal Revenue Service, only an individual can own an IRA. So, you can’t put your IRA into a trust.

There are a couple of ways you can handle your retirement account. You could list your beneficiaries on the accounts, bypassing trust.

The other option for your 401(k) or IRA is to make the trust the beneficiary upon your death. Then, the trust could divide the assets among your beneficiaries. This may be an option if you are concerned that your beneficiaries will deplete the account or not pay the taxes.

Don’t Put Health Savings Accounts in a Living Trust

Heath savings accounts (HSAs) let you pay medical expenses with pretax income. You put the money into the account, and it grows tax-free. Withdrawals aren’t taxed.

However, these are individual accounts, so they cannot be transferred to trusts that involve joint ownership.

Just like a retirement account, name your living trust as the beneficiary. If your spouse is already the beneficiary, then name the trust as your second beneficiary.

Don’t Put UGMA and UTMA Accounts in a Living Trust 

Uniform gifts to minors accounts (UGMAs) and uniform transfers to minors accounts (UTMAs) are irrevocable trusts. These accounts make a minor the owner and leave the donor or custodian to manage the funds.

Living trusts are revocable and managed by a trustee. Because of the difference in permanence and ownership, these accounts cannot be transferred into a living trust.

Keep these accounts separate. Either use a UTMA or a UGMA to give to a minor or use a living trust. Keep in mind that a living trust gives you more control over how the money is used. You can designate the funds to be released when you wish. With a UTMA or a UGMA, the minor has full access to the funds when they reach legal age.

Living Trust Offers Many Benefits

A living trust offers many benefits to you and your beneficiaries. It can protect your beneficiaries from going through a lengthy probate process.

But knowing what can and can’t go into your trust is important. Trying to put the wrong item in your living trust could cost you, for example, your 401(k) plan’s taxes and penalties.

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