A revocable living trust, or “RLT,” protects your assets and allows you to use them during your lifetime. When you pass away, your RLT assets pass to your beneficiaries without going through the probate process. Before the RLT takes effect, it must be funded with assets. This occurs when assets are transferred into the trust. In other words, you transfer ownership of the assets from your name to the name of your RLT.
Some of your assets should go into the RLT, but some should not. Some assets may or may not be included in the RLT, depending on your circumstances. Transfer-on-death assets do not need to be included in your RLT as those assets will already pass to the beneficiaries you’ve designated without going through probate. Other assets, such as your retirement accounts, may trigger unintended consequences if transferred to your RLT. There are many factors to consider in making these decisions. Here are a few common assets and considerations.
Retirement Accounts and Qualified Annuities
Retirement accounts such as a 401k, 403b, IRA, or other qualified annuities should not go into your RLT. For one thing, you’re already able to pass this asset to a named beneficiary without going through probate. Further, these assets are subject to specific taxation rules. Placing this kind of asset in a trust could lead to unintended tax consequences. Transferring a retirement account into your RLT will likely be treated like a complete withdrawal and cause income tax liability. However, a retirement account can name your RLT as a beneficiary without the same consequence.
A life insurance policy designates a beneficiary, who will receive the proceeds upon your death without going through the probate process. While you can name the trust as a beneficiary of your life insurance policy, this should be done with caution. This is because if you are the trustee of your RLT, the trust assets are considered your property. In this situation, the addition of the life insurance proceeds to your estate may trigger estate tax liability.
Titled vehicles, such as cars, boats, snowmobiles, and motorcycles are not typically retitled in the name of your RLT. There are a lot of variables and state-specific considerations when it comes to putting titled vehicles into an RLT or not.
Some states may treat the title transfer to the trust as a sale and impose taxes. Some states allow vehicle owners to name an after-death beneficiary while others do not. The value of the titled vehicle, whether it is depreciating quickly or holding its value, as well as whether there is a loan against it can complicate trust goals if the asset is included in the RLT. Further, if the asset is held in the trust and is involved in an accident, the other trust assets may be vulnerable in a lawsuit.
Personal property, which includes things like artwork and other collections, furniture, and jewelry, usually doesn’t go into an RLT. Personal property doesn’t have any kind title to transfer into the trust’s name. Instead, personal property is usually taken care of by a trust provision or a separate memorandum.
Transferring your real estate into your RLT can potentially avoid estate tax that the property would be subject to if it went through probate. For those owning real estate in several states, the convenience of avoiding probate in several different states is another potential benefit. Real estate subject to a mortgage, however, would likely need to be refinanced in the trust’s name upon transfer into the trust, which might be problematic.
Most financial accounts—such as savings accounts, certificates of deposit, money market accounts, investment accounts, stocks and bonds, and mutual funds—are typically transferred into the RLT. If you are the trustee of your RLT, the checking account you use for your regular expenses can also go into the RLT. This is because as the trustee, you manage the trust’s assets and have the power to pay bills from the assets.
Work with an experienced Corning estate planning attorney.
Funding your trust requires attention to detail. We will help you determine the best way to handle each of your assets. Call Roth Elder Law, PLLC today to schedule an initial meeting at 607-962-6162 or complete this intake form and we’ll be in touch.