Revocable Living Trusts (RLTs) are commonly used for a variety of reasons ranging from avoiding probate to avoiding guardianship by retitling assets into the name of the trust if you should become disabled. However, not all assets can or should be transferred or even mentioned in RLTs including the following:
- Retirement Accounts – IRAs, 401(k)s, 403(b)s, 457s and other qualified accounts should not be transferred into RLTs during your lifetime (in certain situations, trusts can be the beneficiary of a retirement account) since there would be income taxation on whatever you take out of such an account. So, for example, if you took $100,000 out of your IRA to put into a RLT, then you would be income taxed on that $100,000 distribution.
- Uniform Transfers to Minors Act Accounts – deposits into an account for the benefit of a minor until the minor reaches the age of majority are considered irrevocable and being owned by the minor (although a custodian is named to be in charge of the account until the child reaches the age of majority when the child can do anything the child wants with the funds). Since the funds are considered owned by the minor, you cannot transfer funds that you deposited into the UTMA into your own RLT.
- HSAs – Health Savings Accounts (HSAs) and Medical Savings Accounts (MSAs) are accounts that grow and there is no taxation when there is a withdrawal for a qualified medical expense. It is not permitted that you fund your trust with these types of accounts (although sometimes you can designate a RLT as a beneficiary of your RLT – see article entitled “Four Ways to Estate Plan For An HSA” by clicking here.
- Assets held in foreign countries – Since most countries have different laws regarding trusts, one should talk with an attorney in the country where the asset is held prior to transferring to a RLT – see article entitled “Recognition of Wills and Trusts in Foreign Countries – Without Review it is Willy Nilly?” by clicking here.
- Vehicles – in Texas, you can simply designate the name of your beneficiary through the Department of Motor Vehicles.
- Homestead if you ever apply for Long-Term Care Medicaid – a homestead is generally a non-countable resource if you apply for long-term care Medicaid which helps pay if you are in a nursing home or for certain home care. However, if deeded into a RLT, it will count as a resource which could result in ineligibility for benefits.
- Joint Accounts – unless retitled into the name of the trust, upon the death of a joint tenant account owner, many joint accounts (typically joint with right of survivorship tenancy, tenancy by the entirety accounts, etc.) go to the surviving-joint owner. However, some joint accounts are treated as tenants in common accounts whereby the surviving joint owner may not own the beneficial interest of such accounts. The signature card controls authority over the account. (See article entitled “Seven Different Types of Bank Accounts Which Determine how Funds are Distributed at the Owner’s Death”).
- Accounts or Assets with beneficiary designations – although these accounts can also be retitled and the beneficiary designation can be removed, the beneficiary designation would also often need to be changed. Trusts never die (people do). So, for example, a RLT can own a life insurance policy with an individual being insured. If the beneficiary is not changed to the trust, then the beneficiary named on the death of the insured would be entitled to the insurance proceeds whereas you might prefer the insurance proceeds to be distributed in accordance with the terms of the trust.
- Unexercised Incentive Stock Options – since sometimes there are time requirements (such as not selling stock for a few years) to get tax benefits for an employee, a trustee of a RLT should be a person chosen to exercise the option in the event of the trustmaker’s death (since the employee could die before the option could be exercised).
- Stock in certain professional corporations – since there are licensing requirements for many professions and a RLT may benefit others who have not met such licensing requirements, professional corporation stock should often not be transferred to a RLT.
If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming virtual Estate Planning Essentials workshops by clicking here or calling 214-720-0102. We make it simple to attend and it is without obligation.