Posted by Ronald J. Fichera Mar 07, 2022
A Revocable Living Trust is a great tool to help your assets pass smoothly to your beneficiaries, and it can significantly reduce the headaches of probate. However, while some assets belong in a trust, others cannot (or should not) go into one.
One of the largest financial planning misconceptions people hold is that having a will ensures their property will transfer quickly to their heirs. The truth is, whether you have a will or not, your assets will go through the probate process when you die.
Probate can be a rather lengthy and costly process for your heirs. The procedure can extend from a couple of months for a simple estate to a couple of years for a more complex estate. For most people, ensuring their property is preserved and passed on at the lowest possible cost is essential to a comprehensive estate plan.
Advantages of Revocable Living Trusts.
A revocable living trust is an instrument created for the purpose of protecting your assets during your lifetime. It also creates an avenue to pass your assets with ease after your death. There are several benefits of creating a trust. The chief advantage is to avoid probate. Placing your important assets in a trust can offer you the peace of mind of knowing assets will be passed onto the beneficiary you designate, under the conditions you choose, and without first undergoing a drawn-out legal process. A trust can also provide you with some level of privacy as to the information shared about your estate. Another feature is that placing your assets in a trust will help protect them should you become incapacitated.
Can I Avoid Probate with a Trust?
It is important to note that there is no way to completely bypass probate. While your most important assets may be transferred as part of your trust, there are some assets that will not fund your trust for a variety of reasons. These other assets will still go through the probate process. Though setting up a trust can be costly and complex, it can make the inheritance process easier on your beneficiaries. To ensure your trust performs as it was intended, timely and proper funding is vital.
What Type of Assets Go into a Trust?
Many people assume that once they sign the trust documents at their attorney's office, they are ready to roll. Setting up a trust, however, is only half of the solution. For a revocable living trust to take effect, it should be funded by transferring certain assets into the trust. Often people fund a living trust with real estate, financial accounts, life insurance, annuity certificates, personal property, business interests and other assets. The most notable types are outlined below:
Real Estate: Many people wonder whether it is a good idea to place their house in a trust. Considering that your home is potentially one of your largest assets, living trusts can be especially beneficial as they can transfer real estate quickly. Additionally, they help avoid the hassle of separate probate proceedings for land, commercial properties and homes that are owned out of state or held in different counties. Any property with a mortgage, however, would require refinancing into the name of the trust, and some lenders may be reluctant to do this.
Financial Accounts: There are several types of financial assets that can be owned by a trust, including:
Funding your trust with bank and brokerage accounts generally requires new account paperwork in the name of the trust as well as signed authorization to retitle or transfer the asset. Likewise, physical bond and stock certificates require a change of ownership to be completed with the stock transfer agent or bond issuer. You may also wish to fund the trust with a checking or saving account, though it is important to carefully consider any implications if these accounts require regular withdrawals or activity. Additionally, while you may fund the trust with an annuity, these instruments already enjoy a preferential tax treatment, and transferring them may forfeit this benefit. With existing certificates of deposit, they are usually transferred to a trust by opening a new CD. When doing so, it is a good idea to see if your issuer will waive any penalties. Finally, safe deposit boxes may be issued to the trust, or ownership may be transferred for an existing box.
Life Insurance: Many people ask if it is a good idea to put life insurance in a trust. The benefits include protecting it from creditors and making it easier for your loved ones to access the money by avoiding probate. Naming the living trust as a beneficiary of your life insurance may come with some risks. If you are the trustee of your revocable living trust, all assets in the trust are considered your property. In this instance, life insurance proceeds are counted as part of your estate's worth and could create a taxable situation should you reach the IRS threshold for taxable estates. For 2022, that amount is $12.06 Million for an individual and $24.12 million for couples. Funding a trust with life insurance and annuity contracts generally requires a change of ownership form submitted to the contract issuer.
Valuable Personal Property: Personal items, such as jewelry, art, collectibles, and furniture, including pianos or other important pieces, may be placed in a trust. Personal property without any legal certificate or title is commonly listed on an accompanying schedule that is kept with your trust documents. Those assets with certificates or legal title often require the owner to quitclaim their ownership interest to the trust.
Collectible Vehicles: Some cars retain their cash value for long periods of time and therefore may be worth transferring to your revocable living trust. It is worth considering the title transfers and taxes that may be imposed, so it is important to speak to a trusted financial adviser or lawyer before transferring such assets.
Can You Put a Business in a Living Trust?
There are a number of advantages of transferring your business interest into a revocable living trust. Benefits generally include providing relief to your family from carrying the burden of your business debts, as well as the potential to reduce the tax burden on your estate. Below are the effects of several types of business ownerships:
What Assets Cannot Be Placed in a Trust?
There are a variety of assets that you cannot or should not place in a living trust. These include:
A Word About Irrevocable Trusts.
While the assets placed in an irrevocable trust are no longer vulnerable to creditors or subject to an estate tax, you forfeit ownership of the assets. Careful consideration should be made when using an irrevocable trust, and it is highly advised that you first consult your financial adviser or attorney.
While creating a living trust may be costly and require a lot of legwork to fund, there are many benefits to using it as an instrument to protect your assets. The flexibility these trusts offer helps to ensure that your assets are protected during your lifetime and pass easily to heirs after your death.
Estate laws vary from state to state. This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although the author intends to make sure the information is accurate and useful, it is recommended you consult a tax preparer, professional tax adviser, or lawyer.
This article was provided by Kris Maksimovich, a financial adviser, for Kiplinger Magazine, and brought to you by the Ronald J. Fichera Law Firm, where our mission is to provide trusted, professional legal services and strategic advice to assist our clients in their personal and business matters. Our firm is committed to delivering efficient and cost-effective legal services focusing on communication, responsiveness, and attention to detail. For more information about our services, contact us today!
This is not tax advice and should not be construed as such. Please seek professional tax services for more information and advice that will apply to your specific tax situation.
As a reminder, this Blog Post is for informational purposes only and is not intended as legal or tax advice.