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What assets cannot be placed in a trust?
In this article, you’ll learn about:
Let’s dig in.
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Here is a list of assets that cannot be placed into a trust:
Let’s dig deeper into the reasons these assets cannot get placed into a trust.
Retirement accounts like 401(k)s, 403(b)s, or IRAs can’t be put into a trust because of tax rules.
The IRS has specific rules for these accounts.
When you contribute to these accounts, you often get a tax deduction.
The money grows tax-free until you withdraw it.
If you move these assets into a trust during your lifetime, it’s like making a withdrawal.
You would have to pay taxes on the entire amount.
That’s why retirement accounts typically can’t be moved into a trust during your lifetime.
But after your death, you can name a trust as a beneficiary of these accounts.
Read More: How Much Money Can You Inherit Without Paying Taxes On It?
Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) are personal accounts.
They are tied directly to the individual they were established for.
These accounts are designed to pay for the healthcare costs of that person.
Placing HSAs or FSAs into a trust would mean transferring ownership.
But the law says these accounts can’t be transferred.
They must stay in the name of the person they were created for.
Moreover, these accounts have special tax advantages.
These advantages could be lost if the accounts were put into a trust.
This is because a trust is a separate legal entity.
It has different tax rules compared to individual accounts.
So, to keep the tax benefits and follow the law, HSAs and FSAs cannot be placed into a trust.
Read More: Do You Need A Lawyer To Remove A Name From A Deed?
Life insurance policies themselves can’t be directly placed into a trust.
This is due to the contractual nature of the policy between the insurer and the insured.
However, you can name a trust as the beneficiary of your life insurance policy.
This means when the policy pays out, the money goes directly to the trust.
This method is commonly used to create an Irrevocable Life Insurance Trust (ILIT).
This can help manage estate taxes and protect the proceeds for beneficiaries.
Read More: What Happens To An Irrevocable Trust When The Grantor Dies?
Certain types of real estate may have issues being placed in a trust due to the mortgage agreement.
A “due on sale” clause is often present in these contracts.
This clause means if you transfer the property into a trust, the lender may demand full payment on the mortgage.
This happens because the lender sees the transfer as a sale.
So, transferring such real estate to a trust can trigger a demand for immediate full repayment, which can be problematic.
Read More: Does A Revocable Trust Become Irrevocable Upon Death
Motor vehicles can technically be placed in a trust, but often it’s not done. Here’s why:
These reasons make putting cars into a trust less common, but it’s not impossible.
It depends on the specifics of each situation.
Read More: How To Set Up A Trust Fund For A Child
UTMA and UGMA accounts are types of custodial accounts.
They are gifts given directly to minors.
These accounts are in the minor’s name from the start.
They are managed by a custodian until the minor reaches a certain age.
This is often 18 or 21, depending on the state.
The key point is that the minor is the owner of the account.
That means the account can’t be moved into a trust.
The trust is a separate legal entity.
It’s not possible to move ownership from the minor to the trust.
This is because UTMA and UGMA accounts are designed to be outright gifts to the minor.
They are not designed to be controlled by a trust.
Read More: The Biggest Mistake Parents Make When Setting Up A Trust Fund
Certain personal property, like art or jewelry, does not come with official documents that prove ownership.
These items can be hard to transfer to a trust.
Trusts work best with assets that have a clear legal title.
When an asset lacks this title, there’s no straightforward way to move it into the trust.
In many cases, people simply list these items in a trust document.
But the process is less formal and clear-cut than for assets with legal titles.
Read More: How Much Does A Living Trust Cost?
Professional service corporations are businesses that provide professional services like law or medicine.
Only licensed lawyers or doctors can own these corporations.
Trusts can’t hold professional licenses.
So, they can’t own shares in these corporations.
This is due to rules about who can own and control these kinds of businesses.
It’s designed to ensure that only qualified and licensed professionals run them.
Read More: How Much Money Do You Need To Start A Trust Fund For A Child?
Here are other questions our clients ask us related to what should you not put in a living trust.
A trust may be needed instead of a will for several reasons:
Read More: Can I Set Up A Trust Without My Spouse?
You might need a trust if your net worth is significant, often suggested at around $100,000 to $150,000 or more.
This is because trusts help avoid probate, a process that can be costly and time-consuming.
If you own real estate in multiple states, a trust can help regardless of your net worth.
However, a trust’s usefulness isn’t solely about net worth.
You might want a trust if:
Read More: How To Set Up A Trust
Placing your house in a trust has several potential benefits:
However, there are also disadvantages of putting your house in a trust, like:
Remember, whether you should put your house in a trust depends on your personal situation.
It’s a decision that should be made after considering your:
Read More: Does Your House Have To Be Paid Off To Put It In A Trust
Yes, it can be beneficial to include bank accounts in a living trust.
Here’s why bank accounts should be included in a living trust:
So, adding a bank account to a living trust can offer control, privacy, and simplicity.
It can also help your heirs avoid a potentially long and costly probate process.
Yes, a trust can override a will in some respects.
When you have a trust and a will, the trust governs the assets it holds.
The will covers anything not included in the trust.
If an asset is in the trust, the trust’s terms will be followed, even if the will says something different.
This is because the trust has legal ownership of the assets it holds, and the terms of the trust are legally binding.
But remember, a will is necessary to cover any assets not held in the trust.
Read More: How Much Does An Estate Have To Be Worth To Go To Probate?
If you want help figuring out what assets to put into a trust, fill out the form below.
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