If you’re thinking about setting up a living trust, you might think your job is finished after visiting your lawyer and signing the necessary documents. But there’s more to this story.
To give that newly minted trust its full power, you need to fund it. You need to decide which assets you’ll put in the trust and complete the transfers. But which assets belong there? And which ones are you better off leaving outside your trust? Here’s what you need to know.
WHY A LIVING TRUST
A living trust is legal structure that allows you to manage your assets while you’re alive and pass assets easily to beneficiaries when you die rather going through the courts.
Jessica Lubar, a tax lawyer and director of advanced planning at Northwestern Mutual, says there are several reasons for creating a living trust. Whether it is advantageous often depends on where you live. One of the primary reasons for having a living trust is that it bypasses probate, or a court process that validates your estate plan and directs the distribution of your assets. Lubar notes that probate can be a complex journey that requires significant time, money and supervision.
Estates that move through probate court automatically become part of the public record. But a trust lets you keep your finances, and the way you distribute them, private. Plus, a trust gives you far more control over how your assets are disseminated when you die. You get to decide who gets which assets, how much and when they get access to them. So, for instance, you can give some of your investments to your child when he turns 18 and the rest when he turns 30.
While a trust and a will both let you designate beneficiaries who will inherit your assets when you die, Lubar says that a living trust might provide lifetime benefits too. Having a trust allows you to choose a trustee to manage your assets if you’re ever incapacitated. This may avoid the need for having a financial power of attorney.
While you’re alive and well, you can simply name yourself as the trustee of your living trust. That way, you’ll retain full power over your assets with the peace of mind that you’ve got a backup plan in place.
HOW TO FUND A TRUST
A trust is simply the legal framework that dictates how you want your assets handled. But those rules apply only to assets held in the trust. “If there are assets that aren’t in the trust when you die, those assets will need to go through probate,” says Lubar.
Once you complete the process of creating the trust, the next important step is funding the trust. You’ll have to retitle each asset you want included in your trust, and, fortunately, the process is straightforward. Start by contacting the financial institution associated with a given asset. Ask about their procedure for changing the name on your asset from yours to the trust’s. A simple form is sometimes all that’s necessary, though some businesses may require additional information or a certificate of trust.
As the trustee of your own trust, you’re free to move assets into and out of the trust during your lifetime. Don’t worry, moving those assets around won’t trigger any tax events.
WHICH ASSETS BELONG IN A TRUST?
Assets that should be owned in the trust are any assets that would need to pass through probate if not in the trust and assets where the disposition is best done through the trust. In addition to assets in a trust, assets that pass pursuant to legal title (e.g., joint tenants with rights of survivorship) or by contract (e.g., a transfer on death provision) do not pass through probate. As long as the trust is designated as the beneficiary or trustee of such accounts, your assets will be disposed of the way that you want them to.
Lubar notes that plenty of financial accounts are perfect candidates for your trust holdings.
Liquid accounts: These include your savings and checking accounts at a bank or credit union
Traditional investments: Consider assets you own through a regular brokerage account but not those held in your retirement portfolios.
Real estate: Moving your home into a trust can save your heirs significant probate costs. “Generally, you need just a deed transferring ownership to the trust,” says Lubar. “If the house has a mortgage, check with the lender to determine whether their approval or consent is required to transfer the property.”
Personal property: There’s no title for most of the possessions in your home, but you can still move them to your trust. “It can be as basic as a schedule attached to the trust when it’s executed that lists the property that’s being transferred to it,” says Lubar.
Business interests: If you have at least partial ownership of a business, consider allocating that to your trust.
Intellectual property: This includes patents, published works and trademarks.
Money you’re owed: If a debt is owed to you, you can add that to your trust as well.
Safe deposit boxes: Be sure the trustee can obtain access to it without a problem.
WHICH ASSETS SHOULD YOU KEEP OUT OF A TRUST?
While a trust works beautifully for many assets you might own, it may not be the best fit for all of them. Before transferring any assets to the living trust, confirm with an attorney that the transfer doesn’t affect any liability protection that the asset might be entitled to based on how it’s owned (e.g., as tenants by entirety for spouses).
Here are a few assets you can keep out of your trust.
Retirement plans and accounts: IRAs, Roth IRAs, and 401(k) plans only belong to individuals — not to trusts. Lubar, however, says you can designate your trust as the beneficiary on those accounts. “That will ensure that the assets pass pursuant to the person’s wishes as laid out in the trust,” she says. Note that having a trust as a beneficiary of a retirement account may result in distributions from the trust occurring faster than if an individual were designated as the beneficiary of the account.
Tax-advantaged savings accounts: These include accounts like Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), and Dependent Care FSAs. As with retirement accounts, however, just list your trust as a beneficiary for these accounts.
Certificates of Deposit (CDs): You might be able to move CDs into trusts but check first with your financial institution. Retitling the CD could be considered an early withdrawal that subjects you to fees.
Life insurance: “There isn’t really a benefit to putting life insurance in living trust,” says Lubar. “Since the death benefit transfers by the beneficiary designation, there isn’t a probate process that’s applicable.” You’ll can still designate the trust as a beneficiary, however.
THE BOTTOM LINE
For many people, creating a trust is a great way to manage your assets while you’re healthy and ensure they’re taken care of as you intend. And, while plenty of your assets work beautifully in a trust, it’s not right for everything you own.
“At the end of the day,” says Lubar, “what’s important is that the individual’s assets go to whom they want them to go to and when they want them to. The trust is just one of the ‘hows’ for accomplishing that.”