Many estate plans are built around revocable trusts (sometimes called “living trusts”). These trusts allow you to 1) avoid the time, expense and privacy concerns associated with the probate process, 2) specify how your assets will be managed and distributed after your death, and 3) provide for the management of your financial affairs should you become incapacitated. And because these trusts are revocable, you’re free to modify or terminate them as you see fit.

After you’ve created a revocable trust, you can’t simply put it on a shelf and forget about it. It’s ineffective unless you fund it — that is, transfer assets to the trust. And funding your trust isn’t a one-time task. As you acquire new assets in the future, you’ll need to consider whether they belong in your revocable trust and, if so, transfer them accordingly.

Not all assets belong in your revocable trust, however. Indeed, it’s important to keep certain assets out of your trust to avoid adverse consequences. Let’s look at some general guidelines.

Assets to fund a revocable trust

Here are assets that are commonly held in a revocable trust:

A home and other real estate. Most people transfer title to their homes and other real estate to their revocable trusts. To make the transfer, you’ll need to execute and record a new deed. If property is subject to a mortgage or other home loan, contact the lender to see if it requires any additional paperwork.

Keep in mind that in most states, revocable trusts provide little or no protection against creditors during your lifetime. So, if asset protection is a concern, you may want to consider other forms of
ownership. Another option is a domestic or off- shore asset protection trust.

Bank accounts. Bank accounts with substantial balances should generally be transferred to your revocable trust. These include checking and savings accounts, certificates of deposit (CDs), money market accounts and safe deposit boxes. Ask your bank about its procedures for retitling assets in the name of your trust, which typically requires a certificate of trust. Note that in some cases, transferring CD accounts to a trust can trigger early withdrawal penalties. If that’s the case, you may want to wait until your CDs mature before making the transfer.

Investments. You can transfer stocks, bonds, mutual funds and other investments to your revocable trust. You’ll need to execute transfer documents and, depending on the investment, have certificates reissued. Your broker can guide you through the process.

Business interests. If you have an ownership interest in a business, such as a privately held corporation, limited liability company or partnership, it’s likely possible to transfer your interest to your revocable trust while retaining voting rights and other powers. Check the company’s bylaws or operating agreement to see if there are any approvals required or other restrictions on transfer.

What about life insurance policies?

It’s possible to have your revocable trust hold an insurance policy on your life, but it’s not necessary, since life insurance proceeds pass via beneficiary designation, thereby avoiding probate. It’s more common to name your revocable trust as beneficiary of your life insurance policy so that the proceeds can be distributed according to the terms of your trust.

If you’re concerned about asset protection or if your wealth is great enough that gift and estate taxes are an issue, it may be advisable to hold your life insurance policy in an irrevocable life insurance trust (ILIT). A properly designed ILIT allows the death benefit to bypass your taxable estate. And if the ILIT is named as beneficiary of the policy, it also offers some protection against creditor claims.

Personal property. For tangible personal property — such as furniture, artwork, antiques or collectibles — you can simply execute an assignment of personal property transferring ownership to your trust.

Assets that shouldn’t be in your trust

Here are some assets you should keep out of your revocable trust:

Retirement accounts. Avoid transferring IRAs, 401(k) plans or other tax-advantaged retirement accounts to your revocable trust. Doing so may be considered a distribution, which can trigger income tax and early withdrawal penalties. A bet- ter approach is to allow the account to pass to your designated beneficiary. Another advantage of this approach is that it’ll avoid probate. You can name your trust as a primary or secondary beneficiary of the retirement account but consult your advisor to discuss any tax implications of various beneficiary designations.

Health Savings Accounts (HSAs) and Medical Savings Accounts (MSAs). These accounts, which allow you to pay for qualified medical expenses with pre-tax dollars, are individual accounts that generally cannot be transferred to a trust. However, as with retirement accounts, you can name your revocable trust as a beneficiary of your HSA or MSA. Although, as with the discussion above relative to retirement accounts, whether you should depends on the specifics of your circumstances.

Vehicles. There are several reasons to keep auto- mobiles and other vehicles out of your revocable trust. For one thing, tax and registration consid- erations can make transferring a vehicle to a trust cumbersome and/or expensive. And if you have an outstanding auto loan, the lender may not allow you to transfer title.

Another concern is that if the trust is the owner and the vehicle is involved in an accident, other trust assets could be exposed to liability claims. The tradeoff, of course, is that the vehicle may be sub- ject to probate, although many states offer stream- lined procedures for transferring certain vehicles to heirs outside of probate.

Have a backup plan

In case you neglect to transfer certain assets to your revocable trust, be sure that you have a “pour-over will,” which automatically transfers any assets titled in your name to your trust. Ideally, you’ll transfer all appropriate assets to your trust during your lifetime, but in case anything falls through the cracks, a pour-over will ensures that those assets are distributed according to the terms of your trust. Contact your estate planning advisor with questions involving revocable trusts.

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Disclaimer: The THK Legal Blog is for informational purposes only and should not be relied upon as legal advice. In no case does the published material constitute an exhaustive legal study, and applicability to a particular situation depends upon an investigation of specific facts. You should consult an attorney for advice regarding your individual situation. All THK blogs are considered advertising material by the Indiana Bar Association.