What should not be in a living trust?

What should not be in a living trust ?    

By Attorney Paul Hanks, Ironclad Living Trusts in California

Not all assets should be transferred into a revocable living trust. Assets such as retirement accounts and annuities must be handled very delicately in relation to a living trust to avoid triggering a tax liability.  

The process of connecting assets to a living trust is known as funding the living trust. Assets can be connected to a trust in different ways. If the wrong method of connecting an asset to a living trust is chosen it can lead to a tax liability. 

As an example, let’s examine an individual retirement account, also known as an IRA, in relation to a trust. An IRA should never be titled as an asset of your revocable living trust. If an IRA is titled into a revocable living trust it will trigger a tax liability. 

The proper way for the handling of an IRA in relation to a living trust is for your spouse to be named as primary beneficiary of the IRA. The trust can be named as the alternate beneficiary of the IRA after your spouse. If you are a single person then you can name your trust as the primary beneficiary of your IRA. Naming the trust as beneficiary is acceptable and is completely different from transferring a retirement plan into a trust. 

The handling of annuities in relation to a living trust is also very important. You cannot change the owner on an existing annuity contract to a living trust without drastic tax consequences so do not do it. The proper approach for connecting an annuity to a living trust is to list one or more pay-on-death beneficiaries on an annuity. The named beneficiaries of an annuity can be individuals or the name of your trust. 

The tax consequences in regard to funding a living trust also extend to Certificates of Deposit. Any Certificates of Deposit owned at the time a living trust is created should be left undisturbed with no change in titling. This is for the reason that the bank will impose a penalty and create a tax issue for you if any existing Certificates of Deposit are retitled into the name of the trust. Therefore you should just leave existing Certificates of Deposit as is until they mature. 

A living trust must be properly funded. If the funding of a trust is not properly done it can lead to tax issues. The improper funding of a trust can also lead to a probate proceeding. 

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