A living trust is one of the smartest tools available when it comes to estate planning. It helps you keep your estate out of probate court, ensures a smooth transfer of your assets, and gives your loved ones peace of mind during a difficult time. However, not every asset belongs in a trust—especially if you live in Cedarhurst, NY, where specific rules and circumstances can affect your estate planning strategy.
Understanding the things you should never put in a living trust is just as important as knowing what to include. Putting the wrong assets in your trust could lead to unnecessary tax consequences, legal headaches, or loss of control over your finances. That’s why it’s essential to be strategic and cautious about what you decide to include.
1. Retirement Accounts: Keep Them Out of the Trust
Retirement accounts such as IRAs and 401(k)s should stay in your name while you’re alive. If you transfer them into a living trust, the IRS considers it a withdrawal, triggering taxes and possibly penalties.
Instead, you can name your trust as a beneficiary—that way, the account transfers automatically to the trust upon your passing without creating tax complications. This method keeps the tax-deferred status intact and ensures a smoother transfer process.
2. Health and Medical Savings Accounts
Health Savings Accounts (HSAs) and Medical Savings Accounts (MSAs) offer great tax benefits when used for qualified expenses. But if you put them in a trust, you could lose those benefits.
Rather than risking their tax-free status, it’s smarter to designate beneficiaries directly on the accounts. This approach allows your loved ones to receive the funds without going through probate and without undermining the tax advantages.
3. Regular Bank Accounts You Use Every Day
It might seem convenient to include your checking or savings accounts in your trust, but it often creates more hassle than it’s worth. These are active accounts you use regularly, and adding them to your trust can make financial management unnecessarily complicated.
Most banks offer payable-on-death (POD) options, which are a simpler and more direct way to transfer funds. This ensures your money goes to your beneficiaries without the legal and administrative burden of updating trust documents every time you open or close an account.
4. Licenses Like Taxi Medallions
Business-related licenses, including taxi medallions, come with regulations that may not mesh well with trust ownership. Transferring them into a living trust could lead to issues with local laws and possibly void the license entirely.
This is especially important in New York, where specific rules apply to licenses tied to public services. Before taking any steps with these kinds of assets, it’s best to consult a legal professional who understands your local regulations.
5. Property or Assets You Don’t Officially Own Yet
If you’re expecting to receive an inheritance or you’re part of a business venture that might grow in value, it’s best to wait until you have full legal ownership before putting anything in your living trust.
Transferring future or speculative assets could be seen as a fraudulent move or violate agreements with business partners. Trusts work best with assets that are fully in your control and legally yours. Anything else could open the door to legal disputes and confusion later on.
6. Items Expected to Drop in Value
The goal of a living trust is to protect and grow your assets. Including items that are expected to lose value can undermine that purpose.
If you own assets that are declining—such as cars with high depreciation rates or unstable stocks—it’s generally better to sell them and place the proceeds in your trust, rather than transferring the assets directly.
7. Everyday Vehicles
Unless your vehicle is a collectible or holds significant value, there’s usually no benefit to placing it in your trust. Cars are bought and sold often, and having to update your trust documents every time creates unnecessary maintenance.
Many states, including New York, allow you to set up a transfer-on-death (TOD) registration for vehicles. This gives your loved ones access to the asset without needing to involve your trust.
8. Life Insurance Policies
While it’s possible to name your trust as a life insurance beneficiary, it’s not always the best idea. The payout from a life insurance policy can become part of your taxable estate if your trust is revocable, and it could also be subject to creditor claims.
A more protective route is to name individual beneficiaries or consider creating an irrevocable life insurance trust (ILIT) for added tax and creditor protection.
9. Custodial Accounts for Minors
Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) accounts are set up to benefit a child, and they come with specific legal rules. Once created, they cannot be revoked or reassigned into a trust.
That means even if you want to move them into your living trust, the law won’t allow it. If you want more control over when and how a child receives money, consider funding a trust for the child instead of using UTMA/UGMA accounts.
10. Social Security Benefits
Social Security payments are not transferable. Federal law strictly prohibits assigning Social Security income to another person or entity, including a trust.
Even attempting to include them in your trust could lead to legal issues. These payments must go directly to the individual or their legal payee. Always keep Social Security benefits outside your living trust and manage them separately.
Knowing What Not to Include Matters Just as Much
Building a strong and effective estate plan in Cedarhurst, NY, takes more than just drafting a trust. You need to know the things you should never put in a living trust to avoid tax pitfalls, legal violations, and administrative burdens.
Living trusts are powerful tools for managing real estate, investment portfolios, high-value property, and other long-term assets. But trying to include everything can backfire. Understanding the risks and avoiding the wrong assets helps you create a more efficient and secure plan.
At Katz Law Firm, we assist clients throughout Cedarhurst and the surrounding areas with their estate planning needs. Our team can help you decide which assets are ideal for your trust and which ones are better handled another way. Whether you’re building a new trust or reviewing an existing one, we’re here to guide you step by step.
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