Crafting an estate plan brings peace of mind. You want assurance your assets pass smoothly to heirs when you can’t lead decisions. But improperly funding your revocable living trust undermines planning effectiveness.
We’re here to highlight key items that do NOT belong inside a typical revocable trust. Excluding certain assets actually better achieves your distribution wishes, avoids unnecessary taxation, and prevents complications.
Retirement Accounts – Name Beneficiaries, Don’t Change Ownership
Retirement plans like 401(k)s, IRAs, and pensions are built-in tools dictating money transfers upon your death. When establishing one, you designate beneficiaries on the account’s original paperwork.
These beneficiary forms control the final disbursement of funds to chosen recipients, bypassing a trust. Even if you name your trust as beneficiary, accounts must still transfer to beneficiaries named within the trust anyway.
Avoiding retitling in the name of your trust eliminates unnecessary confusion. So, list beneficiaries on plan documents rather than altering account ownership.
Life Insurance Proceeds – Dictate Payouts With Policy Beneficiaries
Like retirement accounts, you should NOT change ownership of existing life insurance policies to your revocable living trust name. Instead, complete beneficiary designation paperwork when first taking out the policy.
Policies pay directly to the beneficiaries identified on forms. Rerouting payouts through your trust creates unnecessary delays, extra paperwork, and potential taxation. Direct payout gives greater flexibility in meeting unique heir needs.
Bottom line – directly naming life insurance beneficiaries makes the most sense. Don’t complicate matters by placing policies inside your living trust.
Health Savings & Medical Expense Accounts – Protect Tax-Advantaged Treatment
Two accounts providing tax advantages for medical care costs also require special consideration when estate planning – Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs). Money deposited in these accounts enjoys tax-free contribution treatment. So long as you withdraw funds specifically for IRS-qualified medical expenses, you pay no taxes on accessed money.
However, non-medical withdrawals or transfers trigger steep taxation NOT avoided by placing accounts in your living trust. Plus, beneficiaries can’t take over HSAs/FSAs without losing preferential treatment.
That’s why you should name beneficiaries on forms rather than altering ownership. This way, recipients directly inherit account balances tax-free following your death as intended.
Uniform Gifts/Transfers to Minors – Kids Automatically Assume Control
Custodial accounts under UTMA/UGMA arrangements are automatically distributed to minor child beneficiaries once they reach the age of maturity in North Carolina. This transfer by law happens regardless of estate planning.
So, funding a revocable living trust with UTMA/UGMA assets needlessly complicates matters. At worst, it risks limiting minor access contrary to custodial intended use.
Instead, grant lifetime gift amounts through a properly structured UTMA/UGMA relationship without altering ownership via your trust. Then, let state laws smoothly transition control directly to kids come at age 21.
Safe Deposit Box Contents – List Separately from Titled Property
Many people list safe deposit box contents in their trust to allow access after they pass away. But there are better options than formally titling the contents in the trust’s name.
Instead, you can give your executor or chosen heir the physical key to the box. You can also write a separate letter explaining who should inherit specific items in the box.
The reason it’s better not to title the contents in the trust is that it can get complicated. The items may get tied up in long trust administration processes after you die before your intended recipient can access them. Plus, what you think is in the box may not match what’s actually there when its opened, causing confusion.
So, instead of titling the contents in your trust’s name, keep it simple. Hand over the physical key to someone you trust. This avoids legal complications so your wishes are followed smoothly.
Our Attorneys Help You Strategically Fund Your Trust
While having a solid revocable trust document is important for passing on your wealth when you die, you also need to retitle your assets in the trust’s name. Otherwise, the trust only exists on paper and has no legal power to distribute your property.
Our estate planning attorneys actively guide clients in strategically titling possessions within your trust. This allows it to smoothly activate when you pass away or if you become incapacitated.
We can help you:
- Retitle real estate in the trust’s name
- Shift investment accounts into the trust’s name while maintaining advisor relationships
- Rename insurance policies in the trust’s name, honoring tax implications
- Classify other property appropriately to activate trust provisions
We also help avoid common pitfalls like:
- Forgetting to retitle property, leaving them subject to probate
- Putting assets better suited for a will (like heirlooms) into the trust
- Neglecting annual reviews to reflect life changes in trust updates
Trusts seem abstract until you actually put your assets in the trust’s name. Our counsel lays the foundations now to benefit heirs and causes for years to come.
Partner With a Trusted Estate Planning Attorney
You worked hard to accumulate assets – make sure your beneficiaries can access them without difficulty by planning carefully.
We have decades of combined experience customizing estate plans to meet personal financial situations. Whether ensuring smooth transitions for heirs or minimizing taxes, we consider all angles and guide your decisions.
Schedule a consultation to discuss customizing a living trust that avoids common mistakes. Let’s walk this path together toward future security for your loved ones.
About the Author
Scott Donaldson
As one of the founders of Cline Donaldson PLLC, Scott Donaldson leverages his background in law enforcement to provide exceptional representation across core practice areas, including personal injury law and estate planning. Before founding his Wilmington-based firm in 2023, Mr. Donaldson honed his understanding of the law as a Lieutenant in the esteemed New York City Sheriff’s Office.
He subsequently graduated cum laude from Campbell University’s Norman Adrian Wiggins School of Law, earning the Law School Book Award for demonstrating exceptional mastery of complex legal subjects. With an extensive legal background, Mr. Donaldson brings authoritative experience and insight when navigating each client case. He remains dedicated to upholding the highest legal standards and achieving optimal outcomes for all he represents.
