The list depends on the account or property type as well as the attributes of your trusts and estate. Some assets and financial accounts of value are designed to automatically sidestep probate by going straight to named beneficiaries. This can include all types of retirement accounts, like IRAs and 401(k)s, as well as life insurance policies.
Although these types of accounts are designed to make the change in ownership seamless after the passing of the original holder, there may still be scenarios where it’s beneficial to name a trust as the beneficiary for tax purposes.
Vehicles – unless they’re collectibles or of particularly high value – are another example of assets that likely don’t need to be included in a trust. The speed with which vehicles depreciate makes them dissimilar from the types of assets stored in trusts, which typically have the potential to gain value over time.
Everyday personal property also doesn’t usually need to be put into a trust, like the books on your bookshelf (unless they’re collectibles) or your dishes and cutlery. The total value of those types of everyday items isn’t normally high enough to have tax implications and there’s less likely to be serious disputes over the distribution of this type of personal property.
In most cases, families struggle to decide what to do with this type of personal property rather than fight over who gets household items after a loved one’s passing.
It’s best to discuss your unique circumstances with an estate planning attorney experienced with trust strategies before deciding exactly what should or shouldn’t be included in your trusts.
Why Trust Structure May Influence Your Decisions
The features of revocable and irrevocable trusts may influence your decisions regarding what types of property should be included in the trust.
Revocable trusts are those in which the grantor (the person who establishes the trust) can alter, amend or revoke the trust. In other words, they retain control over the assets and can essentially function as the trustee. A revocable trust may become irrevocable on the grantor’s death.
High-value personal property, like collectibles or art, real estate and investment accounts may be ideal assets for a revocable trust because they can pass to beneficiaries on the grantor’s passing without probate. The downside is that the continued control of the assets by the grantor means they are still considered part of their estate during their life, which can have negative tax implications.
Irrevocable trusts can’t be easily changed or revoked during the grantor’s lifetime. They essentially relinquish control over the assets placed in the trust, which can have tax planning, Medicaid planning and asset protection benefits.
Certain death benefits, like life insurance policies, can be removed from the grantor’s taxable estate via an irrevocable trust, as can other high-value assets.
Many assets you might not put in your typical revocable or irrevocable trust may fit better in a specialized trust. You might also want to use different types of trusts tailored to your family situation or personal long-term goals.
For example, you may establish a special needs trust if you have a child or dependent who has a disability. Assets held in the trust won’t affect the beneficiary’s eligibility for means-tested government assistance.
When Might It Be Necessary to Put Accounts With Named Beneficiaries Into a Trust?
While these accounts can often bypass probate thanks to having a named beneficiary, they are still considered part of the decedent’s gross estate. This means the government will calculate those assets when determining whether the estate is subject to estate taxes.
Life insurance typically isn’t taxed like income for beneficiaries, but the death benefit is still calculated into the decedent’s estate value. This can potentially be avoided with an irrevocable life insurance trust.
Retirement accounts are a little more complicated in that the proceeds will be subject to income tax for the beneficiaries. Whether the retirement savings account is a traditional IRA or 401(k) or Roth account will also influence the tax implication for beneficiaries, as accounts funded with after-tax contributions will still provide tax-free distribution (although specific disbursement rules often apply).
Consult With a Phoenix Estate Planning Expert and Financial Advisor on Your Trust Options
Our team at Fullerton Financial Planning work closely with estate planning professionals to provide comprehensive retirement planning and Medicare planning services to Phoenix retirement savers and investors.
If you’d like to learn more about our comprehensive retirement planning services, call us at (623) 974-0300 to speak with a financial advisor.
