Transcription
Most people think the goal is simple: create a living trust and then put everything I own into it. Egads. Professionals are always harping on funding the living trust, but they forget that not everything should go into a living trust. So, funding sounds responsible? Well, because it is. But over-funding, putting things in a trust that can have adverse consequences, nasty little surprises can also be a problem. So I'm going to give you an easy-to-use list of things that should not be in your living trust. Because if you fund your trust the wrong way, you can trigger taxes, you can lose protections, and you can create headaches. Don't get me wrong, living trusts are amazing. Way better than doing nothing or using a simple will. But there are nuances that you will want to be aware of, so the powerful tool you're using doesn't backfire on you and your family.
So today I'm going to walk you through the seven assets you should not put into your living trust and what to do instead. Oh, and if you stick around to the end, I'm going to give you an invaluable tool to get started. Absolutely free. It is our infamous emergency binder. Think of it as your go-to should bad things happen. We created it in electronic format that you can download and use, because we feel that strongly that proper planning is essential. So we took away the price barrier and made it free. You'll want to use this for yourself and share it with your friends. It's that good.
But who is this lawyer bearing gifts? Well, I'm Toby Mathis, tax attorney, and I've created this channel to give you free information so you don't have to pay for it. When it comes to living trusts, I've seen this mistake over and over again. People spend time and money setting up a great trust and then fund it incorrectly. Sometimes, not at all. So we need to fund our living trust, but we don't want to cause any issues. So here's the rule I want you to remember: Funding your trust is not about putting everything into it. It's about making sure everything transfers the right way, the way you want. Period. End of the day, we want to make sure our assets are passing in a thoughtful and caring way. I mean, you worked your whole life for them, so it's worth ten minutes of your time to make sure you don't accidentally step on a landmine.
So let's go through the seven assets most people get wrong. Number one: Retirement accounts. So this is your 401(k), your IRA, your 403(b). Do not move these into your trust. They're already trusts. When you move a retirement account into a trust, the IRS can treat that as a full distribution. That means taxes, penalties, and a very, very expensive mistake. So here's the right move: You don't move the retirement accounts into the trust. You coordinate them with it via the beneficiary designations. These are these, these tools, these retirement accounts. They're already trusts. So all we care about is making sure they have the right beneficiaries. This means setting your. Usually, you're going to put your spouse as the primary beneficiary. They can keep the tax benefits of the retirement account. But this is the only exception. Only your spouse. Non-spouse beneficiaries have to take the money out of these accounts, typically within ten years of death for traditional retirement accounts, and they're going to pay tax on that. So you should consider naming your living trust as a contingent beneficiary if you want control how that money flows after you're gone. Yep. It sounds kind of weird, right? A trust, what? A trust as a beneficiary? But why? If your kids inherit directly as a named beneficiary, they get the money outright. No protections. Their creditor can get to those funds. I'm talking about IRAs and 401(k)s. Their creditors can get to those monies. Ex-spouses, someone with a judgment against them, their student loans. I mean, you get the idea. If your trust inherits, you control how it's used. You can still go, you can still go to the kids, but you have guardrails on it. You can protect that money because a living trust has something called a credit shelter provision. It keeps the trustee from giving it to some third party. We don't want it to go to this issue with the IRAs and 401(k)s. And all these things, it went all the way up to the Supreme Court. Creditors took an inherited IRA, or excuse me, an inherited IRA from a mom's daughter. Mom had amassed an IRA worth over $450,000, and she left it to her daughter. Daughter's creditors ended up taking it because the daughter was a direct beneficiary. A living trust could have prevented it. So the living trust should be a contingent beneficiary after your spouse. If you have no spouse, then the trust can just be the beneficiary. It's the beneficiary of the IRA, the 401(k). It is not the owner of those during your lifetime. You are the owner of your IRA. You are the owner of your 401(k). Your 403(b), you are the owner. We are only making the living trust a beneficiary, generally after a spouse. And that's a huge difference. And this confuses you at all? Feel free to ask questions in the comments below, because I don't want you confused, but we want to make sure you get answers. But I know that sounds weird to people. Some of you guys are used to my channel, and you know, sometimes you have a trust with the trust as a beneficiary of a trust, or a trust is assigning its beneficial. If that is new to you, simply ask a couple questions below and it'll be clear. And I'll give you another option towards the end, too, of how you can learn more.
Number two: HSAs. And I think there's still MSAs out there rolling around. We still have them, but not so much. The HSA is the king now. It's the same concept as IRAs and 401(k)s. HSAs and MSAs belong to the individuals. Think of it like a checking account with tax benefits, and it can only be owned by an individual. It cannot be transferred to any trust, not even your revocable living trust, because the moment you do, the tax protections disappear. The simple solution is to name beneficiaries directly on the accounts. It's still get the money without going through probate. So like your spouse gets all the tax benefits you do. If it's not your spouse, then there are tax consequences. Because when you pass, that HSA or MSA cease to be such upon your death when, and this is only when there's a non-spouse beneficiary. If your spouse is the beneficiary, it keeps the tax benefits. Anything else, then the tax benefits gone. So we treat those similar to IRAs and 401(k)s. We make the living trust a contingent beneficiary after your spouse. So if you're the owner of the account, your spouse is the primary beneficiary. The living trust is the contingent beneficiary. Just remember that for all of those: spouse primary, then the contingent is the living trust.
Number three: Annuities. This one trips up a lot of retirees because annuities feel like they should go in the trust. They, they got real money there, and you want it protected. But here's the thing: an annuity is actually a trust agreement. There's a custodian managing those assets for you, much like a trustee would. So in a sense, it already has the structure baked in it. But if you're titling an annuity into your living trust, the insurance company, they could choose to treat that as a surrender event, meaning all the deferred gains in that annuity become taxable right now. And that's a potentially massive and completely unnecessary tax hit. The right move: It's the same as the retirement accounts, same as the HSA. You own the annuity individually. Your spouse is the primary beneficiary. Sometimes you're going to look at the annuity itself. There may be some other work with your advisor on it, whoever sold it to you, or talk to us. We'll make sure when the spouse inherits an annuity, they can continue as if it was always theirs, keeping the tax deferral intact. So you name your spouse as the primary beneficiary. And then if you have other beneficiaries on that annuity, it's them. Then your living trust becomes the contingent beneficiary. So you can control how that money flows once your spouse or other primary beneficiary is gone, that's on that annuity. Again, annuities, they're kind of a trust themselves. So sometimes they have, it could be your spouse and a daughter or a kid, one of your kids, things like that. We want after the named individuals, we want it going to the trust as a contingent beneficiary. The trust, however, does not own it. The trust inherits it, which is a big, big difference. You are the owner of your annuity during your lifetime.
Number four: Life insurance. This one confuses a lot of people. You can put life insurance into a trust, but most of the time you shouldn't. Why? Because life insurance already avoids probate, uses beneficiary designations. So if you move it into your revocable trust, you're usually just adding complexity without any benefit. The better approach is just to name beneficiaries properly for the policy and, if needed, just like you've heard me say a few times now, use your trust as the contingent beneficiary so you can control how the money is distributed. There are protections, those credit shelter provisions I talked about in the living trust, and there's other protections for things like substance abuse. We got lawsuit protection, divorces, and other nastiness that can affect your beneficiary. The living trust being the beneficiary actually helps. Now, if you have a large estate, there's a strategy called using an irrevocable life insurance trust, or ILIT, which can remove the insurance proceeds from your taxable estate. For very wealthy families, over $30 million, if they're married, they do not want the life insurance to be included in their taxable estate, because the taxes can be massive, upwards of 40%. So they gift premiums to this special type of trust, that ILIT, and it keeps it out of the estate. It's complicated and it's a very different tool. It is not your basic living trust. So this is another area where you would own a typical life insurance policy individually, and use a living trust as a beneficiary. If you want to get the life insurance out of your estate because you have a, you're Richie Rich, then you would use a different kind of trust called an irrevocable trust to own the policy. But that is the exception to the rule for today. Just remember that you own your life insurance policy individually. That's me. And the living trust can be a beneficiary.
Number five: Vehicles. I'm going to add more than just cars. Cars, trucks, boats, RVs. Most people say this would go right into the trust. Usually no. And there's really three reasons why. First, there are all these things. They're typically easy to transfer after death through a state's DMV process. And in some states, you can use a transfer on death title. The old adage really comes down to: Is the juice worth the squeeze? That always pops into my head when I think of these things. Is it worth changing title? Second, and this one surprises people: Putting a vehicle in your trust can actually hurt you from an asset protection standpoint. And here's why: If there's a car accident and your vehicle is in your trust name, well, you just let plaintiff's lawyers know to name your trust as a defendant in a lawsuit. Depends on your structure whether that's going to be a big issue for me. It might not be for a lot of people, it might be. Everything's right there. It's right there on the title, by the way. Your living trust. They'd be crazy not to name it. So instead of protecting you, you've just handed somebody a roadmap to everything that the trust owns. Keep vehicles in your own name and keep your trust out of it. Third, insurance companies get confused when a vehicle is titled in a trust name. They're not used to it, so you may have to shop around for coverage, and even then you might have to spend time educating your insurer. It's rarely worth the hassle. Again, is the juice worth the squeeze? Now, for me, it was easy. I actually owned my car in a living trust because I bought it cash. There was no lender to deal with. It was fairly easy. I had to put it in, but I wouldn't have gone out of my way to retitle it if I had bought it personally. Save yourself the hassle. Do the paid on death. And less. And this is a big and less. Unless you have a very expensive car, collectible cars, valuable cars, let's say over $100,000, then it's probably worth the hassle and you can make sure the vehicle gets where you want it to go with protections afforded in that living trust. Like we went over, under $100 grand, it's likely not worth the hassle. Everybody's number is different. I'm just going to say rule of thumb: unless it's a very valuable automobile, probably not worth it. If it's just a regular old vehicle, normal vehicle, hey, it's a $10,000 car, $30, $20, whatever it is, just own it individually.
Number six: Regulated assets and licenses. This is going to throw some people off. Regulated licenses, regulated assets. And this one is less common, but it does matter. Let's think about professional licenses, a liquor license, specific types of business permits. They can have very strict rules on who can own them. You can't just transfer that into a trust without checking the regulations and the rules. If you do it wrong, you could invalidate that valuable license altogether. So always verify before moving any regulated asset or any license. Again, this one's kind of an outlier, but it needs to be addressed because many folks have these. And you need to act within the laws and the statutes and the rules governing those assets and licenses. It might be an issue. So for our purposes, this is a do not transfer unless you know the answer first. And that's all I'm going to say on that one. But for those of you guys who have these types of things, you know what I'm talking about. And you just say, hey, I'm going to go to my attorney and I'm going to go to this, this state or the county or whomever is issuing it, the professional organization. I'm going to say, hey, what do I do? And they may have some guidance for you.
Number seven: Our friend, the 529 plan. I'll see if I can put a link. I just did a video on these with an expert that just, they just knew this stuff inside and out. It was awesome. But it's a 529 college savings plan, and a lot of grandparents and parents in our audience have these, and this one's probably going to catch some of them off guard. A 529 plan has a very specific account owner, me in my case, and a specific beneficiary, usually a child or a grandchild. The ownership structure is built into the account itself. You cannot title this into your living trust, at least during your lifetime. This is my 529 plan. I am the owner. And here's the thing with 529s that make them different from anything else on this list: The account owner retains control already. What do I mean by that? You can quite literally change the beneficiary of the 529 plan at any time, or you can just take the money back. So I have a 529 plan, I own it, my daughter is the beneficiary. I can literally just take that money and buy a car with it. I have taxes and there's probably a penalty from on those earnings, but it is mine. Or I could change it for my daughter and I could make it into somebody else. I could just pick somebody. I have complete control over that beneficiary. So in a sense, the control you are looking for in a trust, it already exists within the account structure of the 529 plan itself. But this is a big but: What happens when I die? The successor owner you name on that account steps in and takes over. It's as simple as that. There's no probate, there's no trust needed. And here's the good news: You can still make your living trust the successor owner. So you own it individually during your lifetime. The trust steps in at death via the successor owner designation. The trust doesn't own it. The trust succeeds into ownership, which is a big difference. During my lifetime, I own it. I pass. Goes to a living trust. Now, living trust can designate different beneficiaries, use the money. So the action item here is simple: Check every 529, 529 account that you hold and make sure that you have either named an individual successor owner. Maybe I make my daughter the successor owner, or whatever. You have your living trust named as a successor owner. My preference: that one step keeps the account out of probate and passes control seamlessly according to your wishes.
So those are the seven things. Boom! We've hit seven. It seems like we just met. So let's tie all this together. The biggest mistake people make is thinking, man, I need to put everything into my living trust. Look, that's not the goal. The goal is this: Every asset transfers the right way, with the least amount of tax, the least amount of friction, and the most control and protection. Sometimes that means the living trust owns it. Sometimes it means use a beneficiary designation, which may be your living trust. We just went through a ton of them. If you want to get this right, here's where to start. Take 20 minutes this week. Just put it aside. List out your assets. What are my accounts? What are their beneficiary designations? And then ask a very simple question: I got this list of, here's a bunch of accounts. What if something happens to me? Does this transfer cleanly? That's all you have to ask. If you want help organizing it, I mentioned this before, the emergency binder. It's actually very extensive and it has lots and lots of like easy-to-follow. You're just going to, you can start tracking everything: your assets, your accounts, your contacts, your instructions so your family isn't left guessing what it matters most. There's a lot more in here as well. It's my gift to you. Why? Why am I giving that? Because I've seen what happens when you don't have simple things like an emergency binder, telling people what you have, how to access it, and who to contact in an emergency. So I figured if I gave it away, maybe more people would use one. Folks, that's half the battle. And I just removed the excuse. Remember what Nike says: Just do it. So download the binder, share it with whomever you want. It is a gift. And then watch my video on the truth about Living Trusts. It breaks down what a trust actually does and what it doesn't do, and how to make sure yours works the way you want. Both of those links are in the description below. Now, if you can like and subscribe if you like real-world tax and asset protection strategies. This is a great channel. So subscribe. And remember, a trust only works if it's funded correctly.