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Should you avoid certain types of assets when funding your trust?

To conclude this serious about funding, not every asset should be retitled in the name of the revocable trust. A motor vehicle is such an example. In the event of an accident, the injured party may bring a lawsuit. If the trust is the named owner, the party may go after all of the trust’s assets for damages under a “deep pockets” theory.

Tax-deferred accounts, such as IRAs or qualified retirement accounts, like 401(ks), are another exception. Naming the trust as owner of these assets might be treated as a complete withdrawal of the funds, triggering income tax in the year of the transfer. Instead of retitling the ownership, the trust might be named as the primary or secondary beneficiary.  

Other assets may avoid probate with simpler procedures, such as payable-on-death accounts. Bank accounts offer this option. The owner simply needs to name a payable-on-death beneficiary, and the account will bypass probate and be transferred to that individual upon the owner’s passing.

Estate planning is designed to communicate an individual’s preferences for the distribution of assets to various loved ones. But what happens if an asset is overlooked?

Fortunately, there is a document designed for this purpose. A “pour over will” states that any forgotten assets should be transferred to an individual’s trust after his or her passing. The forgotten assets may have to go through probate, which provides notice to potential creditors. Assuming no claims are made against the asset, it will be transferred to the trust and distributed according to the trust instructions.

Source: The Balance, “What Types of Assets Can Go Into a Revocable Living Trust?” Julie Garber, July 12, 2016

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