A Living Trust only has the authority to manage the assets titled in the name of the Trust; assets not titled in the name of the Living Trust cannot be managed by the Trust. Retitling assets into the name of the Living Trust is known as Funding.
Funding your assets into the Living Trust is very important to ensure that the Trust has control over those assets. Assets properly titled in the name of the Living Trust will avoid the death probate and may pass on the Trust protections to the beneficiaries upon your death.
I recommend that most of your assets be funded into your Living Trust.
There are two types of assets that should never be retitled into the name of your Living Trust: (1) Retirement accounts and (2) International assets (assets not located in the United States), and an additional two that for the most part should not be moved into the Living Trust: (3) Annuities and (4) Automobiles.
Retirement Accounts: Changing the owner of a retirement account (IRAs, 401ks, 457s, etc.) into the name of your Living Trust would be treated as an immediate taxable event – as if you had cashed out the account. The retirement account should stay titled in your name while you are alive. To keep the retirement account out of probate upon your death, I recommend that you complete the beneficiary designation form with the company managing your retirement account. For a more in-depth discussion on who or what to list as the beneficiary, please attend one of our upcoming funding workshops.
One further note, you have the option to make your Living Trust beneficiary completely different from your retirement account beneficiary. As the retirement account is not retitled into the name of the Living Trust, the Living Trust has no control over the retirement account. You have the option to list the Living Trust as the beneficiary of the retirement account, however there are many situations where that would not be recommended.
International Assets: Your United States based Living Trust is only meant to hold United States assets. For international assets, you would need to talk with an attorney in the country where the asset is located to determine what would happen to the asset upon your death. If you do not like the default answer, you may want to create separate estate planning documents in that country. If you create separate estate planning documents in another country, please make sure to tell the attorney that you do not want those new documents to supersede your existing United States estate planning documents.
Annuities: Some annuities are qualified – meaning they are treated as retirement accounts. Moving such an annuity into your Living Trust would be treated as an immediate taxable event. To avoid accidentally moving the wrong type of annuity into your Trust, I recommend that you leave the annuity out of your Trust and instead list a beneficiary on the annuity to inherit upon your death.
Automobiles: You may move your automobile into your Living Trust, it is just not required. Who wants to go to the DMV more than you need to? Upon your death, so long as a probate will not be needed, the DMV has a simple form to transfer ownership of the automobile.
If you want to learn how to move assets into the Living Trust or what to do with the assets that should not be funded into the Living Trust, please attend one of our upcoming funding workshops.