10 Assets You Should Leave Out of Your Living Trust

A living trust can be a smart way to manage your assets, avoid probate, maintain privacy, and ensure your estate is handled according to your wishes. However, not everything belongs in a living trust. In fact, putting certain assets in your trust can lead to unintended consequences like higher taxes, legal issues, or the asset losing value.

Before we dive in, remember that speaking with an estate planning attorney is always a good idea when setting up or making changes to your living trust. At Katz Law Firm, PLLC, we can provide guidance based on your unique financial situation and goals.

With that said, here are ten types of assets you generally want to think twice about before including in your living trust:

1. Retirement Accounts (IRAs, 401(k)s, etc.)

Putting your retirement accounts into a living trust can get complicated fast. Since your trust is considered a separate legal entity, any money you transfer from your IRA or 401(k) counts as a withdrawal. That means you could get hit with taxes and early withdrawal penalties.

Instead, a better option is to name your trust as the beneficiary on your retirement accounts. That way, the money goes straight into your trust when you pass away without any extra taxes or penalties.

2. Health Savings Accounts (HSAs) & Medical Savings Accounts (MSAs)

The big benefit of HSAs and MSAs is that you don’t pay taxes on the money if you use it for medical expenses. But if you transfer these accounts to your living trust, poof – that tax protection disappears.

The simpler solution? Name beneficiaries directly on the accounts. They’ll still get the money without going through probate, and the tax benefits stay intact.

3. Checking Accounts & Other Active Finances

While you technically can put your everyday checking or savings account in a living trust, there are easier ways to pass that money to your heirs without probate. Most banks let you name payable-on-death (POD) beneficiaries, which does the same thing without the extra paperwork of putting it in your trust.

Plus, if your trustee ever needs to take over managing your finances, giving them access to all your day-to-day accounts can be a real headache. It’s usually simpler to keep those separate.

4. Taxi Medallions & Similar Licenses

If you own a license or medallion that lets you operate a specific business, like a taxi company, think carefully before putting it in your trust. These types of assets often come with strict regulations about ownership and transfers.

For example, many cities have rules about who can own a taxi medallion and how it can be transferred. Putting it in a trust could inadvertently violate those rules, making the medallion invalid. Definitely talk to a lawyer who knows the specific laws in your area before making any moves with these assets.

5. Assets You Don’t Really Own or Control

Let’s say you’re expecting a big inheritance from a rich uncle, or you have an ownership stake in a company that’s about to hit it big. It may be tempting to put those assets in your trust before they’re officially yours.

But hold up – that could be seen as a fraudulent transfer, and it might not even work the way you hope. For the inheritance example, if your uncle leaves that money to you in his will, it’ll go straight to you as an individual, not your trust. And trying to transfer your company ownership could violate agreements with your business partners or investors.

The lesson? Only put assets in your trust that you fully own and control. Anything else is risky business.

6. Assets Expected to Go Down in Value

The whole point of a living trust is to manage and protect your assets for the future. So it usually doesn’t make sense to put assets in there that you expect to lose value over time.

For instance, maybe you have a car collection, but you know the market for those specific models is about to tank. Or perhaps you own a ton of stock in a company that’s on the brink of collapse. In those cases, you’re probably better off selling the assets and putting the money elsewhere, rather than letting them drag down the overall value of your trust.

One caveat – if you have an asset that doesn’t have much financial value but is really meaningful to your family (like great-grandma’s tea set), putting it in the trust can still be a good idea. That way, you can make sure it goes to the right heir and avoid any family arguments.

7. Vehicles

For most people, cars and other vehicles don’t need to go into a living trust. Why? Because we tend to buy and sell them pretty often, and every time you do, you’d have to update your trust paperwork. Talk about a hassle.

Many states also let you set up a transfer-on-death registration for vehicles, which lets them bypass probate without a trust. That said, if you have a rare or classic car that’s more of an investment than a daily driver, putting it in your trust could make sense.

8. Life Insurance Policies

Here’s the thing about life insurance and living trusts: since your trust is revocable, the policy payout is fair game for any creditors you leave behind. It could also add a big chunk to your taxable estate.

Instead, consider naming specific people as beneficiaries on the policy itself. Or, for extra protection, look into an irrevocable life insurance trust. That can shield the money from creditors and estate taxes.

9. Uniform Transfers/Gifts to Minors Accounts (UTMA/UGMA)

If you’ve set aside money for a child in a Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) account, that account is locked in. Kids will get full control once they hit the age limit, usually at 18 or 21.

Since you can’t revoke those accounts, you can’t move them into your living trust. Trusts do give you way more say in how and when the money gets distributed, though. So if you want that kind of control, it’s better to put the money in your trust from the get-go.

10. Social Security Payments

You’ve paid into Social Security your whole working life, so it’s only natural to want to pass those benefits along to your loved ones. But here’s the catch – you can’t. Under current law, it’s illegal to assign your benefits to anyone else, including a trust.

In fact, even having a provision in your trust that tries to do this is prohibited. The law is super clear: Social Security benefits have to be paid directly to the individual or their authorized representative payee, not into a trust account.

So while it might seem like a tidy way to manage your finances, trying to funnel your Social Security checks into your living trust is just asking for trouble. It’s best to keep those benefits separate and follow the Social Security Administration’s rules to the letter.

The Best Assets to Put in Your Living Trust

Living trusts are fantastic tools for many people, but they’re not one-size-fits-all. When you’re deciding what to include in yours, always think about the potential risks and downsides, not just the benefits.

In general, assets we recommend transferring into your trust, include:

• Real estate, including your home and any investment properties
• Financial assets like stocks, bonds, CDs, and annuities
• High-value personal property (think antiques, art, or jewelry)
• Business interests, such as partnerships or LLC shares
• Intellectual property, like patents and copyrights
• Precious metals and collectibles

For these kinds of assets, a living trust can be a huge help. It lets them skip probate, which saves your loved ones time and money. Plus, it keeps everything private and makes sure your wishes are followed.

And if you’re ever unsure, don’t be afraid to get professional advice. An experienced estate planning lawyer can walk you through all the ins and outs and help you create a trust that fits your exact needs. After all, when it comes to protecting your hard-earned assets, it pays to sweat the details.

At the Katz Law Firm, PLLC, we help clients with estate planning and asset protection, including living trusts. Our attorneys can work with you to determine which assets belong in your trust and which ones are better handled through other means.

Contact us today to schedule a consultation and learn more about how we can help you achieve your estate planning goals.