What should you and should you not put in a living trust? This may seem difficult to decide, but it’s actually very easy. Many attorneys like to make this seem to be a difficult process, and that’s why some of them charge thousands of dollars to create and fund a living trust. Most people (or families) own similar types of assets. These assets are homes and investment property, checking and savings accounts (CD’s), investments such as stocks, bonds, mutual funds, retirement plans, annuities, and life insurance. Understanding what causes these assets to go through probate is the key to answering this question. But, be aware that leaving assets out of a living trust can also be a big mistake.
What Causes Assets To Go Through Probate?
Most states have thresholds for the value of a person’s estate in order to determine if the estate is required to go through probate before being distributed to the beneficiaries. If a person’s estate value at the time of death is less than the threshold, no probate of the estate is required. The key to avoiding probate is to own less than the state’s minimum threshold. For example, in the state of California, if a person own’s more than $166,250 in assets, the estate is generally required to go through probate. Less than $166,250, there is no probate. It is also important to point out that the thresholds are based on “market value”. So, that’s fairly easy to understand, isn’t it? Own less than the state’s probate threshold. But, the problem is that most people own more than that threshold after accumulating assets over their entire lifetime. This is where a living trust can save the day. When a person creates a living trust, they can own assets through their living trust instead of in their own name. The person does retain total control of the assets in their living trust during their lifetime, but since the living trust is not a person and just a document (similar to a Will), any assets owned and controlled through a living trust are not counted in a person’s estate value at the time of death. Therefore, the answer to the question “What Should You and Should You Not Put in a Living Trust” is to simply transfer assets into the trust in order to reduce a person’s estate value under the probate threshold. Let’s take a look at how that’s done with the different types of assets people own.What Should You Put in a Living Trust?
Property
(Real Estate): First of all, the most valuable asset that people own is usually their home. For probate purposes it’s the market value of the home that is counted and includes condominiums, townhomes, and duplexes as well. Say a person owns a home valued at $700,000 with a remaining mortgage to be paid of $500,000. Regardless of the $200,000 equity, the full $700,000 is counted in the total estate value. Therefore, real estate should be placed in a living trust including any additional property owned above and beyond a person’s principle residence. This includes property owned out-of-state that’s located anywhere within the United States. However, any property owned in other countries outside of the United States cannot be placed in the living trust. An attorney from the country in which the property is located should be contacted to discuss inheritance options for such property. Regarding jointly owned property with people other than a spouse, a person can transfer their portion of ownership in the property into their living trust. An example would be two sisters that purchased an investment property together 50% each. Each sister can place half of their interest owned in the property into their own living trust.Bank Accounts, Securities
(Stocks, Bonds, Mutual Funds, Etc.): Any bank accounts or securities with reasonably large value are commonly placed into a living trust. Remember, the goal is to personally own less than the probateable threshold. By placing these assets into a living trust they are no longer considered part of a person’s estate and their value is ignored when determining the need for probate.Small Business Interests
If a person owns their own business that is formed as a corporation, that person usually transfers their stock interest into their living trust. With the living trust as owner, the business will not be dragged into a lengthy and costly probate, thus avoiding any interruptions to business as usual. While living, the person still continues to operate the business just as before creating the living trust, which therefore makes this the way to go. Partnerships and shares in a Limited Liability Company (LLC) are also transferred into living trusts.What Should You Not Put in a Living Trust?
After having placed an estate’s major assets into a living trust, other assets can be left out of a living trust and continue to be held in a person’s own name (or jointly with a spouse). As long as the total value of these other assets, when added up is less than the state’s probate threshold, individual ownership will not trigger the need for probate. When creating a living trust, there are also some ancillary documents that go along with it. One of those documents is known as a Pour-Over-Will. This special Will works in conjunction with the trust and functions to pass all of a person’s assets left out of a trust back into the trust immediately upon a person’s death. It basically acts as a “catch all” for less valuable assets that we all own. Once these assets are “poured” into the trust, they are then distributed to the beneficiaries as directed by the trust.Checking and Savings Accounts
(CD’s): Checking accounts are definitely used for convenience, and our primary source in paying bills and receiving money such as paycheck deposits. Leaving a checking account in a person’s name, or jointly with a spouse is common when the balance is low. Maintaining balances in the range of $5,000 to $15,000 is usually safe as the Pour-Over-Will will take care of accounts valued in this range. Same goes for small savings accounts and certificates of deposits.Household Furnishings
Furniture these days, although expensive when buying brand new, largely lose their value when sold used. Very expensive artwork or collectibles can and should be placed into a living trust, but home furnishings usually are left out of the trust and taken care of by the Pour-Over-Will. This also makes it easier as there is no need to list and document each separate household item. The Pour-Over-Will covers it all.Jewelry and Precious Metals
Most jewelry does not need to be placed into trust and is also scooped up by the Pour-Over-Will and passed to the beneficiaries as directed by the trust. Of course, any specific valuable jewelry item or precious metals like gold and silver, that could eat into the probate threshold, can easily be added to the trust.Vehicles & Mobile Homes
Just like household furnishings, used cars do not retain value and generally do not need to be placed into the living trust. Title of vehicles can generally remain owned personally. If the vehicle happens to be an extraordinarily valuable asset, such as an antique car or large motorhome, the title can also be easily transferred into the trust by filling out a few forms and filing those forms with the department of motor vehicles.Life Insurance and Annuities
Most commonly, these two assets are not placed in your normal family living trust. The value and payout of these policies are calculated based on a person’s life expectancy and therefore a living trust cannot be substituted as the insured. However, life insurance happens to be one of the few assets that are exempt from probate. Both life insurance and annuity proceeds pass probate-free to the chosen beneficiaries of the policies. It is acceptable to name individual beneficiaries of the policies, but the living trust can also be named as the beneficiary. In that case, the proceeds of the policies are granted probate free to the trust, and then distributed as directed to the beneficiaries of the trust. Listing the trust as beneficiary does have its advantages. One advantage is making changes. Instead of having to make multiple changes to multiple policies, one simple change to the living trust will apply to all policies where the trust has been placed as the beneficiary.Retirement Plans
(IRA’s, 401k’s, 403(b), Keogh’s, Etc.): Similar to life insurance, retirement plans are based on a person’s life expectancy. These assets cannot be placed in a trust as doing so would terminate the plan, and can cause the gain in the assets to become immediately taxable. However, just like life insurance, retirement plan accounts with named beneficiaries are also one of the few asset types that pass probate-free.It’s Not Rocket Science
It’s generally pretty easy to determine which assets should and should not go into a family living trust. The rule of thumb is valuable assets go into the trust and less expensive items can be left out of the trust and taken care of by the Pour-Over-Will as a catch-all. And as mentioned, each state’s probate threshold can be used as a reference in determining if the assets left out are valued as a whole under that state’s limit. This information is general in nature. Some of these assets, including a few types of retirement plans, are complex in nature. It is imperative to seek the guidance of a qualified attorney in creating and managing a living trust estate plan. Our association has developed a process where you can get advice and services from a very experienced law firm that’s handled the preparation of living trusts for over 24,000 families since 1988. The amazing thing is this streamlined and simplified process actually reduced costs. If you would like to learn how to obtain a complete living trust portfolio at the low price of $599 flat rate (no hidden fees), we created a 45 minute informative and educational online video. Just to watch and learn how affordable, easy and simple it is to obtain a living trust for yourself.Watch Our FREE Educational Webinar
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This area of the website is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of the author, not of the National Association of Family Services, and have not been evaluated by the National Association of Family Services for accuracy, completeness, or changes in the law.
