Posted by Dana Law Group on August 31, 2021
Having a trust can be a great way to ensure that your assets end up where you want them after you pass away. Likewise, a trust gives you some added control over spending/use of your assets by your beneficiaries. Still, there’s a lot of misinformation out there regarding trusts and what they entail. Specifically, it can be helpful to understand what should not be included in a trust so you can plan accordingly.
In general, it is best to keep life insurance policies out of your trust for tax reasons. Of course, this doesn’t mean that you cannot designate beneficiaries for your life insurance payout. It just means that you should handle this through your life insurance company and policy directly instead.
Money from health savings accounts and other types of medical savings accounts should also be kept out of your trust. In fact, if you choose to include these in your trust, you will likely be creating more hassle for yourself and your beneficiaries later on. That’s because these types of medical savings accounts cannot be re-titled in a trust; this means funds would need to be manually withdrawn from the savings account and placed in the trust directly.
Money from your retirement accounts should also be left out of your trust for tax purposes. When retirement accounts are re-titled to be included in a trust, this legally turns them into an asset. Unfortunately, this also means that these funds can be subject to income tax, which can be substantial. In general, it’s best to leave these types of accounts out of your trust altogether to avoid the tax burdens.
If you have set up a Uniform Gift to Minor Account (UGMA), you might think that this is something you need to include in your trust. However, the good news is that when you created the account, you already signed over the legal rights to the minor. As a result, there is actually nothing else you need to do—and there is no reason to include this type of account in your trust.
Knowing what to include (and what not to include) in a trust can be quite complicated. And unfortunately, making the wrong choices can actually have some pretty major consequences—particularly from a tax standpoint.
The good news is that by simply working with an experienced estate planner and probate lawyer, you can get the professional help you need in crafting a trust that suits your needs. Contact our team at Dana Law Group today to learn more about how we can help with your trust.