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If you’ve ever left a piece of foil on a dish, set chocolate chips on fire or exploded eggs, then you know that some things just shouldn’t go in the microwave. In this way, your living trust is a lot like a microwave; directing certain assets to it could have unintended consequences. Your trust is a great way to pass assets to whom you want, in the way you want, with the least amount of hassle and cost, but it’s not for everything. Review the considerations below before putting all of your assets in the name of your trust or naming it as a beneficiary.
Non-Retirement Accounts and Other Property: Put very simply, don’t title any property in the name of your trust that your attorney has told you to transfer in other ways. Once your trust document has been drafted, work with your attorney to retitle property, as instructed.
IRA’s/Retirement Plans: IRAs and retirement plan accounts cannot be titled to the name of your trust. Naming the trust as the beneficiary is the alternate way for the trust to direct the disposition of these assets but, be careful! Naming your trust as the beneficiary of your 401k, IRA or other retirement plan might be a big mistake (‘big, huge!’). The trust may require beneficiaries to take everything out of the plan as taxable income within five years of your death, rather than allowing them to spread distributions – and ordinary income tax – over their lifetimes.
Does this mean that you should never name your trust as the beneficiary of a retirement plan? No. You may need the trust to control how your retirement assets are received by minor beneficiaries or beneficiaries with creditor, spending or substance problems. It’s possible to name the trust as a beneficiary without the negative consequences mentioned above if you’re using a tool specifically created for that purpose (just like it’s possible to hard-boil eggs in the microwave using a big boiley). A designated beneficiary trust allows distributions to be stretched over a beneficiary’s lifetime, but most trusts aren’t drafted as such. Not sure? Ask your attorney for specific beneficiary directions and check whether who you’ve named as beneficiary of your retirement plans matches the instructions provided.
Nothing: Putting the wrong things in your microwave can create a mess, but putting nothing in it can also end in a blow-up. In the same way, failing to fund your trust is a great way to ensure that it doesn’t function properly. Funding a trust is the process of re-titling assets and property into the name of the trust. It’s your way of telling the world: “If something happens to me, look to this trust for my instructions on what to do with this piece of property.” Although it’s rare that we would forget to put our meal into the microwave before starting it, failing to fund a living trust is one of the most common estate planning mistakes. Again, work with your attorney to re-title property, as instructed.