Financial Advisor Insights

Why Put Assets in a Living Trust?

What is a revocable living trust?

A revocable trust (also called a living trust) is "funded" during your lifetime and becomes irrevocable at your death. Funding a trust means retitling assets in the name of your trust. Unless you fund the trust, it doesn't really serve a purpose. During your life, you can add, use, or remove assets in the trust as you would normally and there are no changes to the tax treatment of these assets. 

Important disclosure: The material in this article is intended to provide generalized information only as to some of the financial planning considerations of revocable trusts and should not be misconstrued as the rendering of personalized legal or tax advice.

Reasons to set up a trustWhy put assets in a living trust?

There are three main reasons to consider utilizing a revocable trust:

  1. To avoid probate. Some assets, like a retirement account, will pass directly to beneficiaries. Assets that don't pass directly to heirs (such as a bank account, brokerage account, home, etc.) will have to go through probate court before they're distributed according to your will (if you had one) or at the court's discretion. Probate is an expensive, time-consuming process. Putting these assets in a revocable trust allows you to avoid probate. 
  2. To ensure your assets are distributed as you intended. As discussed above, without a trust you lose complete control over how your assets are distributed upon your death. Using a trust gives you complete control over who-gets-what, even for decades to come. For example, instead of letting an 8-year-old inherit a rental property or investment account outright, you can include age-based milestones and other provisions to help ensure the assets aren't squandered. 
  3. To take advantage of tax planning opportunities. The federal estate tax exemption in 2020 is $23.16M and portable between spouses. Some states, like Massachusetts, have their own estate tax and a much smaller exemption amount. The Massachusetts estate tax exemption is currently $1M and unlike the federal exemption, the amount isn't portable, so a credit shelter trust or marital trust is often utilized after the first spouse dies to preserve the exemption. In this example, assets up to the exemption amount ($1M in this example for Massachusetts) would flow from a decedent's living trust to a credit shelter trust and the remaining assets (if any) would flow to other trusts (a QTIP trust, family trust, etc.). If the surviving spouse died later in the year, the credit shelter trust would generally not be included in the taxable estate, which can reduce or eliminate estate tax at the state level altogether, provided the remaining gross estate is $1M or less. 

What types of assets can you put in a living trust?

A number of different types of assets can be put into trust during your life, though some will be subject to state laws:

Other types of assets can only flow into a trust after death:

  • Retirement account, if the trust is listed as a beneficiary
  • Life insurance, if the trust is listed as a beneficiary

As with anything in estate planning, there are several important considerations before putting an asset in trust or naming your trust as a beneficiary, so you’ll need to discuss your situation with your estate planning attorney.

Read: Attorneys Share Real Estate Planning Nightmares

Other considerations:

  • What’s the cost of putting the asset in a trust? Is it worth the expected benefit?
  • What are the implications by retitling an asset in your own name into the name of a joint trust vs a revocable trust in your own name?
  • Is the goal probate avoidance or creditor/liability protection? A living trust can help with the former, but you may want to explore other ways to protect your assets such as an LLC, personal umbrella liability policy, or even an irrevocable trust
  • What are the future tax implications?
  • If married, do you and your spouse have similar legacy goals and beneficiaries? A revocable living trust can help ensure your wishes are carried out with your assets, assets that remain after you and your spouse are gone, or in the event they remarry

Trusts can be an efficient way to accomplish your goals, but they’re not the solution for every problem. Work with an attorney in your area in conjunction with your financial advisor and CPA to develop a coordinated strategy that meets your needs.

Wealth Management Financial Planning Advisor

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