A living trust is a powerful tool for passing assets without probate, but not everything belongs in it. Many people fall into the trap of trying to move every asset into their trust. That can create negative tax ramifications, insurance headaches, or invite liability. This guide breaks down the assets you should keep out of your living trust, why they cause problems, and how to set them up the right way so your plan still works.
Why Funding Your Living Trust Isn’t About Putting Everything In
There’s a preconceived notion that every asset must be retitled in your living trust to bypass probate. That is not true. A well-built plan uses the trust for the right assets, then uses beneficiary designations and titling for the rest.
A living trust helps:
- Avoid probate for titled assets like real estate and financial accounts
- Keep your plan private
- Provide control over how and when beneficiaries receive assets
But some property is better left out. Vehicles can expose your trust in lawsuits. Retirement accounts can trigger taxable events if retitled. Life insurance already bypasses probate with beneficiary forms. The smart approach is knowing what to keep out, and how to coordinate those assets with your overall plan.
Common Myths About Trust Funding
- Myth 1: All assets must go into a living trust to skip probate.
- Myth 2: Titling everything in a trust protects you from all lawsuits.
- Myth 3: Retirement accounts should be owned by your trust.
- Myth 4: Life insurance needs to be placed in the trust to work with your plan.
Not all assets belong in your living trust.
Vehicles: Cars, Boats, and More That Stay in Your Name
Vehicles seem simple to title into a living trust, but it often creates more pain than benefit. This includes:
- Cars and trucks
- Boats and watercraft
- Trailers and equipment
There are three core reasons to keep vehicle titles out of your trust.
Reason 1: Easy Transfer Without Probate or Trust
Most states allow a simple transfer of a vehicle after death with a death certificate, so there is no need to retitle into your trust just to bypass probate.
A clean way to handle this:
- In your final instructions, note who should receive each vehicle, for example, your truck to your son.
- After your death, your successor trustee uses the death certificate and works with the DMV to complete the transfer.
This keeps things simple and avoids extra paperwork during your lifetime.
Reason 2: Avoiding Lawsuit Risks and Asset Protection Issues
Titling a vehicle in your trust can draw your trust into litigation. Imagine a car accident, plaintiff’s counsel sees the trust name on title and adds the trust as a defendant.
- Your trust gets named in a lawsuit.
- You expose trust assets to scrutiny and claims.
To minimize that risk, keep vehicles titled in your personal name whenever possible. This helps keep your trust out of vehicle and boating accident claims.
Reason 3: Insurance Complications
Insurers often mishandle policies when a vehicle is titled to a trust. The result can be confusion or gaps in coverage.
- You might have to shop around for a carrier who understands trust-owned vehicles.
- You could face delays or coverage questions in a claim.
Avoid unless anonymity is crucial. If privacy is your priority and you must title a vehicle to a trust, expect extra work with the insurer and be sure coverage is clear in writing.
Retirement Accounts: Annuities, IRAs, and 401(k)s Belong Outside
Treat Annuities, IRAs, and 401(k)s as a separate class. These accounts are, in effect, their own contracts with tax benefits built in. Retitling them to your living trust can cause serious problems. They belong outside your trust while you are living.
The smarter move is to use beneficiary designations to connect these accounts to your overall plan. Name your spouse as primary if that fits your goals, then name your living trust as the contingent beneficiary so the trustee controls how funds are managed and distributed if your spouse is not living.
Here’s a quick comparison:
| Asset Type | Owned by You (with Beneficiaries) | Retitled to Living Trust |
|---|---|---|
| IRA, 401(k), Annuity | Preserves tax-deferred or tax-favored status, easy to pass with beneficiary forms | Risk of treating it as a distribution, possible taxable event, loss of special tax treatment |
The Tax Trap of Transferring Them In
Retitling these accounts to a living trust can be treated as a distribution or liquidation of the asset. That creates avoidable tax burdens and may ruin the account’s special tax status.
- Immediate taxes could be due.
- You could lose tax-deferred growth.
Keep ownership as is. Use beneficiary designations to tie them into your plan.
Proper Beneficiary Designations for Control
To keep control without breaking the tax benefits, use simple designations:
- Primary beneficiary: your spouse, if appropriate.
- Contingent beneficiary: your living trust.
Then write explicit trust terms for stretching assets and managing distributions, especially for young or spendthrift beneficiaries. Your trustee can then follow your instructions instead of handing funds over outright.
A Big Mistake to Avoid with Young Beneficiaries
A common mistake is listing your children as contingent beneficiaries on large retirement accounts. If you and your spouse pass when your kids are, say, 23 and 24, they could receive $600,000 outright. That likely doesn’t match your living trust terms if you planned to delay access until age 45. The retirement accounts would operate outside of the estate plan.
Instead, name the trust as contingent. Your trustee then controls payouts according to your terms, which keeps distributions responsible and aligned with your plan.
Life Insurance: Keep It Out for Simple Probate Avoidance
Life insurance already bypasses probate through beneficiary designations. You do not need to place a policy into your living trust to get it to the right people. This works much like retirement accounts, where the contract controls what happens after death.
A smart setup looks familiar:
- Primary beneficiary: spouse, if that fits your plan.
- Contingent beneficiary: your living trust.
This approach keeps the policy out of probate while still giving your trustee control if your spouse is not living.
Smart Beneficiary Strategies
Use a simple designation order:
- Primary beneficiary: spouse or partner.
- Contingent beneficiary: your living trust.
This is often the preferable way to keep proceeds coordinated with your overall estate plan without retitling the policy.
When to Consider a Separate Irrevocable Trust
If you have a large policy and live in a state with a low estate tax threshold, consider an Irrevocable Life Insurance Trust (ILIT). An ILIT owns the policy, which can keep the death benefit out of your taxable estate.
- Removes policy from your estate for tax purposes
- Keeps control with a trustee
- Works alongside your living trust, not inside it
An ILIT is a separate trust, not your living trust.
Final Tips for Fully Funding Your Trust the Right Way
Your living trust still needs to be fully funded. Real estate, bank accounts without beneficiary features, and similar assets should be moved into the trust to avoid probate. The assets below should not be placed into the trust while you are living:
- Vehicles of any type
- Annuities
- IRAs
- 401(k)s
- Life insurance policies
To link everything together, keep ownership as is for those five, then use beneficiary designations to match your plan.
A quick checklist:
- Review and update all beneficiary forms for retirement accounts and life insurance.
- Add your spouse as primary, your living trust as contingent, if that fits your plan.
- Add clear instructions in your trust for how retirement assets should be handled for younger beneficiaries.
- Keep vehicles in your personal name, and note who should receive them in your instructions.
- If you have a large life insurance policy, ask whether an ILIT makes sense in your situation.
Want help setting this up the right way? You can schedule a free consultation with Anderson Advisors to get your questions answered. If you like practical planning tips, subscribe to Clint Coons’ YouTube channel for regular insights on living trusts, asset protection, and real estate investing.
This is not legal advice. Your situation is unique, so speak with a qualified professional before making changes to your plan.
Conclusion
A living trust is a core piece of a solid estate plan, but it is not a catch-all. Keep vehicles, annuities, IRAs, 401(k)s, and life insurance out of the trust while you are living. Use beneficiary designations and clear trust instructions to keep control and avoid mistakes. If you set this up with intention, your assets move smoothly, your heirs get what you want them to receive, and you avoid trouble with taxes, lawsuits, and insurance. Ready to tighten up your plan? Book a free consult, then update your beneficiary forms today.