When I sit down with families in Brooklyn to discuss estate planning, one of the most common questions I hear is, "Can I put everything into my trust?" It's a great question—and one that deserves a thorough answer. While trusts are powerful estate planning tools that can help you avoid probate, protect your assets, and ensure your wishes are carried out, not every asset belongs in one.
Understanding which assets should stay out of your trust is just as important as knowing what to include. Making the wrong choice could cost your family thousands in taxes, trigger unexpected penalties, or create legal headaches down the road. Let me walk you through the key assets that typically shouldn't be placed in a trust—and explain why.
Retirement Accounts: The Most Common Pitfall
Here's something that catches many people off guard: retirement accounts like IRAs, 401(k)s, and 403(b)s should not be transferred directly into a trust. I've seen well-meaning families make this mistake, and the consequences can be financially devastating.
When you transfer ownership of a retirement account to a trust, the IRS treats it as a complete withdrawal. That means you'll owe immediate income tax on the entire account balance—potentially pushing you into a higher tax bracket and losing decades of tax-deferred growth.
Instead of transferring these accounts, you can name your trust as a beneficiary. This approach gives you control over how the assets are distributed after you pass away while preserving the tax advantages. However, this requires careful planning with a qualified estate planning attorney to ensure the trust qualifies as a "see-through" trust under IRS rules.
Health Savings Accounts and Medical Savings Accounts
Similar to retirement accounts, Health Savings Accounts (HSAs) and Medical Savings Accounts (MSAs) cannot be transferred to a trust without losing their tax-exempt status. These accounts are designed to help individuals save for medical expenses with significant tax benefits, but those benefits disappear if you attempt to change ownership to a trust.
The best approach is to keep these accounts in your individual name and designate beneficiaries directly on the account forms.
Life Insurance Policies: A Nuanced Situation
Life insurance can be tricky. While you can place a policy in certain types of trusts (specifically, an Irrevocable Life Insurance Trust or ILIT), directly transferring it to a standard revocable living trust often creates more problems than it solves.
For most families, the simpler solution is to name your trust as the beneficiary of your life insurance policy. This gives you control over how the death benefit is distributed without the complications of trust ownership. If estate tax reduction is a concern, an ILIT might be appropriate, but that's a specialized tool requiring careful planning.
Vehicles: Registration and Insurance Complications
In New York, transferring vehicles to a trust can create unnecessary complications with insurance coverage and registration. While it's technically possible, many insurance companies charge higher premiums for trust-owned vehicles, and the DMV paperwork becomes more complex.
A better alternative is to use a transfer-on-death (TOD) registration if available in your state, or simply allow the vehicle to pass through your will. Since vehicles depreciate quickly and are rarely worth enough to significantly impact probate costs, the administrative hassle usually outweighs any benefit.
UGMA and UTMA Custodial Accounts
Custodial accounts established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) are legally owned by the minor child, not by you. Because of this unique ownership structure, these accounts cannot be transferred to your trust.
Attempting to move these assets would disrupt the custodial arrangement and potentially create gift tax issues. These accounts should remain separate and will transfer to the child when they reach the age of majority.
Everyday Checking Accounts (Sometimes)
While many financial institutions allow trust ownership of checking accounts, some people prefer to keep one personal checking account outside of their trust for daily expenses. This can simplify routine transactions and avoid the need to show your trust documents every time you open a new account or make certain banking decisions.
That said, at Alatsas Law Firm, we often recommend that clients transfer most of their liquid assets, including bank accounts, into their trust to ensure comprehensive probate avoidance. The key is striking the right balance for your specific situation.
Making the Right Choices for Your Family
Estate planning isn't one-size-fits-all, especially when it comes to funding your trust. What works for one Brooklyn family might not work for another. The decisions you make about which assets to place in your trust—and which to keep out—depend on your unique circumstances, goals, and family dynamics.
Over nearly 30 years of serving families in Brooklyn, Queens, and Staten Island, I've learned that the best estate plans are built on a foundation of education and personalization. That's why we take the time to explain not just what to do, but why each decision matters for your family's future.
Next Steps: Don't Leave Your Plan to Chance
If you're working on your estate plan or already have a trust in place, now is the time to review which assets you've transferred—and which might be better handled through other methods. An improperly funded trust is one of the most common estate planning mistakes, but it's also one of the easiest to fix with the right guidance.
Have questions about your specific situation? Wondering whether your retirement accounts, insurance policies, or other assets are properly positioned? I invite you to reach out to our office for a consultation. Together, we can create a comprehensive plan that protects your assets, minimizes taxes, and gives your family the security and peace of mind they deserve.
What concerns do you have about funding your trust? Have you encountered any challenges transferring assets? Share your thoughts in the comments below—I'd love to hear from you.
