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Funding Continued: Not-So-Easily Funded Assets

By: Atty. Marcus Collins

Here are three key takeaways from this article:

  • Not all assets are easy to fund into a revocable living trust. While the trust can hold many types of assets, retirement accounts (IRAs, 401(k)s) and Health Savings Accounts (HSAs) can cause tax issues if transferred. Vehicles require additional paperwork and might affect insurance. Digital currencies pose challenges due to the evolving legal landscape, secure storage, and valuation fluctuations. Assets abroad introduce complex legal issues. You should seek the advice and counsel of an experienced estate planning attorney when undertaking to fund your trust.
  • There are tried-and-true methods for some tricky assets. Even though retirement and health savings accounts shouldn’t be directly transferred, the trust (if drafted correctly) can still be named as a beneficiary to receive the funds after the owner’s death. Vehicles require a trip to the DMV and possibly notifying the insurance company. Digital currencies need clear instructions in the trust for secure storage and access.
  • Consulting with an estate planning attorney is crucial. Every situation is unique. You should seek professional guidance to navigate the complexities of funding a trust and ensure a smooth inheritance process.

Revocable living trusts are popular estate planning tools designed to avoid probate, control the loss of control during a disability of the trust settlor, take advantage of tax opportunities (including Illinois estate taxes), and streamline the inheritance process. As we discussed in the previous post, “Helping Your Family: The Necessity of Trust Funding,” by transferring assets into the trust, you ensure a smoother transition for your beneficiaries, and guarantee that your trust is able to accomplish all the goals we just mentioned. But not all assets are equally easy to handle when it comes to funding. In this week’s post, we give you a rundown of some assets that might pose a challenge in funding, or at least cause you a wrinkle or two:

  • Retirement Accounts (IRAs, 401(k)s): While technically transferable, it’s usually not recommended because of the tax implications. By changing the owner of your retirement account, you could end up getting your entire account taxed! Retirement accounts are fundable, though—assuming, of course, that the trust has been properly drafted to receive and deal with retirement accounts.

    In our office, we plan for the opportunity for the retirement account to follow the living trust plan, and we use the death beneficiary designation to do it. Specifically, because we know that our clients have trusts that are drafted to handle it, we direct our clients to name their living trusts as the primary beneficiary of their retirement accounts.
  • Health Savings Accounts (HSAs): Similar to retirement accounts, HSAs offer tax benefits tied to the original owner. Transferring ownership of them to a trust jeopardizes those benefits. HSAs should be treated as carefully as retirement accounts, and maximized benefits (or benefits only attainable by a surviving spouse) should be considered.
  • Vehicles: We encourage our clients to fund their vehicles into their living trusts. Vehicles, like any other asset, contribute to the maximum estate value threshold for whether a probate is required. Additionally, they should be controlled by the disability instructions in the trust, just like any other asset.

    Of course, funding vehicles into a trust requires a trip to the DMV and providing them with the proper paperwork. Moreover, for some insurance companies, funding the vehicle into the trust will necessitate naming the trust as an “additional insured” on the policy, usually for some nominal fee.
  • Digital Currencies: The law on digital currencies continues to develop, which means the ground we stand on in making legal determinations isn’t as solid as we would like. Unlike traditional assets held by banks or brokerage firms, digital currencies require secure storage procedures. There is a risk of being hacked that’s involved in storing them on an exchange. However, the use of private keys (for accessing the currency) can result in unintentionally locking out the people that need to take custody of the funds (namely, your death trustees). Your revocable living trust should address these risks and have a plan in place for how to deal with them.
  • Assets Abroad: International property or accounts can introduce complex legal issues depending on the country’s laws. It’s wise to consult with an attorney specializing in international estate planning.

Remember, this is not an exhaustive list, and every situation is unique. Always consult with an estate planning attorney to determine the best course of action for your specific assets and goals. An attorney can help you navigate the intricacies of funding your revocable living trust and ensure a smooth transition for your loved ones.