Are you thinking about creating a living trust as part of your estate plan?
When used properly, a living trust is a powerful estate planning tool that helps you to add a layer of control and privacy to how you pass on assets. Many people turn to a living trust because of the flexibility afforded in it but it is important to recognize that not every asset belongs in a living trust.
Some types of accounts should never be placed in the ownership of a trust, even if they make up for the bulk of the estate. This includes assets in retirement accounts like tax deferred annuities, IRAs, or 401(k) plans. Medical savings accounts and health savings accounts should also be excluded from your trust.
This is because if you put any of these accounts into your trust, the IRS forever treats that transaction as a distribution, meaning that you’ll need to pay income taxes on the entire amount.
You can, however, name a trust as a beneficiary of your retirement accounts, which gives you some level of control over how the assets will be distributed to your heirs, and could in some situations protect the funds from creditors.
However, be aware of the 2019 Setting Every Community Up for Retirement Enhancement Act, which requires any non-spouse beneficiary to deplete an IRA they inherit within 10 years. Set up a time to consult with an experienced estate planning lawyer about how this might affect you. Our Pasadena estate planning law firm can guide you through the process of selecting the right tools for your future.