What should you not put in a living trust in AZ? If you are curious about what assets can and cannot go into trusts.
Discover the Essentials: What Should You Avoid Including in Your Revocable Living Trust Arizona? Uncover the key considerations and pitfalls when setting up your living trust in the Arizona.
An Arizona living trust is designed to protect your assets and provide you with a reliable method to pass them to your heirs and avoid the probate process. According to a recent survey, two out of three Americans don’t have any type of estate planning in place. Consulting with an experienced estate planning attorney can help you navigate the complexities of setting up a living trust in Arizona.
If you live in Arizona and want to start drafting a revocable living trust, there are some important things to know. Arizona has some of the best trust laws in the country, making an Arizona living trust a good strategy for you and your family. When properly set up, it will keep you out of probate court and avoid probate process for your successor trustee.
But what should you not put in an Arizona living trust? Read on to learn about things to exclude to help you create the right plan for your heirs and their future. Always consult with an estate planning attorney to discuss your needs. An estate planning lawyer will help you with living trusts.
Your Retirement Accounts
You might think that adding your retirement accounts to a living trust is a good idea, but these items should be omitted. Don't include things like your IRA, 401(k), 403(b), or any other retirement accounts you have.
Transferring these accounts to revocable trusts is viewed as a complete withdrawal of the funds. As a result, you could be held liable for taxes on the transaction.
Rather than transferring these accounts into the trust, there's an easier way to give them to your heirs. Simply name the trustee as the primary or secondary beneficiary of your retirement accounts. This will ensure that they receive them in the event of your passing. If you have questions, talk to an estate planning lawyer to understand why. An estate planning law firm that understands taxes will explain better why.
What Should You Not Put in a Living Trust? Life Insurance
Life insurance is designed to give your dependents money after you die so they can pay for things like your funeral and the cost of living. If you own a revocable trust and you're the trustee, all of your assets (including life insurance) are considered your property (real property or personal property).
Adding this to the trust means that the value of your life insurance proceeds is counted as part of the total value of the estate. The government has only imposed taxes on estates with a value of over $11.8 million for an individual since 2011. Currently, the tax reaches approximately 17 percent of an estate's worth.
If your estate's value goes over $11.8 million because of life insurance proceeds, the total estate taxes would cost more. You can avoid this higher tax rate by simply leaving the life insurance policy you have as it is. Just check with the insurance holder to ensure that the beneficiaries are correct and up to date.
Talk to an estate planning attorney to understand how a living trust in Arizona can also be funded using life insurance if you are part of a blended family. You may want to create an irrevocable living trust for a spouse or a child with special needs using life insurance.
Medical and Health Savings Accounts
Both medical and health savings accounts are utilized to help you pay for medical costs. These accounts cannot be added to a living trust.
A tax-free health and/or medical savings account should not be added as part of your trust assets. If you want to tie them to the trust, you can name the trustee as the primary or secondary beneficiary of the savings account instead. Doing this will give your beneficiaries flexibility to use the accounts once you pass away.
An estate plan, and especially revocable living trusts, are great instruments that avoid probate court.
Foreign Assets
So, what should you not put in a living trust if you have foreign assets? In most cases, you won't be able to transfer these foreign-held assets to a trust based in the United States.
If you're not sure how to handle high-value foreign assets, it's always a good idea to speak to an estate attorney who is licensed in the country where the assets are held. Don't assume that you can add these to your trust, as it might not be possible without the right process in place.
The legal title of foreign assets will not necessarily work the same way in Arizona.
Vehicles and Other Assets
Vehicles, boats, airplanes, and other items typically fall under the “questionable asset” category. Technically, they could be transferred into a revocable living trust, but some states add estate taxes on vehicles and boats. If you need to make sure the asset also has a legal and equitable title to add it to your living trust and let your successor trustee know.
Choosing a reliable successor trustee is crucial to ensure that these assets are managed according to your wishes after your passing.
Many states view this type of transfer as a sale of the property rather than a transfer of assets. In certain states, vehicle owners cannot name a beneficiary after death. In Arizona, you can. Most of the time your vehicle won’t be probated before it gets passed on to your beneficiary.
Not only do most cars lose value over time, but many tend to still have loans against them. If you transfer it to an heir, they could be left paying for the loan. Talk to an Arizona law firm to understand what is right for you.
If the vehicle gets damaged or is involved in an accident, your trustee could be sued by the other party.
If you have a valuable, rare, or antique car with a high value, it might be beneficial to move it to your trust. Talk to an experienced attorney before you decide to move any of these “questionable assets” over to your living trust. That is especially important if you own an expensive collector’s vehicle. You may want the base price to reset and assign a property beneficiary before you sell it to minimize taxes.
Active Financial Accounts
You need access to your checking and savings accounts to pay your monthly bills. It's a good idea to add the bank accounts to your trust and make sure your trustee has full control of the trust assets.
If you don't want to add personal accounts you can add the trust as a beneficiary. Another way to make things easier is to create a separate account from the trust where you can access funds easily for regular expenses.
Some banks may also have a payable-on-death (POD) option. You can use this option to add primary and secondary beneficiaries who will receive the balance of your accounts after your death. It's one of the quickest, easiest ways to transfer these assets directly to your trust or heirs without excess paperwork.
The Magic Wand Provision in a Living Trust in Arizona
At our estate planning law firm, we like to add a provision to a living trust that we create called "The Magic Wand Provision." To completely avoid probate, all your assets need to be in your living trust when you pass.
What happens if not all your assets are titled as trust assets? Your personal representative will have to petition the probate court, open a probate, and add all assets to the trust. Under the Arizona uniform probate code, a full probate process will be necessary.
There is a small shortcut though. At our estate planning law firm, we have a provision that we like to call "The Magic Wand Provision." What that provision does is assign all property to the trust with a few exceptions. That way, we will still need to petition to the court to add assets to the trust but a full probate will not be necessary.
A living trust is not just a trust document. It is a legal document that addresses your financial assets, property, and other certain assets the right way. It takes into consideration your family circumstances. Avoiding probate is usually the main goal when creating a trust in Arizona, but addressing issues like how to leave assets for minor children will be part of the process as well. A Last Will is always created together with a living trust in Arizona.
Arizona offers a lot in terms of protection in a living trust, but only an experienced trust attorney will be able to take advantage of all the benefits. A trust is also not public record like probate. Creating a living trust may be a good estate planning strategy for you and your loved ones. If you are married, you may want to consider creating a shared living trust.
Start Your Living Trust Today
If you've ever asked, what should you not put in a living trust, now you have a clearer picture of the items to omit. Remember to consult with a professional to ensure that you're leaving your most important assets to your loved ones. Creating a living trust the right way and funding it correctly will keep you out of probate. There are many benefits to doing so in Arizona. Create an Arizona living trust today for your beneficiaries.
If you live in Arizona and are interested in estate planning and our other services, contact Citadel Law Firm PLLC to schedule a consultation today. We can help with beneficiary asset protection trusts too.
Call (480) 565-8020 or click here to schedule a free estate planning consultation. Create your revocable living trust in Arizona or irrevocable trust today; we will be pleased to help you."
Frequently Asked Question about What Not Put in a Living Trust in Arizona
When you're setting up a living trust in Arizona, it's crucial to understand what shouldn't go into it. For instance, retirement accounts like 401(k)s and IRAs are often better left out due to tax consequences and the advantages of direct beneficiary designations. You also need to think carefully about including personal items with sentimental value, as they can complicate trust administration. Curious about how these choices might affect your estate planning strategy? Let's explore the implications further.
Why you should not add retirement accounts to a Trust in Arizona?
When considering what to include in your living trust in Arizona, it's crucial to avoid adding retirement accounts. These accounts, such as 401(k)s and IRAs, typically have specific tax advantages and rules that don't mesh well with a revocable living trust.
Instead of transferring these accounts into the trust, you should keep them separate and rely on beneficiary designations to ensure they're distributed according to your wishes.
By designating beneficiaries directly on your retirement accounts, you maintain their tax-deferred status, which can save your heirs significant amounts of money.
When retirement accounts are placed in a trust, they may trigger immediate tax consequences, negating those advantages. Additionally, if you name your revocable living trust as the beneficiary, it can complicate the distribution process and lead to unnecessary delays.
What is the downside of a Living Trust?
Living trusts can certainly offer benefits, but they come with some downsides you should consider.
One significant disadvantage is the initial cost and effort involved in setting up a living trust. You'll need to work with an estate planning attorney to draft the necessary documents, which can be more expensive than a standard will.
Additionally, once your living trust is established, you must transfer assets into it. This funding process can be time-consuming and may require ongoing management.
If you forget to transfer assets, those items may end up in probate, defeating the purpose of your living trust.
How can an estate planning attorney make sure you have the right trust for your family?
To ensure you have the right trust for your family, an attorney will assess your unique financial situation and estate planning goals.
An experienced estate planning lawyer will begin by discussing your assets, liabilities, and any specific wishes you have for your loved ones. This comprehensive understanding allows them to recommend the most suitable type of trust, such as a revocable trust, which offers flexibility and control during your lifetime.
Your attorney will also evaluate potential tax implications and the needs of your beneficiaries. By considering factors like age, financial literacy, and special needs, they can tailor the trust structure to fit your family's unique dynamics.
Additionally, your estate planning lawyer will guide you through the necessary documentation and ensure that your trust complies with Arizona laws.
Regular reviews are essential as life circumstances change. Your attorney will help you update your trust as needed, whether due to marriage, divorce, or the birth of a child.
With their expertise, you can feel confident that your trust not only meets your current needs but also adapts to future changes, securing your family's legacy for years to come.
Do I need a Living Trust in Arizona if I only have retirement accounts?
Many people wonder if a Living Trust is necessary in Arizona if they only have retirement accounts. The short answer is no, a living trust in Arizona isn't typically required for retirement accounts like IRAs and 401(k)s. These accounts often have designated beneficiaries, which means they pass directly to those beneficiaries upon your death, bypassing the probate process.
However, a Living Trust can still be beneficial, even if you primarily hold retirement accounts. It can provide a more comprehensive estate plan by addressing other assets and ensuring that your wishes are honored. For instance, if you have minor children or wish to control how your assets are distributed after your death, a trust might be helpful.
It's also worth considering that if you have additional assets outside of your retirement accounts, a living trust in Arizona can simplify the transfer process, reducing the burden on your loved ones.
Ultimately, while retirement accounts may not necessitate a living trust, evaluating your overall estate plan is essential to ensure it meets your needs and goals. Consulting an estate planning attorney can guide you in making the right decision for your situation.
Can a Living Trust Reduce Estate Tax in Arizona?
A trust can play a significant role in your estate planning strategy, particularly when it comes to managing estate taxes in Arizona. While a revocable living trust doesn't typically reduce your estate taxes, an irrevocable living trust can offer significant benefits.
When you transfer assets into an irrevocable living trust, those assets are no longer considered part of your estate. This means they won't be subject to estate taxes upon your death. By removing assets from your taxable estate, you can potentially lower the overall estate tax liability.
This strategy is especially useful for individuals with large estates that may exceed the federal estate tax exemption limit. Additionally, an irrevocable living trust can provide asset protection and can help ensure your beneficiaries receive their inheritance without the burden of estate taxes.
It's crucial to understand that establishing an irrevocable living trust is a significant decision, as you lose control over those assets. Consulting with an estate planning attorney can help you navigate the complexities of estate taxes and determine if an irrevocable living trust aligns with your financial goals.
In Arizona Do I still need a Will if I make a Living Trust?
While a living trust can effectively manage your assets and streamline the distribution process, it doesn't completely eliminate the need for a will in Arizona.
Even if you've set up a living trust as part of your estate plan, a will serves important purposes that a trust can't fulfill.
First, a will allows you to specify guardianship for minor children, ensuring their care aligns with your wishes.
Additionally, any assets not included in your living trust will be subject to probate, which can be avoided if you have a pour-over will. This type of will automatically transfers any assets you forgot to place in your living trust, simplifying the process.
Moreover, a will provides clarity and direction for your loved ones, reducing potential disputes.
It can also appoint an executor, someone you trust to handle your estate according to your wishes.
Conclusion
In conclusion, when creating a living trust in Arizona, it's crucial to avoid including retirement accounts, sentimental personal items, and complex business interests. These exclusions help streamline trust management and prevent potential tax implications or complications. If you're uncertain about the best approach for your family's needs, consulting an attorney can provide clarity and ensure your estate planning is effective. Remember, even with a trust, a will still plays an essential role in your overall estate plan.