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 Living Trust in 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. According to a recent survey, two out of three Americans don't have any type of estate planning in place.
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.
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.
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."