Most people have heard the term “trust,” “revocable living trust,” or “family trust.” Perhaps they have heard friends talk over a dinner party about a new trust as if it were a new car in the driveway. A revocable living trust doesn’t carry quite the same cache as the fancy new car—but perhaps it should.
How can a trust protect my assets?
Many people think they should create a trust, but they don’t quite understand how it might benefit them. A revocable trust can both mitigate your tax burden and help beneficiaries avoid long and costly probate processes. Before you start a trust, though, you must ensure it will work for your goals. If you don’t, you may be wasting time and money and create a big mess for your family.
If you want to start a trust, it is essential to understand how it will operate with your assets. Too often, clients educate themselves on the concept of a trust, read the trust document text, sign the paperwork—and then do nothing. This is like signing a car’s purchase paperwork, reading the owner’s manual—and then leaving the car sitting in the driveway. Like cars, if people actually used revocable living trusts regularly, our assets and legacy wishes would be much better off.
This article is going to focus on one aspect of how to operation a trust: how to add assets to a trust. For more information on trusts, visit the Holman Law trust page, titled Living Trusts and Testamentary Trusts.
Quick Introduction to Revocable Living Trusts
Before we get started, here are a few important terms.
Revocable Living Trust Definitions
A trust is a third-party entity that can hold onto your property or assets for the benefit of someone besides yourself.
This is a trust that is active during your lifetime (not just after death).
Irrevocable Living Trust
It is a trust that you cannot modify during your lifetime but is used to solve financial problems.
Revocable Living Trust
This is a trust that you can modify during your lifetime and is very flexible.
What is a revocable living trust?
You can move assets in and out during your lifetime—it’s very flexible. It can help you keep your options open for long-term opportunities. It can be called simply a “revocable trust.” In this article, when we say “trust,” we are referring to a revocable living trust.
What is an irrevocable trust?
- protect your assets from creditors seeking to make claims on your estate. A common disadvantage of a revocable living trust is that creditors can still make claims on its assets. The irrevocable trust solves this problem.
- solve specific challenges unique to your family.
What exactly is an asset, anyway?
An asset is anything that either has current economic value or might have economic value in the future. It can refer to a property, a car, a bank account, or even a mineral interest or promissory note. Property and bank accounts are the two most common assets placed in a trust.
Should you set up a revocable living trust?
Absolutely. It can help with your tax burden and protect your assets from probate. Revocable trusts also travel well. They are helpful if you and your family have plans or dreams to move to a different state. However, the right kinds of assets must go into your trust. After a consultation with your attorney, guns, retirement accounts, and certain other assets should be handled differently.
Assets You Can Put in a Revocable Trust
Adding Real Estate to a Trust
Real estate is typically considered a probate asset. By default, before an asset like real estate can be inherited, it must go to probate court. Unfortunately, the probate process can be lengthy and costly. The property will be unusable during that time. It can even depreciate in value.
Putting a house or other real estate into a trust allows it to skip probate, saving your family time and expense. Trusts can mean a faster and smooth transfer of property title.
Transferring a House Out of a Trust
Some trustees will transfer a house out of a trust. For example, they may decide to give it as a lifetime gift to a family member. In these cases, they should be mindful of high capital gains taxes.
Property in Trusts and Medicaid Eligibility
A primary residence in a trust can actually disqualify you from receiving Medicaid. If you unexpectedly need to qualify for Medicaid, your primary residence should be transferred back into your name.
Adding Mortgaged Property to a Trust
You may need the written permission of your lender to transfer mortgaged property into a revocable trust. This is usually not a problem, however. The request is quite common and permission is usually granted. Your lender will often have you sign some paperwork to document this transfer.
Adding Bank Accounts to a Trust
What accounts can I have in my trust?
There are several kinds of bank (or credit union) accounts that you can put in a trust:
- Checking accounts
- Savings accounts
- Certificates of deposit
- Stock, bond, and other investment accounts
How to Set Up a Trust Fund Bank Account
There are two primary ways to funnel your accounts to your trust.
- Have the trust own the account. You can assign or create a financial account for the trust. The trustee would then be in charge of these accounts. They could write checks, withdraw funds, invest, and more. This can be especially useful if one of the beneficiaries becomes incapcated or is at risk of elder abuse. A trustee will ensure funds in these accounts are used in the best interest of the beneficiary.
- Name the trust as a beneficiary of the account. In these cases, the assets do not transfer to the trust until the death of the grantor.
Can a retirement account go into a trust?
A retirement account must be held in an individual’s name. Therefore, it can only be transferred to a trust by way of a beneficiary designation upon that individual’s death.
Do not try to transfer ownership of retirement accounts to a revocable living trust. If you do, you might end up paying extra taxes. You will still avoid probate on these assets if you designate beneficiaries on these accounts.
Ensure Your Bank Accounts Benefit Your Children Under a Protective Children’s Trust
If you have children and you want to ensure they receive their share of your estate in a protected manner, you can:
- Establish a children’s trust through your revocable trust (or your last will—see our trust page to learn more about testamentary trusts).
- Name the trust as either an owner or beneficiary of your accounts.
- Set up trust instructions that ensure the funds will be split, distributed, and controlled in accordance with your wishes.
If you skip this last step, the children may have full access to your funds at a young age. They might not be ready to make their own discretionary purchases. Your children’s creditors will also be able to reach the funds if the account is not protected in a trust.
More Assets You Should Add to a Trust—Sometimes
Several other kinds of assets can be added to a trust. Some of these will require special consideration, however.
For instance, it can be difficult to add vehicles to revocable trusts due to issues with title transfers. Usually, an alternative method is used to keep them out of trust and transfer them in a different manner (an affidavit of heirs, a joint tenancy with right of survivorship, or a designated beneficiary). However, adding the vehicle to the trust can be done if needed.
All of the following can be added to a trust. However, there may be better alternatives available. Check with an estate planning lawyer to find out if adding these assets to a trust is really the best option for you.
- Casualty and property insurance
- Closely held corporation stock (stock that is not publicly traded)
- Partnership interests or LLC interests
- Mineral interests
- Promissory notes
- Safe deposit box
- Club memberships
Can a revocable living trust avoid taxes?
The short answer is that revocable trusts do not avoid taxes. However, trusts can minimize taxes and attain estate planning objectives that can reduce tax liability.
How are trusts taxed?
Stepped-Up Basis vs. Carryover Basis
As of 2021, under current law, a beneficiary receiving an asset is taxed based on what the “fair market value” of the home was at the time of the grantor’s death. If the original owner—the grantor—buys a house for $20,000, and the house is worth $100,000 at the time of death, the beneficiary only pays capital gains taxes for any amount received over $100,000. This is called a stepped-up basis.
If that same beneficiary receives the house during the lifetime of the grantor, the beneficiary would receive a carryover basis for the taxes on the house. This means they would have to pay tax on any amount received over $20,000.
A trust ensures that property is transferred to an intended beneficiary while also preserving a better capital-gain tax outcome: a stepped-up basis, rather than a carryover basis.
Revocable trust income is reported on a grantor’s social security number while they are still living. Usually, a separate tax ID number is only created upon the grantor’s death. At that time, any income distributed to beneficiaries is reported on the beneficiaries’ tax statements at their individual tax rates. Trusts that themselves accrue income typically pay a significantly higher tax rate than the individual tax rate.
Estate and Gift Tax
Establishing a revocable living trust is not a strategy for avoiding the estate and gift tax. However, language can be drafted in the trust to give a trustee the authority to create irrevocable trusts. One of the benefits of irrevocable trusts (vs. revocable trusts) is that they can delay or reduce estate and gift tax liability. An irrevocable trust may be used when estates are worth multiple millions of dollars or are expected to reach that value in the future. Irrevocable trusts are also great asset-protection strategies (like the children’s trusts mentioned earlier)
Can I create a revocable living trust on my own? Or do I need a lawyer to create a trust?
It is possible to create a revocable living trust in California or Texas (or anywhere in the US) without a lawyer. However, it takes more work than creating a will: you have to actually add assets to the trust. An estate planning lawyer can save you money in the long run by determining which of your assets do and do not belong in the trust, when to add them, and how to best manage them. Your investment in an attorney will be used for more than drafting paperwork—you will gain expert advice that can anticipate issues and opportunities that you may not be aware of.
The attorneys at Holman Law are here to help! Set up a conversation about starting a trust today.
Estate Planning Attorney Licenced in California and Texas
More families than ever are moving from California to Texas. An estate planning lawyer licensed in both states—like Steven C. Holman—can help Texas and California residents set up living trusts. Contact us to get started with your trust today!
FAQs About Revocable Living Trusts
How does a revocable trust avoid probate?
A revocable trust ensures that assets are given to the appropriate beneficiaries through a third party—the trust. This circumvents the very questions about inheritance that a probate court is meant to answer. The probate court is no longer needed or legally required.
How do you revoke a revocable living trust?
A revocable living trust can be modified or revoked by the grantor, the trust’s creator. There are three steps involved in the process of revoking the trust altogether.
- Remove all assets from the trust.
- Fill out a special statement that explains you would like to dissolve the trust.
- Sign, notarize, and distribute this notice to interested parties.
Steven C. Holman
Estate Planning and Elder Law Attorney
I love to spend time with my wife and three children and serving the Dallas Fort Worth community. I provide clients with a wealth of knowledge and experience navigating each individual’s Estate Planning needs including Trusts, Probate, Elder Care Law, and Long Term Care Planning. My law firm specializes in assisting clients with complicated legal forms and qualifying for the maximum Medicaid and Veteran (VA) benefits in Texas.