What Should You Not Put in a Living Trust?

A living trust can help you manage and pass on a variety of assets. However, there are a few asset types that generally shouldn’t go in a living trust, including retirement accounts, health savings accounts, life insurance policies, UTMA or UGMA accounts and vehicles.

Living trusts can be useful estate planning tools that give a trustee the authority to manage assets for you and your beneficiaries while you’re alive. Assets in a living trust typically include bank accounts, real estate, personal property and investments such as stocks, bonds and cryptocurrencies. You can even title mineral rights or a membership interest in an LLC into a living trust.

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Here’s what you may not want to put in a living trust, why certain assets can cause issues and what you might do with those assets instead.

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Retirement accounts

Why not: You can technically transfer a retirement account such as a 401(k) or Roth IRA into a living trust, but because a trust is a separate legal entity, the transfer counts as a withdrawal from the account. Withdrawals are taxable, meaning that moving these assets into a living trust often comes with a tax bill. If you’re not at least 59½, you may also have to pay additional penalties for early withdrawal.

Instead: Name the living trust as the beneficiary on the retirement account. That way, the funds transfer directly to the trust upon your death. In the trust documents, you can specify how the funds should be divided among your beneficiaries.

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Health savings accounts

Why not: Health savings accounts (HSAs) allow you to pay for medical expenses with pretax income. You contribute pretax money to the account, the investments in the account grow tax-free and the withdrawals are not taxed if you use the money for medical expenses. However, HSAs are individual accounts only, so they typically cannot be transferred to trusts involving joint ownership.

Instead: Like with a retirement account, you can name your living trust as the beneficiary of your health savings account. If you already have a primary beneficiary, such as a spouse, you can name your trust as a secondary beneficiary^[0]

» Learn more about the difference between HSAs and FSA

Life insurance policies

Why not: First, revocable living trusts don’t protect assets from creditors, so all or a portion of your life insurance benefits could be reclaimed if you die with debt. Second, if the payout from the policy is large enough and your estate is large enough, naming a living trust as a beneficiary on a life insurance policy could trigger federal or state-level estate taxes.

Instead: Name a person as the beneficiary for your life insurance policy or set up an irrevocable life insurance trust for more control over the assets and to potentially reduce your estate taxes if your estate is large enough that estate tax applies.

UTMA and UTGA accounts

Why not: Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) accounts are irrevocable. They make a minor child the owner of the account, leaving the donor or a custodian to manage the funds. Living trusts are revocable and typically managed by a trustee. Because of these differences in ownership and permanence, UTMA and UGMA accounts can’t be transferred into a living trust.

Instead: Keep these tools separate. You can use either a living trust or a UTMA or UGMA account to give funds to a child, or use both separately. A living trust can give you more control over how the assets are used; a UTMA or UGMA account gives your child full access to all of the funds when they reach legal age.

» Learn more about custodial accounts

Vehicles

Why not: Vehicles under a certain value can bypass probate in some states, making a living trust unnecessary to transfer them to an heir. Also, if you plan to sell the vehicle, it can be complicated to remove it from the trust to do so.

Instead: A high-value collectible car that you think will increase in value may actually be a good fit for a living trust, but for a regular vehicle, register it with a transfer-on-death (TOD) deed. That way, it can go directly to a beneficiary without going through probate.