The Lowdown on Living Trusts

A trust can solve a lot of problems. But like all tools, it can also be misused.

- SANDRA BLOCK

IF YOU’RE PUTTING TOGETHER AN ESTATE PLAN, you have no doubt heard about the benefits of a living trust. Assets placed in a trust won’t go through probate, a time-consuming and potentially costly process. In addition, a living trust, also known as a revocable trust, allows you to designate a trustee to manage your estate after you’re gone—an important consideration if your heirs are minor children or adults who are unable to handle a large inheritance. // But although living trusts can streamline the disposition of your estate, there are plenty of opportunities to make costly missteps, particularly when it comes to transferring your assets to a trust. Some types of accounts should never go into a trust, even if they account for the bulk of your estate. That category includes assets in your retirement accounts, such as your 401(k) plan, IRAs and tax-deferred annuities. Health savings accounts and the less-common medical savings accounts, which allow you to take tax-free withdrawals for medical expenses, should also be excluded from your trust. If you transfer any of these accounts to your trust, the IRS will treat the transaction as a distribution and you’ll have to pay income taxes on the entire amount, says Kris Maksimovich, president of Global Wealth Advisors in Lewisville, Texas. Maksimovich says one of his clients recently transferred an IRA to a trust; fortunately, he was able to unwind the transaction before the distribution was taxed.

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