Assets That Can And Cannot Go Into Revocable Trusts in New York

When creating a revocable trust, it's important to know that not all assets should be included. Many assets can go into a revocable trust to help with estate planning goals, like avoiding probate and keeping things private. However, some assets are better not retitled as trust property. These assets might have special tax rules or transfer limitations that don't work well with a revocable trust. Also, certain assets may already avoid probate or have tax advantages on their own, which would be lost if put into a revocable trust. Knowing which assets shouldn't go into a revocable trust is key to making sure the estate plan works well and doesn't cause any problems.

Assets Commonly Placed in Revocable Trusts

Assets commonly placed in revocable trusts include real estate such as primary residences, vacation homes, rental properties, commercial properties, and undeveloped land. Bank accounts, including checking accounts, savings accounts, money market accounts, and certificates of deposit (CDs), are also frequently placed in revocable trusts. Investment accounts, such as brokerage accounts, mutual fund accounts, stock portfolios, and bond portfolios, are another category of assets that can be held in revocable trusts. Personal property, including jewelry, artwork, collectibles, and furniture and household items, can also be placed in revocable trusts.

Assets Generally Not Placed in Revocable Trusts

IRAs, 401(k)s, and 403(b)s are types of retirement accounts that have special tax rules. These accounts can't be put into a revocable trust without causing big tax problems. The better option is to name the trust as the beneficiary of the retirement account. That way, after you pass away, the money in the account will be handled based on what your trust says.

For Health Savings Accounts (HSAs) and Medical Savings Accounts (MSAs), it's similar to retirement accounts where it's better to choose a beneficiary or designate the trust as the beneficiary for these accounts. This ensures that after you're gone, the accounts will be taken care of according to your wishes.

Technically, you can put a life insurance policy into a revocable trust. However, it's usually a better idea to name the trust as the beneficiary of the policy. This lets the trust control the life insurance money after your death based on the trust's instructions, and the policy doesn't have to go through probate. Placing life insurance policies into irrevocable trusts (ILITs), however, are a common practice.

Annuities usually have rules that limit transfers, and putting an annuity into a revocable trust can lead to penalties or tax issues. Like with retirement accounts, it's generally better to name the trust as the beneficiary of the annuity rather than putting the annuity into the trust.

Consulting with an estate planning attorney like us is crucial when considering a revocable trust. We have the knowledge and experience in creating revocable trusts and other estate planning tools. We can provide personalized advice based on the grantor's unique circumstances, goals, and concerns, and help the grantor understand the legal and tax implications of placing various assets in a revocable trust. Should you need assistance, you can call us at 212-233-1233 or send us an email at [email protected]. We are located in Midtown, Manhattan in New York, NY. We cover Manhattan, Brooklyn, Queens, Bronx, Staten Island, Long Island and Westchester County.

How Real Estate Goes into a Revocable Trust

Real estate is the asset that most often justifies setting up a revocable trust in the first place. The trust avoids the probate that real estate would otherwise require. Putting real estate into the trust involves:

• Preparing a new deed transferring title from the grantor as individual to the grantor as trustee.
• Recording the deed at the County Clerk or City Register where the property is located.
• Updating the property tax records to reflect the trust as owner.
• Notifying the property's insurance carrier so the trust is shown as the insured.
• For mortgaged property, notifying the lender (federal law generally protects residential transfers to revocable trusts from due-on-sale enforcement).

Once the property is in the trust, day-to-day operation is unchanged. The grantor-trustee continues to occupy the home, pay the mortgage, and manage the property as before. The change is only in the legal title.

Bank Accounts and Brokerage Accounts

Retitling bank and brokerage accounts into the trust is generally straightforward. Each institution has its own procedure but the general steps are:

• Provide the institution with a Certification of Trust (a short summary document) and the trust's tax identification number.
• Sign the institution's internal account-change forms.
• Wait for the institution to process the change (typically a few days to a few weeks).
• Receive new account statements showing the trust as the account holder.

The accounts continue to function as before from the grantor-trustee's perspective. Checks can be written, deposits made, and transactions processed normally. The only practical difference is that the account is now in the trust's name.

Why Retirement Accounts Stay Out

The reason retirement accounts (IRAs, 401(k)s, 403(b)s) should not be transferred into a revocable trust is that the transfer would be treated as a taxable distribution. The full balance of the account would become immediately taxable as ordinary income, with potentially severe tax consequences.

The correct approach is to name the trust (or specific individuals) as the beneficiary of the retirement account. The beneficiary designation controls what happens to the account at death, separate from the trust. After the SECURE Act, naming a trust as beneficiary requires careful drafting because of the new 10-year distribution rules for non-spouse beneficiaries.

Life Insurance: Beneficiary vs. Ownership

For life insurance, two different planning approaches exist:

Trust as beneficiary. The grantor remains the owner of the policy and names the revocable trust as the beneficiary. At the grantor's death, the death benefit is paid to the trust, where it is administered according to the trust's terms. This is the most common arrangement.

Trust as owner (ILIT). An irrevocable life insurance trust (not a revocable trust) owns the policy from the start. This structure removes the death benefit from the grantor's taxable estate but requires giving up control over the policy. Used for estate tax planning purposes when the estate is large enough to benefit.

Putting life insurance into a revocable trust during the grantor's life produces neither of these benefits. The policy is still in the grantor's taxable estate (because the trust is revocable) and the practical administration is no different from naming the trust as beneficiary. The trust-as-beneficiary approach is simpler and equally effective.

Special Asset Categories

Closely-held business interests. These can typically be transferred to a revocable trust, subject to the consent requirements in the relevant operating agreement, partnership agreement, or shareholders' agreement. The transfer may trigger review under the business's transfer restrictions.

S corporation stock. S corporations have restrictions on who can be a shareholder. Revocable trusts are generally permitted shareholders, but the trust document must include specific provisions to maintain the S election. Failure to include these provisions can cause the S election to terminate, with significant tax consequences.

Vehicles. Cars and other vehicles can be retitled to the trust through the DMV. Some states are simpler than New York; the New York DMV has specific procedures.

Intellectual property. Patents, copyrights, trademarks, and royalty streams can be assigned to the trust through formal assignment documents recorded with the relevant offices.

Cryptocurrency. Digital assets can be held by a trust, but the practical mechanics (controlling private keys, managing wallets) require careful planning. Some estates have lost cryptocurrency entirely because the grantor did not provide for trustee access.

What Happens to Unfunded Assets at Death

The pour-over will is the safety net for assets that were never transferred into the trust. Any asset still in the grantor's individual name at death passes through probate under the pour-over will and is then poured over into the trust for administration.

The pour-over will catches forgotten assets but does not avoid probate for those assets. The probate process happens for them just as it would without the trust. This is why full funding of the trust during life is the goal — the more assets in the trust at death, the less needs to flow through probate.