Keep These Assets Out of Your Living Trusts

After a will, the most preferred estate planning tool is a living trust for the timely management and smooth transfer of your hard-earned assets to your next generation. However, a rookie mistake many people make is never funding the trust they have created, i.e., not transferring their assets to the trust.

One reason is confusion about why a Trust is needed when you’ve already made a will. However, a Will and a Trust are both important pillars of a comprehensive estate plan. A Trust can cover any gaps a will leaves and vice versa.

But that does not mean you should put all your assets and real estate into the trust either. More confused? Wait, let’s go about it one step at a time.

Why Are Assets Transferred into a Trust?

First things first: if you already have a will, why do you need a Trust at all? Because a will only comes into effect after your death/. However, you may need someone to manage and take care of your assets, property, medical decisions, and other important tasks on your behalf in case of emergency or incapacity.

A Trust lets you manage your assets privately, legally, and securely during your lifetime. To do this, you must legally transfer ownership of your assets to the Trust. The Trustee, a reliable person chosen by you, becomes in charge of overseeing and handling assets in the Trust. You remain in control because the trustee follows the rules, terms, and conditions you set.

The biggest advantage a Trust has over a will is that it helps your estate avoid probate. With a will, when the owner dies, the estate must go through probate, which entails probate fees, taxes, and a host of other expensive and lengthy legal processes. A Trust, on the other hand, does not need probate, making it a more efficient and quicker way to handle asset transfer – provided the assets are in the Trust.

And therein lies the catch. While some people don’t transfer ownership of their assets to the Trust at all, some end up transferring every single asset and property to it. And that – transferring everything to the Trust – can cause problems as well.

7 Assets to Keep Out of Your Living Trusts

Not all assets need to be transferred to the Trust, as it can create unnecessary paperwork and complicate simple things. Here are seven assets you should always keep out of your living trust to avoid legal and tax issues:

Retirement Accounts

Some retirement assets, such as a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA), offer tax benefits and the option to name direct beneficiaries. This option allows direct transfer to your chosen beneficiary without going through probate. In such a case, transferring it to a Trust becomes unnecessary. In fact, it would invite unnecessary paperwork and could cancel your tax benefits.

So, instead of transferring your retirement accounts to your Trust, you could name your spouse as the primary beneficiary and the Trust as a contingent beneficiary while keeping the account in your individual name.

Bank Accounts

Technically, you can place your bank chequing and savings accounts in a Trust. However, this can create financial complications. A better approach is to designate a Power of Attorney to someone you trust and who is good with money matters to handle routine financial responsibilities on your behalf.

Life Insurance

Life insurance policies provide significant financial support to your loved ones when you are no longer around. Especially in families with complex estates or familial discord, a life insurance policy can often be the only source of money to cover everyday expenses, school fees, debts, and other unavoidable costs.

With this importance and sensitivity in mind, your life insurance policy lets you simply name a beneficiary. Those with large estates can add an extra layer of protection by creating an irrevocable life insurance trust (ILIT) to avoid estate taxes. Other than that, you don’t need to put it under a living Trust.

Principal Residence

As a homeowner in Canada, you are entitled to the principal residence exemption (PRE) on capital gains tax when you sell your “principal residence”, i.e., the house you have been living in. However, putting your principal residence into a Trust can create complications if the Trust does not meet certain rules.

Personal Vehicles

Whether you own a car, a motorcycle, an RV, or even a boat, you don’t need to put it into the Trust. Vehicles usually offer a simple ownership transfer procedure or Transfer-on-Death titles, eliminating the need for putting them into a Trust. In fact, doing so could pose a bigger problem if the vehicle is involved in an accident while under the Trust’s ownership. For one, insurance companies might impose additional underwriting requirements for trust-owned vehicles. Secondly, if it gets involved in a lawsuit, it could draw unnecessary and unwanted attention to the Trust and its other assets.

Hence, keeping personal vehicles in your own name is a safer bet. The only exception is if you own antique vehicles or ultra-valuable cars that are considered financial assets rather than transportation vehicles.

Foreign Assets

Assets located in other countries, including real estate, cannot always be put into a domestic living trust. This requires specialized knowledge and guidance that only an experienced estate planner can provide. So, make it a point to consult a reliable estate planner about your overseas assets.

Certain Business or Partnership Interests

Business partnerships, interests or investments, whether domestic or international, are founded on strict conditions and agreements. Transferring them to a Trust without first checking the agreement can disrupt business operations and trigger tax complications.

Assets You Can Transfer to Your Living Trusts

While the assets listed above shouldn’t be transferred to a living trust without proper planning and professional guidance, other assets such as commercial real estate, valuable heirlooms or collectibles, private corporation shares, etc. can be transferred into your living trust to better manage them and pass them on to your next of kin in the event of your incapacitation or death.

The main purpose of setting up a Trust is to bridge the gaps left by a Will and ensure a transparent, tax-efficient, and trustworthy transfer of your assets to your chosen beneficiaries. Following the simplest, most foolproof way to pass on your wealth and property to your loved ones can make their lives easier and less stressful during what can otherwise be an emotionally draining phase of life.

Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You with Trust and Estate Planning Needs

Having a competent estate planner and advisor by your side to guide you on the best way forward can make your estate planning journey a lot more comfortable. At Edelkoort Smethurst CPAs LLP, our accountants and estate planners can create the right estate plan to protect your estate from taxation and ensure a smooth transition. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with the best accounting and trust planning services, contact us online or by telephone at 905-517-2297.