Trusts are an excellent tool for estate planning and asset protection, allowing individuals to transfer their assets to a trust during their lifetime. However, there are some assets that cannot be placed in a trust. In this article, we will discuss the assets that cannot be placed in a trust and why.
Assets That Cannot Be Placed in a Trust
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Individual Retirement Accounts (IRAs)
IRAs are tax-advantaged savings accounts designed to help individuals save for retirement. They cannot be placed in a trust because they are considered personal investments by the Internal Revenue Service (IRS). If an IRA is placed in a trust, it will lose its tax-deferred status, and the entire balance of the account will become taxable in the year of the grantor’s death.
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Health Savings Accounts (HSAs)
HSAs are tax-advantaged savings accounts designed to help individuals pay for medical expenses. Like IRAs, they cannot be placed in a trust because they are personal investments. If an HSA is placed in a trust, it will no longer be considered an HSA, and the entire balance will become taxable.
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Life Insurance Policies
Life insurance policies cannot be placed in a trust because they are contracts between the policy owner and the insurance company. The policy owner retains control over the policy and can change the beneficiaries at any time. However, the proceeds from a life insurance policy can be paid directly to a trust.
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Certain Government Benefits
Certain government benefits, such as Social Security, Medicare, and Medicaid, cannot be placed in a trust. These benefits are paid based on the income and assets of the beneficiary, and placing them in a trust may affect the beneficiary’s eligibility for these programs.
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Tangible Personal Property
Tangible personal property, such as jewelry, artwork, or furniture, cannot be placed in a trust unless it has been properly titled in the name of the trust. Otherwise, these assets will be subject to probate.
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Why Some Assets Cannot Be Placed in a Trust
The primary reason some assets cannot be placed in a trust is that they are considered personal investments or contracts between the owner and a third party. IRAs, HSAs, life insurance policies, and tangible personal property are all examples of personal investments that require ownership by an individual. If these assets were placed in a trust, they would lose their tax-advantaged status, their contractual terms could be changed, or they could become subject to probate.
Government benefits are also excluded from trusts because they are intended to provide assistance based on need. If these benefits were placed in a trust, they may no longer be considered as part of the beneficiary’s income or assets, which could affect their eligibility for government programs.
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Conclusion
In conclusion, while trusts are an excellent tool for estate planning and asset protection, there are some assets that cannot be placed in a trust. IRAs, HSAs, life insurance policies, tangible personal property, and certain government benefits are all examples of assets that cannot be placed in a trust. It is essential to consult with a qualified estate planning attorney to determine which assets can be placed in a trust and which ones cannot.
