Living trusts are often praised as the cornerstone of avoiding probate. By transferring assets into a trust, individuals can ensure a smoother transition of wealth to heirs, often bypassing costly and time-consuming court proceedings. Yet, despite their benefits, not all property is well-suited for titling in a living trust. Including the wrong assets can create unintended tax consequences, legal complications, or unnecessary administrative burdens. It is wise to keep certain assets out of a living trust to avoid probate.
Understanding Living Trusts
A living trust is a legal entity that holds assets during a person’s lifetime and directs their distribution upon death. It provides flexibility, privacy, and efficiency compared to a will. However, it is not a one-size-fits-all solution. Certain assets are best kept outside of the trust to ensure they function as intended.
Retirement Accounts and Living Trusts
One of the most common mistakes in trust planning is transferring retirement accounts, such as IRAs, 401(k)s, or pensions, into a living trust. Federal tax rules treat these accounts differently, requiring that they remain in the individual’s name until withdrawal or distribution.
If a retirement account is retitled in the name of a trust, it could trigger immediate taxation of the full balance. Instead, individuals should use beneficiary designations to transfer these assets directly to their heirs, preserving tax advantages such as “stretch IRA” benefits where applicable.
Vehicles and Living Trusts
Cars, trucks, and other vehicles are generally poor candidates for trust ownership. The administrative burden of retitling, insurance complications, and the frequency of buying or selling make them impractical to place in a trust.
In most states, small estate provisions allow vehicles to pass outside of probate without issue. Unless a car is a valuable collector’s item or part of a business, keeping it in personal ownership usually makes more sense.
Health and Medical Savings Accounts
Like retirement accounts, Health Savings Accounts (HSAs) and Medical Savings Accounts (MSAs) have unique tax treatments that do not align with trust ownership. Instead, owners should assign beneficiaries directly through the account provider. Upon death, the funds transfer smoothly to the named beneficiary.
Assets with Named Beneficiaries
Life insurance policies, payable-on-death (POD) bank accounts, and transfer-on-death (TOD) securities accounts already bypass probate when a beneficiary is named. Including these assets in a trust is redundant and can even complicate matters. Ensuring that beneficiary designations are up to date often provides a more straightforward path.
Mortgaged Property
While real estate is often placed into a trust, property with outstanding mortgages requires careful planning and consideration. Transferring a home with a mortgage into a trust may trigger concerns or due-on-sale clauses from lenders. Proper legal guidance ensures compliance with both trust law and lending agreements.
When to Seek Guidance
It is wise to keep certain assets out of a living trust to avoid probate. Estate planning is a deeply personal process, and what works for one family may not be suitable for another. An estate planning attorney can help evaluate which assets should be placed in a trust and which should remain outside. They also ensure that excluded assets are transferred through other probate-avoidance methods, such as beneficiary designations or joint ownership structures.
If you are considering creating or updating a living trust, consulting with an estate planning attorney ensures your trust is both practical and efficient. If you would like to learn more about placing assets in a trust, please visit our previous posts.
Reference: Yahoo Finance (September 11, 2025) “If you want your kids bypass probate when you die, here are 5 assets to avoid putting in a living trust”
Photo by Mingyang LIU
