A client from Manhattan sat in my office last month, proud he had set up and funded his revocable living trust. He did the work himself, meticulously transferring every account he owned into the trust’s name. The problem? One of those accounts was his traditional IRA, worth nearly a million dollars. By changing the owner to the trust, he inadvertently triggered a taxable event that could have cost him hundreds of thousands in income tax. He thought he was being diligent; instead, he created a serious financial problem.
This is a common, well-intentioned mistake. A trust is a powerful instrument for managing your legacy and avoiding the delays of New York’s Surrogate’s Court. But it is not a universal container for every asset you own. Knowing what to keep out of a trust is just as important as knowing what to put in. It is a matter of deliberate, prudent planning.
Stewardship.
Retirement Accounts: A Mismatch for Most Trusts
Assets like IRAs, 401(k)s, 403(b)s, and other qualified retirement plans should almost never be owned by your revocable trust. These accounts are tax-deferred for a reason—the IRS has specific rules governing how they grow and how they are passed to the next generation. Disrupting those rules has consequences.
When you transfer ownership of a traditional IRA to a trust, the IRS can treat it as a complete withdrawal of all funds. The entire balance becomes taxable income in that year, potentially pushing you into a higher tax bracket and creating a significant, unplanned tax bill. Roth IRAs have their own issues, as a transfer can negate their tax-free growth benefits.
The correct way to handle these accounts is through their beneficiary designation forms. These forms are a contract between you and the account custodian that dictates who receives the asset upon your death. This transfer happens outside of probate and supersedes any instructions in your will or trust. Naming your spouse, children, or other individuals directly is usually the most tax-efficient method. While it is possible to name a trust as a beneficiary—often for minors or beneficiaries with special needs—it requires a specially drafted “see-through” trust to maintain the tax-deferred stretch. This is not a simple DIY task.
Your Everyday Car and Primary Checking Account
Beyond tax-sensitive assets, there is the matter of simple practicality. Should you title your primary checking account—the one for groceries and utility bills—in the name of your trust? What about the car you drive every day?
Legally, you could. But it often creates more administrative friction than it’s worth. Imagine trying to sell your car. Instead of signing the title as an individual, you now must prove you are the trustee, provide copies of the trust documents, and sign with your fiduciary title. Banks may place holds on checks or require extra paperwork for transactions on trust-owned accounts. These small, daily hassles add up.
For many clients, a better balance is to keep these high-frequency, low-value assets in their individual names. The risk of them going through probate is often minimal compared to the inconvenience of managing them within a trust during your lifetime. The goal is to build a plan that works for you, not one that turns daily life into a legal exercise.
Assets with Their Own Probate-Avoidance Tools
Some assets come with their own mechanisms for avoiding probate, making their inclusion in a trust redundant. The law provides simpler tools for specific situations.
Life insurance is a prime example. Like a retirement account, a life insurance policy is a contract that pays out directly to your named beneficiaries. The proceeds are not a probate asset and are generally not subject to income tax. Placing the policy itself into a revocable trust adds little value. For larger estates, an Irrevocable Life Insurance Trust (ILIT) can be a strategy to remove the death benefit from your taxable estate, but that is a different and more complex instrument than a standard living trust.
Similarly, property held as “Joint Tenants with Rights of Survivorship” (JTWROS) automatically passes to the surviving owner by operation of law. This is common for a family home owned by a married couple. The deed does the work, and the asset sidesteps probate entirely. Trying to place your “half” of a JTWROS property into a trust is legally complicated and defeats the purpose of the joint titling.
New York law even provides for simple bank accounts known as “Totten trusts.” Under EPTL §7-5.2, you can title an account in your name “in trust for” another person. This money is yours to use during your life, but it passes directly to your named beneficiary upon your death, no probate required. It is a targeted tool for a specific goal.
Building a proper estate plan is an act of intentional design. It requires a clear understanding of how each asset works and which legal vehicle is best suited to carry it to the next generation. A trust is central to that plan, but it is not the entire plan.
If you have an existing trust or are considering creating one, the next step is to perform a complete review of how your assets are titled. We can schedule a session at our firm to audit your current holdings and ensure they are aligned correctly with your trust and your family’s long-term goals.
