When a Manhattan executive decides to finally fund their revocable living trust, the impulse is often to sweep every existing account, deed, and policy into the trust’s name. Stewardship. You want your wealth protected, centralized, and kept entirely out of Surrogate’s Court. But transferring the wrong asset into a trust does not protect your family—it triggers an immediate, irrevocable tax event. I frequently review estate plans where well-meaning individuals attempted to re-title an existing retirement account into a trust, only to discover they accidentally distributed the entire balance, making it taxable as ordinary income in a single year.
Trusts are incredibly effective vehicles for generational wealth transfer, but they are not universal receptacles for everything you own. Funding a trust requires a deliberate review of how each asset interacts with state law and the federal tax code. Here are the assets we deliberately keep out of your trust—and the legal mechanisms we use to protect them instead.
Qualified Retirement Accounts
The most dangerous mistake you can make when funding a trust is attempting to transfer ownership of a qualified retirement account during your lifetime. Individual Retirement Accounts (IRAs), 401(k)s, 403(b)s, and similar tax-advantaged accounts belong to you individually. The IRS strictly prohibits an entity—even a revocable living trust where you are the sole trustee—from owning these accounts while you are alive.
If you instruct your financial institution to change the ownership of your IRA to your trust, the IRS views this as a complete withdrawal of the funds. You will owe income tax on the entire balance, and if you are under 59 ½, you will face an additional early withdrawal penalty. Instead of changing the owner, we use designated beneficiary forms. While a trust can sometimes be named as the beneficiary of a retirement account after your passing, the ownership during your life must remain strictly in your individual name.
Health Savings Accounts (HSAs)
Health Savings Accounts share similar restrictions to retirement accounts. They are tied directly to an individual’s high-deductible health plan and cannot be owned by a trust. Because these accounts offer triple tax advantages—tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses—the federal government mandates individual ownership.
To pass these funds to your family efficiently, you must name a direct beneficiary on the account itself. If you name your spouse, the account seamlessly becomes their HSA. If you name anyone else, the account ceases to be an HSA upon your passing, and the fair market value becomes taxable to the beneficiary.
Professional Practices and Corporate Shares
As a firm that represents many physicians, dentists, and architects, I frequently encounter succession issues regarding professional practices. Under New York law, specifically Business Corporation Law (BCL) Article 15, shares of a Professional Service Corporation (P.C.) can only be owned by individuals who are licensed to practice that specific profession.
You cannot simply transfer your P.C. shares into a standard revocable living trust. If the trust allows for beneficiaries who are not licensed in your profession, the transfer violates state law and can jeopardize your corporate standing. Instead, we use specific business succession strategies—such as buy-sell agreements or specialized trust drafting—outside the standard framework to protect the value of your practice without running afoul of licensing boards.
Motor Vehicles and the Statutory Exemption
We generally keep personal motor vehicles out of your trust. While it is technically possible to title a car in the name of a trust, doing so frequently creates administrative friction with auto insurance carriers and the Department of Motor Vehicles. Furthermore, a vehicle owned by a trust may lose certain liability protections afforded to individual drivers.
More importantly, New York law already provides a built-in mechanism to keep everyday vehicles out of probate. Under the Estates, Powers and Trusts Law (EPTL) §5-3.1, known as the “Exemption for Benefit of Family,” certain personal property automatically vests in a surviving spouse or children under 21, bypassing Surrogate’s Court entirely. This statute explicitly includes one motor vehicle with a value of up to $25,000. Because the state already provides a statutory shortcut for transferring your car, retitling it into a trust is usually an unnecessary burden.
Restricted Stock Units (RSUs) and Unvested Equity
For corporate executives, equity compensation often forms a massive part of their legacy. However, unvested Restricted Stock Units (RSUs) and non-qualified stock options typically cannot be transferred into a trust.
Employment agreements generally contain strict non-transferability clauses. The company grants these units to you, the employee, to incentivize your continued performance. Attempting to assign them to a trust violates the grant agreement. Once the shares vest and the actual stock is deposited into your individual brokerage account without restrictions, we can then move those shares into the trust as a standard funding procedure. Until that vesting occurs, you must rely on the company’s internal beneficiary designation policies.
Custodial Accounts for Minors
Parents and grandparents often establish Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) accounts. These accounts hold funds irrevocably for the benefit of a minor, with a custodian managing the assets until the child reaches adulthood—often age 21 in New York.
Because these funds already legally belong to the child, you cannot transfer a UTMA account into your own revocable trust. The assets are not yours to reassign. If you are the custodian and wish to prepare for the contingency of your own passing, you must formally nominate a successor custodian on the account rather than attempting to merge the child’s property with your estate plan.
A Note on Real Estate
If you read generic legal information online, you might see claims that real estate belongs outside a trust. Let me be clear—in New York, failing to put your primary residence or investment property into your trust is a critical failure of estate planning.
Real property is the single most common asset that forces families into probate. If you own a home in Brooklyn in your individual name when you pass away, your family cannot sell it, refinance it, or legally manage it until a judge grants them authority. Transferring your deed into your revocable trust during your lifetime ensures your successor trustee can step in immediately. Aside from rare exceptions—such as cooperative apartments (co-ops) where a specific board refuses to permit trust ownership—real estate is the exact asset your trust was designed to hold as its foundation.
Trust funding is a deliberate process. It requires looking at every asset you own and making a specific determination about how it interacts with state statutes and tax laws. Leaving a critical asset out can force your family into court, but putting the wrong asset in can trigger severe financial penalties. To ensure your accounts and properties are correctly aligned with your legal documents, request a detailed beneficiary and asset alignment review with our office to confirm your funding strategy is sound.
