A client recently came to our Manhattan office, proud to have established and—he thought—fully funded his new revocable trust. He had diligently retitled almost every asset he owned into the trust’s name: his brokerage account, his savings, his life insurance policy, and even his IRA. I commended his diligence but had to explain that his good intentions created several significant, and potentially costly, problems. A trust is a powerful instrument for legacy stewardship, but it is not a catch-all. Knowing what to keep out is just as important as knowing what to put in.
Retirement Accounts are a Tax Trap
The first asset we had to address was his Individual Retirement Account (IRA). Placing a tax-deferred account like an IRA or a 401(k) into a revocable trust is one of the most common and damaging mistakes I see. When you change the owner of an IRA to a trust, the IRS generally treats it as a full distribution of the entire account balance. The result? The entire value of the IRA becomes taxable income in that single year, potentially pushing you into a higher tax bracket and triggering a massive, and entirely avoidable, tax bill.
These accounts are designed to be passed to heirs through beneficiary designations. This is a direct, contractual arrangement with the financial institution that holds the account. Upon your death, the funds pass directly to your named individuals, bypassing probate. This is efficient and honors the tax-deferred nature of the account. While a trust can be named as a beneficiary of a retirement account—a strategy we use for specific situations like providing for a minor child or a spendthrift heir—the account itself should never be retitled into the trust’s name during your lifetime.
Assets That Pass by Contract, Not by Trust
Similar to retirement accounts, other assets have built-in mechanisms for transfer upon death. These are often called “non-probate” assets because they pass outside the purview of a will and the Surrogate’s Court. The primary examples are:
- Life Insurance Policies: The death benefit is paid directly to the beneficiaries you name in the policy.
- Payable-on-Death (POD) Bank Accounts: The account balance transfers automatically to the designated POD beneficiary.
- Transfer-on-Death (TOD) Brokerage Accounts: Securities transfer directly to the named TOD beneficiary. In New York, these transfers are governed by statutes including Part 4 of Article 13 of the Estates, Powers and Trusts Law (EPTL).
Funding a trust with these assets is, at best, redundant. At worst, it creates ambiguity. If your life insurance policy names your daughter as the beneficiary, but your trust—which now owns the policy—states that all trust assets should be split between your daughter and son, who gets the payout? This conflict can lead to delays and litigation, the very things a trust is meant to prevent. The beneficiary designation is a clear, direct command. It should be used with intention, not overwritten by a blanket transfer of assets into a trust.
The Problem with Everyday and Titled Property
Stewardship also requires practicality. A trust is a formal legal entity, and managing its assets requires a certain level of administrative care. For some assets, this formality creates more trouble than it’s worth.
Consider your personal checking account. If you title it in the name of your trust, every check for groceries or the electric bill must technically be written from the trust. This is cumbersome and unnecessary. We generally advise clients to keep a personal checking account in their own name for daily expenses.
Vehicles are another example. Transferring a car title to a trust can complicate insurance and registration. Selling the car requires the trustee’s signature and formal documentation. It’s often more prudent to leave vehicles out of the trust and allow them to be handled as part of the small estate administration process after death, which is a simplified proceeding in New York for estates valued under $50,000.
Finally, your primary residence requires careful thought, especially if you own it with a spouse as “tenants by the entirety.” This form of ownership, common in New York, provides automatic survivorship rights. When one spouse dies, the other automatically becomes the sole owner, no probate needed. Transferring the home into a revocable trust can sever that tenancy, undoing a valuable, built-in protection without providing a significant countervailing benefit.
A Deliberate Approach to Funding
A well-drafted trust is only effective if it is funded correctly. This is not a matter of simply moving every asset into a new bucket. It is an act of deliberate financial and legal organization. The goal is to align each asset with the most efficient and prudent method of transfer, ensuring your legacy passes to your heirs with clarity and minimal administrative burden.
If you have an existing trust or are considering creating one, the next step is not to begin transferring assets indiscriminately. Instead, schedule a comprehensive trust funding review with your estate planning counsel. We can inventory your assets and determine the correct titling and beneficiary designations for each one, ensuring your plan functions as intended.
