A client once came to our Manhattan office, proud of the work he had done himself. He created a revocable living trust and, following online instructions, meticulously funded it. He retitled his home, his brokerage account, and—to my alarm—his entire IRA. He believed he had protected his family. In reality, he had triggered a massive, entirely avoidable tax bill. By retitling his IRA to the trust, he had made what the IRS considers a full distribution. The entire balance became taxable income for that year.
A trust is a powerful instrument for legacy stewardship, but it is not a catch-all. The act of placing an asset into a trust is a legal transfer of title. For some assets, this transfer is not only unnecessary but actively destructive. Knowing what to keep out of a trust is just as important as knowing what to put in.
The Trouble with Trusts and Retirement Accounts
The most common and costly mistake I see is the attempt to transfer ownership of qualified retirement accounts—like IRAs, 401(k)s, and 403(b)s—to a trust. These accounts are tax-deferred vehicles governed by specific federal laws. The owner of the account must be an individual, not a trust. Attempting to change the owner to your trust is treated by the IRS as a complete withdrawal, as happened with my client. The result is an immediate and often staggering income tax liability.
The correct way to integrate these accounts into your estate plan is through beneficiary designations. You do not change the owner; you name who receives the asset upon your death.
You can name a trust as the beneficiary of your IRA, but this is a sophisticated strategy with its own rules. For this to work correctly and preserve the tax-deferred “stretch” for beneficiaries, the trust must meet specific IRS requirements to be considered a “see-through” or “accumulation” trust. This is a deliberate choice made to control distributions for a young beneficiary or protect assets for a loved one with special needs. It is not a default setting—it’s a specific tool for a specific job, and it must be drafted with extreme care.
Practical Exclusions: Cars and Daily Checking
Not every exclusion is about avoiding a tax catastrophe. Some are about simple practicality. I generally advise clients against titling their primary checking account or their everyday vehicle in the name of their revocable trust. While legally possible, it creates unnecessary friction in daily life.
Imagine trying to sell your car when the legal owner is a trust. The paperwork becomes more cumbersome for the buyer and the DMV. Similarly, writing daily checks from a trust account can be awkward, and some vendors may be hesitant to accept them. For a married couple, a simple joint account often works more efficiently for day-to-day expenses.
These assets can typically be managed after death without going through the full probate process in New York. For smaller estates, provisions under Surrogate’s Court Procedure Act (SCPA) Article 13 allow for a simplified administration process. For most families, the hassle of titling and managing these everyday assets within a trust outweighs any potential benefit.
Strategic Decisions About Your Primary Residence
For most of my clients, placing their primary residence into a revocable living trust is a core component of avoiding probate. It is often the right move. However, the decision is more nuanced than many people assume, especially when long-term care is a concern.
Many people mistakenly believe that putting a home into a standard revocable trust protects it from Medicaid. It does not. Because you retain full control over the asset in a revocable trust, it is still considered a “countable resource” for Medicaid eligibility purposes. Asset protection for long-term care requires a completely different tool—an irrevocable trust. This involves surrendering control and making a completed gift, a significant decision with permanent consequences.
Furthermore, while a properly drafted revocable trust preserves the federal Section 121 capital gains exclusion for a primary residence, an improperly structured trust can jeopardize it. This tax break on the sale of a home you live in requires the trust to be structured to pass that benefit through to you as the grantor. It is a solvable problem, but one that requires deliberate, intentional drafting by an attorney who understands the interplay between trust law and tax code.
Stewardship.
Building an estate plan is an act of deliberate architecture. It requires a clear understanding of how each piece—each asset, each title, each beneficiary designation—works together. Simply putting everything into a single trust can weaken the very structure you’re trying to build.
If you have an existing trust and are uncertain about whether it was funded correctly, the prudent next step is to get clarity. We regularly provide a Trust Funding and Asset Alignment Review to identify these kinds of costly errors and ensure your plan truly reflects your intentions.
