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A Living Trust is one of the smartest tools in estate planning, but putting the wrong assets inside it can create taxes, headaches, and problems for your family. By the end of this video, you’ll know exactly which assets should never go into your living trust and why. I’m Ted Gudorf, an attorney here in Dayton, Ohio for the last 30 years. My team and I have helped families protect their wealth.

Preserve their legacy and pass on what matters most. The first asset is the one that produces the largest single tax bill I see in estate planning, and it comes from people doing exactly what they were told to do. A client came to our office after doing her own research and deciding she wanted everything in her trust. She had already contacted several financial institutions to begin the transfers. She had not reached her IRA yet.

Her daughter suggested she check with an attorney first. When I heard what she was planning, I immediately stopped her. If she had made that call to her IRA custodian, she would have owed income taxes on four hundred thousand dollars before the year ended. The IRS does not treat moving your IRA into a living trust as a transfer. They call it a withdrawal.

Every dollar in that account becomes ordinary income the year that the change takes place. On a four hundred thousand dollar IRA, you’re looking at $150,000 or more in federal and state income taxes, depending upon where you live. In California, that number can reach $200,000. You can’t undo it once it happens. Remember, your IRA is

four hundred one K, four hundred three B all exist under strict federal ownership rules. Congress allows those accounts to grow tax deferred or tax free only because the individual account holder follows those rules. The moment ownership transfers to a trust, those rules break. The account loses its qualified status and the IRS taxes the full balance that year.

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What you do instead is straightforward. Keep those retirement accounts in your individual name. Then contact the institution holding them and ask one question who is listed as my beneficiary? That call takes fifteen minutes, and it may be the single most important step in your entire estate plan. If the beneficiary is outdated, if it names a former spouse or a parent

Who has already passed away, that money goes to the wrong person, regardless of what your trust or will says. For larger accounts, meaning a single IRA of $500,000 or more going to one person, there are specialized trust structures built to receive inherited retirement accounts at death without triggering an immediate tax event. These are not.

Your living trust, they spread distributions over time and significantly reduce what the beneficiary owes. One client whose child stood to inherit a $1.2 million IRA, use this structure to spread that tax burden out over a decade rather than absorbing it all at once. Ask your estate planning attorney whether that structure makes sense for your situation. Retirement accounts stay out of the trust.

You manage them through the beneficiary designation form alone. Now you know why retirement accounts stay in your own name. But the next asset is one where I’ve watched families have an attorney’s office thinking everything is handled, and then discover years later that it was not. The beneficiary form on your policy is what controls where that money goes, not your trust, not your will.

The form you filled out the day you bought the life insurance policy controls. One person had a $200,000 life insurance policy. Her trust was fully funded. Her estate plan was clean, but the beneficiary on her policy was still her mother, who had died two years earlier. No contingent beneficiary was ever listed. The death benefit went into probate. The process

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Took 18 months. It cost the family twelve thousand dollars in legal fees just to resolve. Every dollar of that was preventable. A ten minute phone call to update that beneficiary form would have solved the entire thing. If your beneficiary form names someone who has died or someone you no longer intend to inherit, the money goes the wrong direction. Full stop. There is a second issue for larger estates.

If you own a life insurance policy in your own name and your estate exceeds the federal estate tax exemption, the death benefit gets added to your taxable estate. Now, the federal exemption for 2026 sits at $15 million per person. But that number has changed before and it will change again. If you carry a $5 million policy,

And your estate is already at twelve million dollars, you are above the line and the tax bill can be significant. So for those situations, there is a tool called an irrevocable life insurance trust. In that case, the trust owns the policy rather than you. The death benefit stays outside your taxable estate at death because it’s payable to the trust.

For one client, this structure saved the family eight hundred thousand dollars in estate taxes. It is not the right move for everyone. For most families, simply updating the beneficiary designation is the step that changes everything. Your action step. Call your life insurance company today or your agent. Ask who is the primary beneficiary? Ask who is the contingent beneficiary.

Write both names down and compare them to your current estate plan. If they do not match, fix it now. So your retirement accounts are handled and your life insurance beneficiaries are current. But the next asset catches business owners completely off guard and the damage does not show up in your estate plan. It shows up on your tax return. If you own shares in an S corporation,

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And you transfer those shares into a living trust that does not contain specific S corporation language, the company could lose its S status the day that the transfer is recorded. No warning, no grace period. Here is why that matters. An S corporation pays taxes once at the owner’s level. The profits pass through directly to you.

And you pay income tax on your share. Now, a C corporation pays taxes twice. The company pays at the corporate level first, and then you pay again when money comes out as a dividend. The S corporation structure is a real advantage for most business owners, and it comes with federal rules that strictly govern who can hold those shares. Not every trust qualifies.

If your trust document does not contain the right language, the company converts to a C corporation automatically. Restoring S Corp status requires an IRS relief request, amended returns, and legal work that costs far more than the estate plan was built to protect. Beyond S corporations,

Most limited liability companies have operating agreements that control who can own a membership interest. Some require unanimous approval from every member before a transfer takes place. Some even prohibit transfers without written consent. So if you transfer your LLC membership interest into a trust without reading that operating agreement, the other members have the right to reject the transfer.

You could walk into a legal dispute over something a 30-minute review would have prevented. Before any business interest goes into a trust, do two things. First, give your estate planning attorney the operating agreement or shareholder agreement so they can confirm the transfer is permitted. Second, if you have S corporation shares, ask specifically.

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Whether your trust document contains the language required to hold them without triggering a conversion. Do not assume it does. Business interests are the most technically involved issue we have covered. Now, the next one is almost the opposite. It looks simple on the surface, which is exactly why people get it wrong. Health savings accounts carry some of the best.

best tax treatment available anywhere in the tax code. Money goes in tax-free, it grows tax-free, it comes out tax-free for medical expenses. That triple advantage exists only because the account belongs to you as an individual. Transfer ownership to a living trust, and that status disappears. The IRS no longer treats it

As an HSA. It becomes a standard taxable account, and the years of tax-free growth no longer apply. The situation at death is where the real problem shows up. If your spouse inherits your HSA, they roll it into their own account and every tax advantage carries forward. But if your living trust is named as the beneficiary,

The full value of the account becomes taxable income in the year you pass away. On an HSA with eighty or a hundred thousand dollars saved, that is a real tax bill your family absorbs all at once. A couple we worked with had contributed to their HSAs for eighteen years. Between the two accounts they had just over $140,000 saved. Both accounts listed their revocable trust as beneficiary.

Because someone had told them to make the trust the beneficiary of everything. We changed both designations. The husband named his wife as primary, the wife named her husband as primary, both listed their adult children as contingent beneficiaries. That one change protected all hundred forty thousand dollars from an immediate tax event at the first death. Your action step.

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Contact the institution holding your HSA. Ask who the current beneficiary is. If it is your trust, change it to your spouse’s primary and your children as contingent. This is one of the most straightforward fixes in estate planning and one of the least addressed. Your HSA is now handled, but there is one more account that grandparents and parents have been building for years.

And the mistake here does not show up as a tax bill right away. It shows up as a frozen account the month a grandchild needs to pay tuition. A 529 plan works like this. You are the account owner. Your child or grandchild is the beneficiary. The money grows tax free and comes out tax free for qualified education expenses. The word qualified is what matters.

Some plans, for instance, the Ohio College Advantage Plan, allow a trust to be the owner of a 529 plan, but some 529 plans do not allow a trust to serve as the account owner. The plan administrator instead will reject the transfer, and you are back where you started, except now you have created paperwork that accomplished nothing.

What most families do not know is that five twenty nine plants have a built-in solution for this problem. It is called a successor owner designation. You name a person or trust to step in and take over the account if something happens to you. The person or the trust becomes the new owner immediately, can change the beneficiary if needed and

And the full tax-free status of the account stays intact. No probate required. We worked with grandparents who had set up a $529 for their four grandchildren with balances ranging from $40,000 to $85,000 each. None of the accounts had a successor owner name. When the grandfather passed away, all four accounts were frozen while the estate went through probate.

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Tuition payments were delayed for months. One grandchild had to take out a short-term loan to cover a semester while the legal process ran its course. None of that needed to happen. So contact your 529 plan administrator and ask whether a successor owner designation is available. Ask if your trust can be either a current owner or successor owner.

It depends upon your plan. But name one today. If you have accounts across multiple plants, check each and every one of them separately because each plan handles this differently. This one step ensures the account transfers to the right person immediately and the money stays available for education exactly as you intended.

Now you know the five assets that belong outside your living trust: retirement accounts, life insurance, certain business interests, health savings account, and perhaps a 529 plan each come with their own set of rules. Keeping them out is not a workaround. It is what a correctly built estate plan looks like. Now, the next question most people ask is.

What does belong in the trust and how do I get it there? That is exactly what the next video answers. Because here is what most families never get around to. And it is where estate plans fall apart. Knowing what to keep out is only half the plan. The other half is knowing what belongs inside the trust and how to get it into the trust correctly. A trust that is not

Properly funded is a trust that does not work when your family needs it to work. I want you to click on seven key trust assets and how to effectively fund them into your trust to see the full process step by step. The mistake in step four surprises almost every client we work with.