Living Trust vs Beneficiary Designations: Which Assets Need Which?

A complete guide to properly structuring your California estate plan

By Rozsa Gyene, Estate Planning Attorney | CA State Bar #208356

One of the most common estate planning mistakes is putting the wrong assets in your living trust — or failing to put the right ones in. Not every asset should go in your trust, and some should never be transferred directly to a trust.

This guide explains which assets should go in your living trust, which should use beneficiary designations, and which can use either approach.

Quick Reference: Asset Ownership Chart

Asset Type Best Approach Why
Real Estate LIVING TRUST No beneficiary option; probate required without trust
401(k) / 403(b) BENEFICIARY Transfer to trust = immediate taxation
Traditional/Roth IRA BENEFICIARY Transfer to trust = immediate taxation
Life Insurance BENEFICIARY Already avoids probate with beneficiary
Bank Accounts EITHER POD or trust both work
Brokerage Accounts LIVING TRUST Better control and coordination
Vehicles EITHER CA allows beneficiary on title

Assets That MUST Go in Your Living Trust

PUT IN TRUST

Real Estate (California Property)

Your California home is the most important asset to transfer into your living trust. Here's why:

  • No beneficiary option: Unlike bank accounts, California does not allow transfer-on-death deeds for real estate
  • Probate is mandatory: Without a trust, your home goes through probate — costing $26,000-$66,000+ in statutory fees
  • Prop 19 protection: Properly structured trusts preserve property tax benefits for heirs
  • Privacy: Trust transfers are private; probate is public record

Action: Transfer the deed to your home into your trust immediately after creating it.

PUT IN TRUST

Investment/Brokerage Accounts (Non-Retirement)

Taxable investment accounts (Schwab, Fidelity, Vanguard, etc.) work best in a living trust:

  • Centralized management: Your successor trustee can manage all investments together
  • No tax consequences: Unlike retirement accounts, transferring to trust has no tax impact
  • Coordinated distribution: Ensures all assets follow same distribution plan
  • Step-up in basis: Beneficiaries get stepped-up cost basis at your death

Action: Retitle brokerage accounts to "[Your Name], Trustee of the [Your Name] Living Trust."

PUT IN TRUST

Business Interests

If you own a business, your ownership interest should be in your trust:

  • LLC membership interests: Transfer your ownership percentage to the trust
  • Partnership interests: Review partnership agreement, then transfer
  • Sole proprietorships: Business assets transfer with trust
  • S-Corp stock: Trusts can hold S-Corp stock (unlike some entities)

Caution: Review operating agreements first — some require partner consent for transfers.

Assets That Should NEVER Go in Your Trust

USE BENEFICIARY DESIGNATION

401(k), 403(b), and Employer Retirement Plans

CRITICAL: Never transfer a 401(k) directly into a living trust. This is treated as a full distribution, triggering immediate income tax on the entire balance — potentially $50,000-$200,000+ in taxes.

Instead:

  • Name individuals as beneficiaries directly on the 401(k)
  • Spouse gets special treatment: Can roll over to their own IRA
  • Non-spouse beneficiaries: Can use 10-year inherited IRA rules

When to name trust as beneficiary:

  • Beneficiary is a minor child (trust controls distributions until adult)
  • Beneficiary has special needs (preserves government benefits)
  • Beneficiary has creditor issues or addiction problems
  • You want to control when/how beneficiary receives funds
USE BENEFICIARY DESIGNATION

Traditional and Roth IRAs

Same rules as 401(k)s — never transfer directly to trust:

  • Name beneficiaries directly on the IRA
  • Spouse beneficiary can do spousal rollover
  • Non-spouse beneficiaries use inherited IRA rules
  • Roth IRAs: Tax-free growth continues for beneficiaries

Action: Log into your IRA custodian and verify beneficiaries are correct and up-to-date.

USE BENEFICIARY DESIGNATION

Life Insurance

Life insurance with a named beneficiary already avoids probate automatically:

  • Death benefit pays directly to beneficiary
  • No court involvement, no probate fees
  • Typically tax-free to beneficiary
  • Fast — usually paid within 2-4 weeks

When to name trust as beneficiary:

  • Beneficiary is a minor (trust controls funds until adult)
  • You want staged distributions (not lump sum at death)
  • Beneficiary has special needs
  • Estate tax planning for very large estates ($13M+)

Assets That Can Use Either Approach

EITHER WORKS

Bank Accounts (Checking and Savings)

Bank accounts can either be transferred to trust OR use Payable-on-Death (POD) designations:

POD (Beneficiary) Pros:

  • Simple to set up at bank
  • Avoids probate
  • You maintain individual control

Trust Transfer Pros:

  • Centralized management if incapacitated
  • Coordinated with other trust assets
  • No need to update beneficiaries separately

Recommendation: For larger bank accounts ($25,000+), transfer to trust. For small checking accounts, POD is fine.

EITHER WORKS

Vehicles

California allows beneficiary designations on vehicle titles:

  • Beneficiary on title: Add at DMV with REG 227 form
  • Transfer to trust: Also possible, slightly more complex

Recommendation: For most people, beneficiary on title is simplest. Transfer to trust only if you have many vehicles or want incapacity protection.

Common Mistakes to Avoid

Mistake #1: Transferring Retirement Accounts to Trust

This triggers immediate taxation of the entire balance. We've seen people accidentally create $100,000+ tax bills this way. Keep retirement accounts titled in your name with beneficiary designations.

Mistake #2: Forgetting to Fund the Trust

Creating a trust document but not transferring assets into it. An unfunded trust doesn't avoid probate. Your home MUST be deeded into the trust.

Mistake #3: Outdated Beneficiary Designations

Beneficiary designations override your trust and will. If your ex-spouse is still named as 401(k) beneficiary, they get the money — regardless of what your trust says. Review beneficiaries annually.

Mistake #4: Not Coordinating Trust and Beneficiary Designations

Your trust distributes assets equally to 3 children, but your IRA names only 1 child. This creates unequal distribution. Make sure everything works together.

Special Situations

Minor Children as Beneficiaries

If your beneficiaries are minors, consider naming your trust as beneficiary on all accounts. This allows you to:

Special Needs Beneficiaries

If a beneficiary receives SSI, Medicaid, or other government benefits, direct inheritance can disqualify them. Name your trust (with special needs provisions) as beneficiary to preserve their benefits.

Blended Families

If you have children from a prior marriage, be especially careful. Beneficiary designations from before your current marriage may leave everything to ex-spouse or exclude current spouse.

Get Your Assets Properly Structured

Our California living trust package includes guidance on which assets to transfer and how to coordinate with your beneficiary designations.

Create Your Trust for $400

Includes funding instructions + deed transfer

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