Frequently Asked Questions
Q: How much can I have before my estate is subject
to the estate tax?
This question is much harder to answer than it
should be. As of this writing, the federal estate tax is
imposed on estates for decedents dying in 2012 that have a value of
$5,120,000 Million or more.
(This amount was adjusted for inflation, and was $5 Million
in 2011.) However, the estate tax law “sunsets”
and the estate tax reverts to an exclusion amount of only $1 Million
on January 1, 2013. Consequently, we are currently advising
clients that they should plan as if they will pay an estate tax if
the value of their estate is more than $1 Million.
Congress may act to raise the
minimum threshold of estate value before it reverts to the
$1 Million exclusion amount. (It may even act afterward and
make the change retroactive.) Whether there will actually be
any change in the amount and, if changed, whether the amount will be
the 2011 ($5 Million), the 2012 amount ($5,120,000) or some other
amount remains to be seen.
Keep in mind that, with proper tax
planning, a married couple can shelter $2 Million from the estate
tax rather than just $1 Million. If you are married and if
your total assets are more than $1 Million, we can help you with tax
planning to minimize the total estate tax bill due on the death of
the second of you to die.
Q: What is included in my taxable estate?
For the most part, all of your assets are
included in your taxable estate.
This may include assets that you don’t consider available to
you such as Individual Retirement Accounts or assets in 401k
retirement plans. It
also includes assets that don’t exist until you die such as the
entire payout proceeds of life insurance plans that you own.
Q: Do I need a trust?
Determining whether you need a trust is not a
simple question, and no professional is in a position to know
whether you need a trust until you’ve met with them and discussed
your assets with them.
Examples of the factors that will be evaluated are the size of your
estate, whether you need estate tax planning, how many assets you
have, whether you own land in more than one state, and whether you
are uncomfortable leaving property outright to your beneficiaries.
Q: I have a will. Why would I consider a trust?
A trust is designed to help you avoid probate.
A will typically does not avoid probate.
Arizona law usually requires that a will be probated to be
effective. You should
consider a trust if you want to reduce the time and expense that
your survivors will spend administering your affairs after your
death.
A trust is also a good vehicle to
plan for your incapacity during your lifetime.
If you become incapacitated, it is typically much easier for
someone to help you administer your affairs if you have a trust than
it is if you do not have a trust.
Q: I have a trust. Why do you recommend a will as well?
A good estate plan will include a Will even if you have a Revocable Living Trust
Agreement. For a trust to work
properly to avoid probate, your assets must be retitled in the trust’s name.
Sometimes assets will not be properly retitled into your Revocable Living
Trust during your lifetime. In that
situation, the Will will direct that any assets that are not already in the
trust will be transferred to the trust upon your death.
We call this type of Will a “Pourover Will”.
Q: I’ve heard about the Arizona Trust Code. Should I
update my trust?
The simple answer is that your trust is probably still effective
if you do not update it.
The better answer is that the Arizona Trust Code contains several
good options for trust documents that were not available prior to
January 1, 2009. The
Arizona Trust Code also imposes certain requirements on your
successors that you may not like and may have the ability to avoid.
If your trust was prepared prior to January 1, 2009, we can
help you evaluate whether you and your family can take advantage of
any of the new Arizona Trust Code provisions.
Q: I set up a trust several years ago, but I didn’t
re-title any of my assets into the trust name. What happens when I die?
Your estate will probably have to be probated.
In order to gain the full probate-avoidance advantage of a
trust, it is necessary for the trustee to have the authority to
manage the trust assets.
The best way to make sure that the trustee has that authority is if
your regular assets are titled in the name of the trust.
Typically your land, regular bank accounts, stocks, bonds,
mutual funds and brokerage accounts should be titled in the name of
the trust.
The major exceptions to this rule
are retirement assets such as IRAs or 401ks and other tax-deferred
assets such as annuities.
You should always consult with your attorney or tax
professional before titling these types of assets into your trust or
naming the trust as beneficiary of these types of assets.
Fortunately, it is usually easy to set these assets up to
avoid probate even if they are not transferred to your trust.
Q: Do I need to put my car into my trust?
We generally advise that you put your car into
your trust. If your car
is in your trust, there is less likelihood that your estate will
need to be probated after your death.
Another option for your existing
Arizona-titled vehicles that may not be titled in the name of the
trust is to complete the Motor Vehicle Department’s form entitled,
“Beneficiary Designation—For Vehicle Title Transfer Upon Death”.
This form is available at the MVD’s website and will avoid
probate of the vehicle upon your death.
Q: My child is still a minor. I don’t want to give her money while she’s still this young. What can I do?
There are a number of good options, but one of
the best is to create a continuing trust for their benefit.
With a continuing trust, you will appoint a Trustee to manage
the beneficiary’s money until they reach a certain age or certain
ages. Until they reach
that age, the Trustee will likely have the authority to make
distributions if the beneficiary needs them for maintenance,
support, health care, dental care or education.
When the beneficiary reaches that certain age or ages, then
the beneficiary can request that the Trustee distribute the trust
principal outright to him or her.
For example, parents may create a
continuing trust for their minor child.
The parents may want one-third of the trust to be distributed
to the child when the child reaches age 25, the next one-third to be
distributed to the child when the child reaches age 30, and the
final one-third to be distributed to the child when the child
reaches age 35. Until
the child reaches age 35, the Trustee has the discretion to make
additional distributions to the child if the Trustee determines that
the child needs the money for maintenance, support, health care,
dental care, or education.
Trusts of this type are very
flexible and can be set up in a way that makes the most sense for
your family and its situation.
It is also important to note that
continuing trusts are not without some disadvantages.
Maintaining a continuing trust is more complicated and more
demanding than giving someone money outright, and your successor
Trustee will have to overcome those complications and demands.
Further, Arizona law entitles Trustees to charge a fee for
their services should they choose to do so.
A professional fiduciary will always charge for their
services, but even individual Trustees may elect to charge a fee.
Another good option is the Arizona
Uniform Transfers to Minors Act (“UTMA”) account.
An UTMA arrangement is often desirable when there are not
enough funds to justify a continuing trust.
While this is a much more limited option than a continuing
trust—the final payment of the assets must be made at either age 18
or 21 depending on how and when the account was set up—it is often a
good option when there is not a significant amount of money
involved. A Custodian of
an Arizona UTMA account has the discretion to make payments from the
account for the child’s needs until they reach the distribution age.
If the Arizona UTMA arrangement is appropriate for your
situation, we can help you prepare your estate plan in such a manner
that any moneys that would otherwise be left to minors will instead
be left to a Custodian of an Arizona UTMA account.
Q: I am concerned that my beneficiary will foolishly
spend any money that I leave them. What can I do?
Once again, one of the best options is to
create a continuing trust for their benefit rather than leaving them
money outright. You can
appoint a Trustee to manage the money for their entire lifetime.
In this case, the continuing trust might provide that the
beneficiary gets all of the net income from the trust every year,
but only has access to trust principal if the Trustee determines
that the child needs funds for their maintenance, support, health
care, dental care, or education.
One of the major concerns for a
continuing trust that lasts for a benefiiciary’s entire lifetime is
who is going to serve as Trustee of the trust.
If you appoint an individual, you will need to consider
several possible successor trustees.
However, if the amount of trust funds is sufficient, you
should probably consider appointing a bank, trust company or other
corporate fiduciary to act as trustee.
Again, trusts of this type are very
flexible and can be set up in a way that makes the most sense for
your family and its situation.
They also have the disadvantages that we discussed above.
Q: I am concerned about my beneficiary’s spouse. How
can I protect the inheritance from her spouse?
Yet again, one of the best options is to create
a continuing trust for their benefit rather than leaving them money
outright. You can
appoint a Trustee to manage the money for their entire lifetime.
Again in this case, the continuing trust might provide that
the beneficiary gets all of the net income from the trust every
year, but only has access to trust principal if the Trustee
determines that the beneficiary needs funds for their maintenance,
support, health care, dental care, or education.
Additionally, the trust document will specify that the trust
is only for the benefit of your beneficiary and not for the benefit
of their spouse.
However, even though setting up a
continuing trust will protect the trust assets if your child gets a
divorce, it still may have an indirect effect on the dissolution of
the marriage. In
Arizona, spousal support is often determined based on the couple’s
standard of living. If
your beneficiary is receiving money periodically from the trust, the
receipt from the trust may increase your beneficiary’s standard of
living and result in your beneficiary having to pay more spousal
support if they get divorced.
Again, trusts of this type are very
flexible and can be set up in a way that makes the most sense for
your family and its situation.
Continuing trusts also have the disadvantages that we
discussed above.
Q: I want to disinherit my son. How do I do that?
A properly drafted Revocable Living Trust
Agreement or Last Will and Testament can disinherit anyone.
When there is a close family relationship such as
parent-child, we recommend that the document specifically state that
the person is being disinherited.
The inclusion of that specific statement makes it clear that
you did not forget to include the person being disinherited.
Q: My beneficiary is receiving benefits from the
government. If I leave them an inheritance, will that affect their benefits?
We can help you determine whether receiving an
inheritance will jeopardize your beneficiary’s benefits.
In many instances, we can help you create a plan that will
protect their benefits while allowing them to enjoy some of the
benefits of their inheritance.
Q: If I want to change my trust, can I just write on the original document?
We recommend that you do not write changes on
your original trust document.
A properly drafted Revocable Living Trust Agreement will
include provisions that specify the exact procedure necessary to
change the trust. Merely
writing changes on the document probably won’t comply with the
procedure and won’t be effective to amend the trust.
Q: Do I need an attorney to amend my trust?
We recommend that you engage an attorney to
assist you with amending your Revocable Living Trust Agreement.
A properly drafted Revocable Living Trust Agreement will
include provisions that specify the exact procedure necessary to
change the trust. An
attorney can help you review the requirements of the amendment
procedure and make sure that the trust is amended properly.
Further, an attorney will be able to make sure that the
amended documents comply with any changes to the law since you
originally set up the trust.
Q: I want to revoke my trust and start from scratch. Can I do that?
We recommend that you consider amending your
trust in its entirety to reflect your new estate planning goals
rather than revoking your trust and setting up a new trust.
A significant reason for recommending an amendment is that
you have probably funded certain of your assets into your existing
trust. Amending the
trust will help make sure that you don’t have to re-title those
assets.
Q: Is it a good idea to name a bank, trust company or other corporate fiduciary to be my successor trustee?
Whether to use a corporate fiduciary is a
question that must be evaluated on a case by case basis.
The corporate fiduciary’s trust officers are going to have a
great deal of expertise in serving as trustee, and will be able to
administer your trust and invest your assets with professional
skill.
A corporate fiduciary will also
bring a level of independence to serving as trustee that might not
be available to a family member or close family friend.
Sometimes beneficiaries are able to bring a great deal of
pressure on an individual trustee because of a family relationship
that would not be a factor if you used a corporate fiduciary.
Additionally, it is possible that
beneficiaries will argue with the trustee if an individual is
appointed as trustee or if individuals are appointed together as
co-trustees. Too often,
these disputes wind up in court.
And too often, a family member or friend who is serving as
trustee will find themselves in trouble because they did not keep
proper records of their trust administration.
Sometimes using a corporate fiduciary will avoid a court
battle because corporate fiduciaries routinely keep all records that
they are legally required to keep and because the beneficiaries may
perceive the corporate fiduciary as more impartial than they
perceive another individual.
Yet the use of a corporate
fiduciary as successor Trustee is not for everyone.
Corporate fiduciaries typically have a minimum value of
assets that must be in the trust before they will consider serving
as trustee. And while we
think that most corporate fiduciaries more than earn the fee that
they charge to administer a trust, some clients are troubled by the
trustee’s fee that a corporate fiduciary charges.
Q: What happens if I get married after I’ve set up my trust?
It is typically a good idea to meet with an
attorney to examine your existing trust several months before you
get married. If you are
not able to meet with an attorney prior to the marriage, you should
discuss the marriage with your attorney as soon as possible after
your marriage. We can
help you evaluate whether the trust needs to be amended to provide
for your new spouse and discuss the obligations that you and your
estate owe to your spouse upon your death.
Your spouse may wish to waive these obligations and we can
assist you with that.
It is important to note that a
Revocable Living Trust Agreement is not a good substitute for a
Premarital Agreement or Postmarital Agreement.
If you and your fiancé or spouse wish to explore planning for
division of assets upon your death or if your marriage should later
be dissolved, we recommend that you speak to an attorney about a
Premarital or Postmarital Agreement.
Q: What happens to our trust if my spouse and I get divorced?
The trust will almost always be part of the
property settlement in the divorce.
Whether trust property was held as your separate property or
as community property will affect how trust assets are divided upon
your divorce.
Q: What happens if my spouse and I set up a trust and then one of us dies?
It probably makes sense to meet with an
attorney and find out if there are any steps that the survivor is
legally required to take.
The Arizona Trust Code may require that certain notices be
given upon the death of one of you.
Or your trust may need to be divided into two or more trusts
if your Revocable Living Trust Agreement document included estate
tax savings provisions.
After one of you dies, we can help you review the trust instrument
and determine what steps, if any, need to be taken.
Q: Does my trust need to file a separate income tax return?
If there is only one Trustor, most Revocable
Living Trust Agreements are set up so that the Trustor does not need
to file a separate tax return.
When this is the case, the Trust’s tax identification number
is the same as the Trustor’s social security number.
If the Revocable Living Trust
Agreement is established by a married couple, the answer is a little
more complicated. Most
Revocable Living Trust Agreements are set up so that the Trustors do
not need to file a separate income tax return while both of them are
alive. After the first
death, if the Revocable Living Trust Agreement contains estate tax
savings provisions that divide the trust into two or more trusts
upon the death of the first to die, it will probably be necessary
for at least one of the trusts to file a separate tax return and
obtain a separate tax identification number.
Note that such a trust may not need to actually pay an income
tax, but still may be required to file a return.
If you have any questions about
whether you need to file a separate income tax, we can review your
trust and tell you what is required.
Q: Why don’t I just give all of my property to my
beneficiaries now?
If you give your property away, it no longer
belongs to you. It would
belong to the recipient and they would be entitled to do whatever
they want to do with it whether or not it’s something that you would
do with the property yourself.
But even if the recipient is willing to do whatever you say
with the property, they may be deprived of the choice.
If they are successfully sued, the property may become
subject to attachment by their judgment creditors.
Transferring property to your kids
may also trigger the gift tax or require you to file a gift tax
return even if no gift tax is owed.
An outright transfer to your kids has gift tax and estate tax
consequences that you need to consider prior to making the gift.
Q: I have heard that I can avoid probate by putting
my assets in joint tenancy with right of survivorship with my beneficiaries.
Shouldn’t I just do that with all of my assets?
The joint tenancy arrangement can be useful to
avoid probate, but it has disadvantages that you may not have
considered. If you put
your children’s names on your property as joint tenants, you are
effectively giving them a portion of those assets.
If they are successfully sued, the property may become
subject to liens or even attachment by the winning party.
And the transfer of a portion of your assets to your
beneficiaries may also require a gift tax to be paid or a gift tax
return to be filed.
Q: Is there a minimum amount for probate?
Arizona law permits the transfer of a
decedent’s property by affidavit if the total net value of real
property—such as land—is less than $75,000 and the total value of
personal property—such as bank accounts—is less than $50,000.
The value for real property is a net value, which means that
you can subtract the outstanding value of any mortgage from the
total value of the land to determine whether the value is under
$75,000. We can help you
review the decedent’s assets and determine whether you may be able
to avoid the time and expense of probate.