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The federal estate tax is imposed on estates that have a value of $11.58 Million or more. This amount applies to the estates of decedents who die in 2020 and the amount is adjusted annually for inflation.
A married couple can shelter $23.16 Million from the estate tax rather than just $11.58 Million with proper predeath tax planning. If you are married and if your total assets are more than $11.58 Million, we can help you with predeath tax planning to minimize the total estate tax bill due on the death of the second of you to die.
Even if tax planning is not done before the first spouse dies, it is still possible for a married couple to use the first spouse’s $11.58 Million applicable exclusion amount through a relatively new provision called portability. Unfortunately, using portability requires the surviving spouse to incur the expense of filing an estate tax return after the first spouse dies. Filing an estate tax return will typically not be required if tax planning is incorporated into your estate planning documents prior to the first spouse’s death.
In almost all cases, it will be less expensive to do tax planning before the first death than it will be to file an estate tax return after the first death. However, in some cases, the potential effects of other taxes for the survivors—particularly the capital gains tax—require careful consideration be given when determining the best planning options.
Finally, the estate tax exemption amount is scheduled to sunset on January 1, 2026. After sunsetting, the exemption will revert to the current amount—$5.79 Million per person; $11.58 Million for a married couple—although these amounts will be indexed for inflation. Consequently, careful planning will assume that you will be subject to a $5.79 Million individual estate tax exemption rather than the temporary $11.58 Million amount.
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 death benefit proceeds of life insurance plans that you own.
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 and family situation with them 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, what type of assets you have, whether you own land in more than one state, whether you are uncomfortable leaving property outright to your beneficiaries and whether you wish to provide creditor protection to your beneficiaries for their inheritances.
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.
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”.
The SECURE Act significantly changes some of the laws affecting retirement plans. One of the biggest changes is the elimination of stretch IRA treatment. Except in certain circumstances, IRAs now have distributed within 10 years of the IRA holders death. Many estate plans were designed to take advantage of the stretch IRA and now need to be updated.
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.
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. These assets are not titled in the trust name during your lifetime. You should always consult with your attorney or tax professional before 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.
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. You can use the form to transfer the vehicle either to your trust or to your intended beneficiary and it will not be effective until you die.
There are a number of good options, but one of the best is to create a continuing trust for the minor’s 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. These age or ages can be well past the age of majority, such as 25, 30, 35 or even older. Until they reach the designated 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.
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 beneficiary’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.
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.
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.
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 limited benefits from their inheritance.
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.
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.
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.
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.
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.
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.
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. If your taxable estate is large enough, you may need to file an estate tax return. 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.
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.
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.
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.
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 $100,000 and the total value of personal property—such as bank accounts—is less than $75,000. 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 $100,000. We can help you review the decedent’s assets and determine whether you may be able to avoid the time and expense of probate.