Frequently Asked Questions
Q: How much can I have before my estate is subject
to the estate tax?
The federal estate tax is imposed on estates that have a value of
$11.2 Million or more. This amount applies to the estates of
decedents who die in 2018 and the amount is adjusted annually for
inflation.
A married couple can shelter $22.4 Million from the estate tax
rather than just $11.2 Million with proper predeath tax planning. If
you are married and if your total assets are more than $11.2
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 $11.2
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--$5.6 Million per person; $11.2 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 $5.6 Million individual estate tax exemption rather than the
temporary $11.2 Million amount.
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 death benefit 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 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.
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.
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.
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:
I don’t want to give money to my child while she’s still a minor.
What can I do?
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.
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
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.
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 limited benefits from 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.
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.
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 $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.