NOVEMBER 14, 2011 VOLUME 18 NUMBER 39
Let’s talk about guardianship and conservatorship proceedings. Before we do, though, let’s remember a couple of important principles:
We only know about Arizona guardianship or conservatorship. Well, OK — we might know a thing or two about other states’ rules and procedures — but we only practice in Arizona. Our observations are not universally applicable. They may not even be universally applicable inside Arizona’s borders.
As always, we simply can’t give specific case-based legal advice here, and you should not rely on this newsletter (or anything you read online or in books) to resolve your case. This is big-picture stuff. We can and do write about how the system works, what the rules look like, and what you might expect if you are involved in a guardianship and/or conservatorship matter in Arizona. Don’t expect to print out our articles, take them to court and argue with the judge, though. She won’t appreciate it, and neither will we. Plus it won’t work. Get good legal advice.
One thing we’ve learned from years of law practice: people think they understand their own cases, but they get blinded to the nuances (or maybe they aren’t told everything about the contrary evidence or opinions) and tend to overgeneralize. We don’t think that means they are stupid, or liars — they are just trying to put the best face on their case, and that’s human nature. But it also means that if you say “aha — he hit the nail on the head and that’s exactly what my worthless brother is trying to do” we’d be likely to tell you (if we were your lawyer): “slow down. It’s not that clear.”
We have written a lot about guardianship and conservatorship. Here’s one of our better (and most comprehensive) articles, a White Paper on guardianship and conservatorship. But it’s a difficult and confusing topic, with lots of information — and misinformation — out there.
Disclaimers aside, let’s talk about guardianship and conservatorship. Let’s start with some definitions of terms.
In Arizona, the word “guardianship” is applied to the court proceedings instituted to acquire legal control over another human beings’ person. In general terms, a guardian is authorized by the court to make placement and health care decisions for that other human being. Not every state uses the same word. Not every state has the same process to get a guardian (or whatever they call the office) appointed. But every state does have some kind of court proceeding in which a person can be appointed to manage the health care and living arrangements of another person.
In Arizona, the word “conservatorship” is applied to the court proceedings instituted to acquire legal control over another human beings’ finances. A conservator usually is authorized by the court to handle checking accounts, real estate, brokerage accounts, businesses, vehicles, horses, airplanes, family photographs, oil and gas leases — you name it. Just to keep the confusion level high, not every state calls this type of court-appointed person a conservator — some, in fact, call them guardians. But in Arizona, the person managing property and finances is a conservator.
Neither guardians nor conservators are “powers of attorney.” In point of fact, powers of attorney are pieces of paper, not people at all. But now we quibble. The person named to manage your property and/or your person in a power of attorney is properly called your “agent” or your “attorney-in-fact.” A guardian or conservator is neither an agent nor an attorney-in-fact. They usually have authority over agents and attorneys-in-fact, though it may require separate court action to make that clear, and it may be possible for the court to determine that the agent (or attorney-in-fact, if you prefer hyphenated names) still has authority even after appointment of a guardian and/or conservator.
Who can have a guardian appointed? Someone who is incapacitated. Their incapacity can be based on their age (minors — those under age 18 — are automatically incapacitated under Arizona law unless they are “emancipated”) or their circumstances. Generally speaking, parents are the natural guardians of their minor children, so they do not need to go to court to secure guardianship. The same is not true for any class of adults. So if your 18-year-old child has a lifelong disability that makes him unable to make responsible decisions, you do not automatically shift from being his natural guardian at 17 to being his legal guardian at 18. A court proceeding is necessary. Same thing if your husband or wife becomes incapacitated — you may need court proceedings to become guardian (if there is no power of attorney and there are things that need to be taken care of). “Incapacity” for adults requires a court showing of (a) a mental, medical or other condition that (b) affects the ability of the person to make and communicate responsible personal decisions and (c) makes it difficult or impossible for them to provide their own food and shelter without assistance. It is also necessary to show that (d) the appointment of a guardian will actually help accomplish that goal.
Appointment of a conservator is based on similar, but slightly different, grounds. First, minority is always considered a legally disabling condition, but parents are not the natural conservators of their children in the way that they are natural guardians. That means if a minor child comes into money, even if they live with both parents and all are harmonious and responsible, there is no way to manage that money without going through the conservatorship process. If an adult becomes unable to manage their money in order to prevent its waste or dissipation, they may have a conservator appointed, as well. Frankly, the definition of when a conservator can be appointed is a great deal less precise than that for guardianships, which can sometimes lead to problems.
An important reality for family members and friends to understand: if a guardianship and/or conservatorship proceeding is initiated, the court has been invoked and will not later simply step aside to let concerned — even appropriately concerned — family members take over. Once the courts are involved, they tend to stay involved.
That means that the cost of securing guardianship and conservatorship can be high. In Arizona, a lawyer is automatically appointed to represent the person who is alleged to be in need of a guardian or conservator. A medical report is required. A court-appointed investigator must go to the residence, conduct an investigation and file a report. There are significant court costs involved. Plus the process is complicated enough that the petitioner is almost always going to hire an attorney. That attorney’s bill is likely to approach half the total cost of getting the guardianship or conservatorship set up.
Much has been written, spoken and broadcast in recent years about the high cost of guardianship and conservatorship. The natural tendency of the system has been to make it more difficult to get guardians and conservators appointed, and to require them to provide more information, more frequently. Though that may be a positive development, it has the (presumably unintended) effect of making the process not only more difficult, but also more expensive.
So — guardianship and conservatorship can be difficult, expensive, even ineffective. Not always, of course, but there is a possibility and it proves to be the case too often. What can beleaguered family members do?
Most lawyers practicing in the field spend the first portion of any contact with a new client talking about how to avoid guardianship and conservatorship proceedings. Did your family member sign a health care power of attorney, a financial power of attorney, a living will, a living trust? Are there other ways to get done what needs to be done? What bad things will happen if we (that is, the family and the lawyers acting together) simply do not file a guardianship or conservatorship proceeding, even if one is warranted? Are there ways to get agreement from all the family members in advance, in order to hold down legal costs?
One important concern, at least in the case of adult guardianship and conservatorship: we will ultimately need to be able to prove that your family member has a medical, mental, emotional or other problem that prevents them from making their own personal or financial decisions. We will need medical evidence. Have you spoken with your family member’s physician, or psychologist, or other member of their treatment team? Can you get a letter from that person describing diagnosis, prognosis and any functional limitations? Without that, we may not be able to proceed. With that in hand, though, the process may be significantly streamlined.
Getting guardianship or conservatorship can be expensive, emotionally wrenching, and sometimes even ultimately unsatisfying. Sometimes, however, it is absolutely necessary. We just need to be sure you are prepared for the cost, the procedures, the limitations, and the possibilities in this type of legal proceeding. That’s why you hire a lawyer, after all.
JUNE 27, 2011 VOLUME 18 NUMBER 23
We have written before about Arizona’s new Trust Code, and the Uniform Trust Code on which it is based. The “new” law (it became effective on January 1, 2009, so it’s not that new any more) included a number of changes to the way trusts have worked in Arizona for decades. One of the minor, but interesting, provisions is the formal creation of a position called “trust protector.”
To be clear, there was nothing prohibiting inclusion of a trust protector before the new law. So far there are no court cases to help flesh out the powers and duties a trust protector may be given. But we do now have a statute — Arizona Revised Statutes section 14-10818 — which gives clear authority for inclusion of this unusual beast.
So what is a trust protector? The person establishing a trust is permitted to include someone who would have the authority to make changes to the trust even after it becomes irrevocable — even, in fact, after the death of the original trust creator. That means you could name your sister (or your father, or your best friend from college, or your lawyer or accountant) to be the person who could make changes to the trust after your death, to protect the beneficiaries from unintended consequences — or from themselves.
There are no very serious limitations on the trust protector’s possible authority. The Arizona statute gives a handful of illustrations of the powers you might give the protector, but it doesn’t limit you to those ideas. Here are the powers the legislature thought you might want to consider:
The power to remove the trustee and appoint a new one. Worried that the bank might become too bureaucratic, or too expensive? A trust protector can help take that worry off your plate. Worried that your son might not be equipped to really handle the trust after your death? Trust protector to the rescue.
The power to change the applicable state law. Do you think Iowa, or Oregon, or Georgia might be a better state to allow your trust’s purposes to be carried out (or reduce state income taxes, or extend the time for the trust to continue after your death)? We suggest those states precisely because they are not now noted for especially trust-friendly rules — but who knows what might happen in the future? A trust protector could monitor those developments and make a change when it makes more sense.
Ability to change the terms of distribution. What if your daughter is embroiled in a messy divorce just at the time your trust is scheduled to dissolve and pay out to her? Or if your son is just about to declare bankruptcy? Or your grandson has just been diagnosed as mentally ill, and really needs a special needs trust to handle the inheritance you have left him? A trust protector could be given the power to change the date of distribution, or to establish a special needs trust, or whatever needs to be done.
Amend the trust itself. You can even give a trust protector the power to amend the trust’s terms. That might include taking advantage of future tax alternatives, or giving a larger share to a grandchild who really needs help, or reducing the inheritance of a child who doesn’t need a full share.
These powers are illustrative, not mandatory. In other words, you can tailor your trust protector’s powers and duties to your own situation and your personal comfort level.
A trust protector can be very powerful, very helpful and very dangerous. It should be obvious that not everyone will want to establish such a super-powerful position in their trust. For those concerned about the difficulty of planning for an uncertain future, however, the trust protector might just be a very comforting and useful tool.
That all begs the question asked in our headline. Do you need a trust protector? Perhaps. We think maybe the first question should be: is there someone (other than your trustee) whom you completely trust to “get” exactly what you want done with your estate after your incapacity or death? If not, your trust is probably not a good candidate for inclusion of a trust protector. But if you do have that person in mind, then let’s talk about how to use them.
JUNE 20, 2011 VOLUME 18 NUMBER 22
Imagine this tragic scenario: your 33-year-old son has a serious illness, and requires extensive medical treatment. The good news is that the treatment may well effect a cure. The bad news is that it will be horribly expensive. Right now he qualifies for government assistance with that expense — after all, he hasn’t been able to work for several years. But that eligibility is about to change.
Your mother set up a trust for each of her grandchildren before her death five years ago. Each trust provided that the grandchild would receive his or her share outright at age 35. In two years, your son will be eligible to receive about $250,000 from his trust — and you think it will probably be spent immediately on medical care that otherwise would be provided at no cost to him.
Arizona (and a number of other states — but we’re not in the business of giving advice regarding state laws we don’t know about) now allows the trustee to do something about your son’s problem. It is possible to “decant” an irrevocable Arizona trust into a new trust, so long as a few basic principles are not violated. The new trust could, for example, be a “special needs” trust, allowing your son to still qualify for medical assistance.
The Arizona law is found at Arizona Revised Statutes section 14-10819. If you read it, you won’t find the word “decant” anywhere. That’s because the term is favored among trust lawyers, but not in the law itself. No matter — “decanting” is a pretty good description of what the trustee is doing. Basically, the trust’s assets are being poured from one bottle (the old trust) into a new, similar-but-different bottle (the new trust) and gaining new vigor and complexity in the process.
Your scenario might be different. It might be your daughter who is a chronic spendthrift. Perhaps one of your children married a spendthrift. You might even be the trust beneficiary interested in extending the period of the trust, perhaps for creditor protection purposes.
The amount of money might be more or less than the story we have sketched out here. You might be the trustee, or a bank or private fiduciary might have that position. None of that makes much difference — the trustee of an irrevocable Arizona trust can, unless the trust explicitly prohibits it, usually decant to solve real-world problems that have arisen since the trust was initially created.
The idea is not brand-new, nor unique to Arizona. New York adopted a similar law as early as 1992, and almost a dozen states now explicitly permit decanting. Arguably, the power to decant is not dependent on a state law — though trustees from states where there is no statute might be hesitant about testing that theory.
One requirement for Arizona’s decanting statute to be available: the trust must be an Arizona trust. That usually means that one trustee must be in Arizona, though even that might not be necessary in every case. Another requirement: the trustee must have the discretion to make a distribution to or for the benefit of the beneficiary. In other words, if Grandma’s trust required the distribution of all income directly to Junior but did not permit the trustee to ever reach the principal, decanting might not be an option.
Could you force an Arizona trustee to decant if you were the beneficiary’s concerned parent? Probably not. What if you were the beneficiary and desperately wanted the trustee to exercise its power to decant? Probably not again. Could you decant a trust if you were the trustee and the beneficiary? Oops — we’ve run out of space and time (that’s lawyer talk for “it depends”).
Decanting trusts is an interesting and useful idea. It can help “fix” problem trusts, especially where circumstances have changed since the trust was first established. If you know of a current or looming problem with distributions from an Arizona trust, you might want to talk to an experienced trust and estates lawyer about the options available.
All you want to do is to find a lawyer to draft a simple will and powers of attorney. You ask your friends, but no one has a referral they feel unequivocally good about. A little online searching reveals that there are any number of organizations, credentials and qualifications–but how on earth do you figure out which lawyer actually knows something about estate planning, or Medicaid eligibility, or special needs trusts, guardianship and conservatorship (or whatever your elder law problem actually might be)? Let us give you a primer so you can identify the candidates.
NAELA (the National Academy of Elder Law Attorneys) is probably the first place to look. Any lawyer in the country who does any significant amount of elder law (and that term is generally understood to include all the categories in the previous paragraph) probably belongs. There are about 5000 members, and the organization has been around for twenty years.
To belong to NAELA all you have to provide is proof that you are a lawyer and a $375 check each year. Even though the dues are not high, they serve as a low-level filter–those who sign up tend to actually work in the trenches of elder law. The organization has the best continuing legal education programs, the best camaraderie and the best sharing of any professional organization around.
There are actually several “flavors” of NAELA. Advanced elder law practitioners formed a subdivision of the organization two years ago; the Council of Advanced Practitioners (NAELA/CAP) is a highly selective group who meet separately once a year, exchange more sophisticated practice ideas and share much closer personal and professional connections.
Then there are the NAELA Fellows. Each year a small handful of NAELA members are selected to be Fellows, based on their reputations in the national and local communities, their hard work in the field, and their writing and speaking. The Fellows are the best-known, hardest-working elder law attorneys in the country–and there are fewer than 100 of them.
NAELA members who want to announce their availability for particular types of elder law work can sign up for the NAELA Experience Registry. Other than a certification that you are familiar with the area you sign up for, and payment of an annual fee, there is no requirement that you prove knowledge, experience or capability. Still, participation in the Experience Registry can be an indication of real interest in an area of elder law.
NELF (the National Elder Law Foundation) was an outgrowth of NAELA but is a separate entity. Its primary function is to operate an elder law certification program, and to grant successful applicants the CELA (Certified Elder Law Attorney) designation. CELAs must pass a full-day written exam (which has a famously low pass rate) and establish that they have real experience in the field.
ACTEC (the American College of Trust and Estate Counsel) is an entirely separate organization with some overlap but a significant difference. ACTEC Fellows (the name for all members) have to have been nominated by an existing Fellow; there is no application process and no way to sign up other than to get invited after a year-long vetting process. ACTEC Fellows tend to dress nicer, drink finer wines (not nearly as much beer) and belong to larger law firms than NAELA members.
There are, in addition, several for-profit organizations focused on estate planning and other elder law sub-specialties. Membership in any one of these may indicate that the lawyer takes the practice seriously, is trying to improve his or her skills through continuing education, and is committed enough to the practice to pay a (sometimes hefty) fee. Those organizations include the National Network of Estate Planning Attorneys (NNEPA), the American Academy of Estate Planning Attorneys (AAEPA), and Wealth Counsel. Each of those organizations has its staunch partisans; even a cursory look at their websites will illustrate that their primary focus is on their membership, rather than providing public information or referrals.
There are at least two national organizations for lawyers who practice in the special needs arena. One, the Special Needs Alliance, is a non-profit organization with an invitation-only membership structure. The other, the Academy of Special Needs Planners, is a membership group open to anyone who is interested enough in the field to pay its hefty membership fee.
In addition to all of that, your state bar association and/or Supreme Court may have created a legal specialty in estate planning, tax, elder law, or related fields–or in more than one of those. State specialization usually indicates a serious peer review process, a challenging written examination, and a higher requirement for continuing legal education to maintain the certification. Arizona, for example, provides certification for “Estate and Trust” lawyers as well as Tax practitioners, and also recognizes the CELA designation described above.
Should you demand that your new lawyer have one or more of the credentials described here? No, not necessarily–though you might ask further questions if he or she does not belong to any of these professional associations. The websites of each may give you some leads to locate experienced and competent practitioners in your area.
DECEMBER 20, 2010 VOLUME 17 NUMBER 39
The ink is not yet dry on Congress’s tax and unemployment insurance compromise. Signed just last week by President Obama, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 has now become law. It continues previous income tax breaks for everyone, regardless of wealth. It extends unemployment insurance coverage for an additional 13 months. It also rewrites the estate tax — it does not simply carry forward the estate tax rules adopted a decade ago.
Under the new law no estate tax will be due on estates of less than $5 million. Since there is no Arizona state estate tax, that means that only the wealthiest Arizonans (or those with significant assets in other states which do impose an estate tax) need to be concerned about estate tax rules at all. It should mean that estate planning just got easier, more predictable and lower-risk for nearly all of our clients.
It should mean that, but it may not. There are a number of details to watch out for, including:
If you are married and your estate plan was initially prepared a decade or more ago, you might well have a two-trust arrangement. Sometimes described by the shorthand “A/B trust” designation, such an arrangement can actually now increase the total tax paid by your heirs. How could that happen? If a separate trust is created and funded at the first spouse’s death, assets assigned to that trust will not get a stepped-up basis on the death of the second spouse. Under the new law you can get an equivalent estate tax result and still preserve the 100% step-up in income tax basis at the second spouse’s death.
If a loved one died during 2010, the heirs get to choose which tax regimen to adopt — either the no-tax choice originally in place for 2010 or the $5 million exemption now adopted. Since the $5 million option includes full stepped-up basis (the original 2010 structure limited the step-up to $1.3 million for unmarried decedents), it may actually be beneficial to opt for the new taxable-estate option. Hard to figure out? Yes. The good news: you have until September, 2011, to decide which option is better.
The $5 million exemption is now “portable.” That means that if your spouse dies without having planned to use the exemption, it is still available to you. In other words, a couple effectively gets $10 million in estate tax exemption without having to prepare any planning documents. One small caveat: if the surviving spouse remarries and their new spouse predeceases, they lose the original unused exemption amount (but still get to use any unused exemption from the second spouse). It looks like Congress has (perhaps unwittingly) created a new marriage-discouraging provision for seniors — or at least for wealthy seniors.
For a decade we have been saying that the most important estate tax principle would be certainty. If you are pretty sure you know what the estate tax will look like for the next five years or so, you can plan accordingly. Unfortunately, Congress and the Administration have given us only two years of certainty — and much of the certainty we have is that the issue will be politically charged and intensely debated for much of that two-year period. In fact, Vice President Biden told a national television audience Sunday morning (on NBC’s Meet the Press) that “scaling back … the estate tax for the very wealthy” would be a top priority for the Administration over the next two years.
The new law also increases the level at which both gift taxes and “generation-skipping” taxes are an issue. Both of those also set at the $5 million level for the next two years. If either or both returns to lower levels after 2012, that could mean an important planning issue for very wealthy individuals in the meantime. Should gifts be made now, just in case? Should gifts be made to grandchildren and later generations, just in case? Expect to see more about those issues in coming months.
Paradoxically, the new rules could mean that more people (at least more wealthy decedents) should be filing estate tax returns — even though no estate taxes are due. Penalties for failure to file are higher, the importance to surviving spouses has increased and the stakes involved have generally gone up.
Does all of that sound like the issues are resolved? No — but the plain fact remains that a tiny minority of Americans are wealthy enough to be worried about any of these issues. How do you know if you need to worry? Take this quick four-question quiz:
Is your entire estate (including life insurance, IRAs and retirement accounts) worth less than about $2 million? Whatever happens in the next two years, it is pretty unlikely that the estate tax level is going to return to a number below about $3.5 million (the favorite number kicked around by Democrats during debates over the past year).
Are you married? If so, you can double the estate value in the previous question.
Do you live in Arizona (or another state with no estate tax)? There are only about a dozen states where state estate tax is important — Arizona is not one of them.
Are you middle-aged or older? If so, are you comfortable assuming that your net worth will not dramatically increase in the next few years?
Depending on your answers, your estate planning choices are likely to be simplified. You should check to see whether you now have estate planning provisions that are no longer needed. You should also check whether your non-tax planning issues have been addressed. Do your documents name the right person to act as trustee, health care agent, personal representative and financial agent? Do they leave your assets to the people (and organizations) and in the proportions that you want? Do they refer to events, locations or items that are no longer relevant?
JUNE 28, 2010 VOLUME 17, NUMBER 21 Mesa, Arizona, lawyer Donald C. Galbasini first began representing members of the Tremble family in 1998. That was when he filed a notice that he would be the attorney for Vernice Tremble, who was serving as conservator for Edward Tremble, Jr., her grandson.
Nine years later Vernice Tremble was removed by the probate judge as conservator — and also as trustee of a special needs trust that had been set up for Edward Tremble. A professional trustee was appointed to take over management of the special needs trust. A year and a half after that, Edward Tremble died and another family member was appointed to finalize the trust administration and distribution. Mr. Galbasini filed a notice that he would be representing the new trustee in connection with wrapping up the trust.
A month after stepping in as the new trustee’s lawyer, Mr. Galbasini filed a request for approval of a $46,736.65 fee — for his representation dating back to 1998. The state Medicaid agency (which would receive most of the balance of Edward Tremble’s trust under the rules governing self-settled special needs trusts) objected, arguing that it was too late for Mr. Galbasini to be filing his bill for approval and payment.
The trustee who had been handling the trust in the interim joined in the state’s objection, adding other arguments. Because of Mr. Galbasini’s long involvement and representation of a conservator who had been removed, argued the trustee, it would be impossible at this late date to figure out whether his representation had benefited Edward Tremble or other family members. The trustee pointed out that Mr. Galbasini had billed at his regular attorney rate for ministerial actions like writing checks out of his client trust account. Furthermore, the trustee was concerned that none of Mr. Galbasini’s reported time was for contact with Vernice Tremble, his client — all of his contacts had been with Edward Tremble’s parents, Mr. Galbasini’s client’s son and daughter-in-law.
The probate judge agreed, and denied Mr. Galbasini’s fee request as untimely. The Arizona Court of Appeals, however, disagreed — it reversed the fee denial and sent the matter back to the trial judge for further hearings. The question wasn’t whether the fee request was late, ruled the appellate court — instead, the important question was whether the fees were reasonable and for the benefit of Edward Tremble’s trust and conservatorship estates.
The appellate court did not rule that Mr. Galbasini’s fees were reasonable, but only that he needed to be given a chance to explain and defend them. If the court finds that the fees were incurred during times when he did not actually represent the conservator or trustee, for instance, the Court of Appeals agreed that those fees should be denied. The mere lateness of the application, however, was not enough to justify a complete denial of Mr. Galbasini’s fees. Conservatorship of Tremble, June 10, 2010.
The difficulty and cost of a probate proceeding can make it hard for heirs to collect small estates. Even the court filing fee can be prohibitively expensive if the decedent’s assets are very small. As a consequence most states have some sort of alternative to a full probate proceeding for smaller estates. Most often those mechanisms are not available for real property owned by the decedent. In Arizona, however, even real estate can be transferred to heirs by a simplified proceeding with limited notice and few formalities.
Arizona’s so-called Affidavit of Succession (see Arizona Revised Statutes section 14-3971) proceeding resembles a stripped-down, highly shortened probate proceeding. It does require a court filing, but no formal notice is given to heirs, anyone named in a will or even the decedent’s creditors. It is available only if the decedent’s interest in the real estate was worth less than $75,000.
But what happens when the informality and lack of notice are used improperly? If someone uses the simplified process fraudulently, can they get away with wrongly taking the decedent’s property? A recent Arizona Court of Appeals decision addresses exactly that question.
When Rodney Olson died in 2003, he left three children and a home in Glendale, Arizona. There was a mortgage on the home, and his children got together and decided they would let the property go into foreclosure rather than try to take over the debts. A year later daughter Sherry Vandervort changed her mind; she moved in to the house, paid $11,000 in back mortgage payments and discussed with her brother and sister what it would take for her to acquire the house.
Ms. Vandervort’s brother waived any claims to the house, but her sister wanted her interest bought out. The two women agreed that Ms. Vandervort would pay her sister $25,000 over time, and she would keep the house. Then she turned to refinancing the loan.
Ms. Vandervort’s lawyer had the other two siblings sign quit-claim deeds to her, then he prepared and filed an Affidavit of Succession under Arizona’s simplified proceeding. In the Affidavit she alleged that she was the sole heir of her father’s estate; because of the nature of the simplified proceeding, no additional notice was given to the other two heirs. Based on the inaccurate filing, title was transferred to Ms. Vandevort’s name and she refinanced the property.
When Ms. Vandervort’s sister became upset about not getting payments on her agreed-upon $25,000, she initiated a full probate proceeding and sought to set aside the Affidavit insisting that it was inaccurate and in fact fraudulent. The holder of the note signed by Ms. Vandervort objected, arguing that the proceeding had appeared valid, and that any misrepresentation or fraud had been committed by others; the lender claimed not to have been aware of any flaws in the simplified proceeding.
The trial court invalidated the Affidavit but agreed that the lender’s claim should be enforceable at least to the extent of the original loan amount. That left the lender out of luck as to the rest of the refinancing.
The Court of Appeals reversed, ruling that the full loan was valid and affirming the Affidavit of Succession as against innocent third parties. The proceeding was fraudulent (because Ms. Vandervort swore to an inaccurate statement about the estate’s heirs), according to the appellate court. The property should be drawn back into the estate and handled appropriately. But because the lender was not involved in the misrepresentations, the full amount of the loan should be a valid encumbrance against the property now to be held as part of the estate. Beck v. Deem, January 14, 2010.
Five years ago the Arizona Legislature adopted an interesting new law. Modeled on a similar law in Missouri, the “beneficiary deed” statute permitted property owners to designate who would receive their property on death—much like a “payable on death” bank account. Now the state legislature has revisited beneficiary deeds, and made them even more flexible and useful.
One unanswered problem arose a handful of times under the previous law. What would happen if a person named to receive property by a beneficiary deed died before the original property owner? If, for example, a parent signed a beneficiary deed to “my two children, John and Mary,” and Mary died before the parent leaving children of her own, did that mean that her children would receive her share, or that son John would own the entire property on the parent’s death?
Effective this fall (the date is not yet set and won’t be known until the legislature adjourns) beneficiary deeds can solve that problem. Under a law signed by Governor Napolitano on March 24, 2006, all new beneficiary deeds must include a paragraph indicating which of two choices the owner prefers. The language required by the new law:
If a grantee beneficiary predeceases the owner, the conveyance to that grantee beneficiary shall either (choose one):
[] Become null and void.
[] Become part of the estate of the grantee beneficiary.
There are still a number of important issues to remember in the use of beneficiary deeds, and it will not be appropriate in every case to use this approach to transfer property. With some of the following limitations in mind, however, it may be that the beneficiary deed is a simple, inexpensive and useful method to avoid probate, especially in small estates. Among the remaining limitations for beneficiary deeds:
They are not available in every state. As of this writing, only Arizona, Arkansas, Colorado, Kansas, Missouri, Nevada, New Mexico and Ohio permit the use of beneficiary deeds.
An individual using a beneficiary deed will need to coordinate his or her estate plan as to multiple assets—it may, for instance, be necessary to keep track of beneficiary designations on multiple properties, several bank accounts, and a number of insurance policies and brokerage accounts. Anyone with more than a handful of assets should probably consider a living trust instead.
A beneficiary deed can be changed by a surviving owner, so in the case of a husband and wife (for example), the final distribution is not set until the second death.
The beneficiary deed provides no estate tax planning benefits for larger estates.
And what about individuals who signed an Arizona beneficiary deed before the new law was passed? Nothing in the law requires them to change their deeds, but they would be well-advised to consider updating the language to clarify what would happen if a beneficiary died before them. For those who might sign a beneficiary deed between now and the effective date, the best approach is less clear. Both the existing law and the new version require that beneficiary deeds be “substantially in the following form”—and then the form changes. Our advice: if you plan on signing an Arizona beneficiary deed in the next few months, expect to sign an updated version this fall.
Kathryn Gordon’s will named her sister, Nancy Molet, to handle her estate. Based on that will Ms. Molet was appointed as personal representative. Like most individuals in such circumstances, Ms. Molet hired an attorney to help her get through the probate process.
Eventually Phoenix attorney Harvey Finks billed the estate $25,710 for his representation of Ms. Molet. She, in turn, billed the estate $10,885.50 for her work as personal representative.
The ultimate beneficiaries of Ms. Gordon’s estate were her daughter June Pierce and Ms. Pierce’s five children. The beneficiaries objected to the size of the legal fees and the Ms. Molet’s fee, and they filed a formal objection with the court.
Attorney Finks pointed out to Ms. Molet that he would likely be called as a witness during the trial on his fees, and so she retained another attorney—Phoenix lawyer Paul Blunt—to represent her for the fee dispute.
Eventually Ms. Molet, Mr. Finks and the estate beneficiaries agreed that it made sense to submit the dispute to binding arbitration. In that type of proceeding, both sides would make abbreviated arguments and put on their cases more informally. They both agreed to be bound by the arbitrator’s decision.
The arbitrator approved most—but not all—of the requested fees. He reduced Mr. Finks’ fee by $2,510 to $23,200, and he lowered Ms. Molet’s fee by almost $5,000, to $6150. Then Ms. Molet submitted Mr. Blunt’s fees for payment by the estate, arguing that she had hired him in her capacity as personal representative.
The Phoenix probate judge decided that Ms. Molet would have to pay her own attorney’s fees. Judge Jane Bayham-Lesselyong decided that “it would be inappropriate” for the estate to pay the cost of defending the fees themselves.
The Arizona Court of Appeals disagreed. In the appellate court’s view, the question was really only whether Ms. Molet acted in good faith when she hired counsel to defend her fees. The heirs argued that Mr. Blunt’s representation benefited only Ms. Molet and not the estate. The appellate court agreed that it is relevant to consider whether the estate or the heirs received any benefit from the representation, but decided that the inquiry should be made as a part of the determination of whether Ms. Molet acted in good faith. Estate of Gordon, March 30, 2004.
The reported decision does not indicate how much the estate paid in legal fees and costs to defend Ms. Molet and Mr. Finks. It seems likely, however, that it was more than the reduction in the original fees ordered by the arbitrator.
Arizona is one of nine “community property” states in the country, and that can be the source of some confusion about estate planning, taxes and property ownership rights for married couples. Recent changes in Arizona’s law make the “community property” designation a little more friendly and understandable, and the benefits to this unique property ownership choice are now clearer.
“Community property” concepts were not part of the English common law. Under the system imported to most of the American states, property was owned by one spouse or the other, though the non-owner might acquire some rights in his or her spouse’s property. The French and Spanish, however, understood the marital community to be a separate entity from either spouse individually, and permitted the “community” to own property. Each spouse then holds an equal interest in the community’s property.
Those American states with rich Spanish or French histories tended to adopt some version of the community property concept. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are community property states, although the method of implementing the concept varies somewhat. Alaska also permits some trust assets to be held as community property.
In community property states a married couple is presumed to hold assets as community property regardless of the actual title on the asset. Couples may, however, choose to hold their property in joint tenancy or as tenants in common if they wish.
One important advantage to having assets titled as community property comes, oddly enough, from federal tax law. Although capital gains taxes are ordinarily due any time an appreciated asset is sold, the increased value of property held by a decedent at the time of death is not taxed. The property’s income tax “basis” is said to “step up” to its value on the date of the owner’s death, often resulting in substantial income tax savings for heirs.
Jointly owned property only receives a partial “step up” in basis. Property held in joint tenancy will usually only get half the income tax benefit on the death of one joint owner. Community property, however, is treated differently: the entire value of a community property asset gets “stepped up” to the value on the first spouse’s death, resulting in twice the income tax savings.
The main drawback to holding community property in Arizona has long been the requirement of a probate proceeding to pass the property to the surviving spouse. Although the long-term tax savings can be substantial, the probate costs are immediate and, in most people’s minds, too high. Since 1995 Arizona has permitted married couples the best of both worlds: property can be held as “community property with right of survivorship” and secure the favorable income tax treatment while still avoiding the probate process. The value of this type of property ownership is, of course, restricted to married couples.
One caveat: some commentators, relying on fairly arcane interpretations of the federal tax law, argue that the “community property with right of survivorship” designation could conceivably be found to result in no step up in tax basis at all. So far the federal government has not taken such a position, but there remains some slight possibility of a problem. In addition, the effect of titling separate property as community property (with or without the “right of survivorship” language) has more than just tax effects. In other words, you should consult an Arizona attorney before changing title on your existing assets or deciding how to title a new acquisition.
