Posts Tagged ‘community property’

Husband’s Interest in Trust Not Divided in Divorce Proceedings

AUGUST 22, 2016 VOLUME 23 NUMBER 31
Carl and Debbie (not their real names) were married, and have two children together. After more than a decade together, Carl filed for a divorce in their home state of Massachusetts.

In the course of the divorce action, the court was required to divide Carl and Debbie’s assets equitably. But what would that mean for the trust established for Carl by his father back in the early years of the couple’s marriage?

Carl’s father had set up the trust to make distributions to Carl, his two siblings, his children, nieces and nephews. Debbie was not named as a beneficiary of the trust, and distributions could not be made to her. Over a two-year period just before the marriage ended, Carl had received over $800,000 in distributions from the trust. At the time of the divorce trial, the trust was valued at almost $25 million; Carl was one of eleven potential beneficiaries of the trust.

The divorce court had to figure out what to do about the trust. Noting that it provided for payments for Carl’s “comfortable support, health, maintenance, welfare and education,” the divorce judge decided that Debbie should be entitled to a share of the trust.

Calculating that Carl’s one-eleventh interest in the trust would be about $2.2 million, the divorce judge assigned 60% of that figure to Debbie. Carl appealed; the Massachusetts Court of Appeals affirmed the divorce judge’s determination. Carl appealed again, this time to the Massachusetts Supreme Court.

The state’s high court disagreed, and reversed the award of an interest in the trust to Debbie. Part of the reason for the reversal: the trust included a spendthrift provision, which should prohibit any claim by third persons against Carl’s interest. The justices also noted that Carl was not one of the trustees of the trust (his brother and one of his father’s lawyers were trustees), that Carl’s interest was not a separate share of the trust (it provided that distributions could be unequal and, in fact, no distributions had yet been made to or for second-generation beneficiaries), and that no distributions had been made to Carl since the divorce petition was filed (though distributions had continued to his two siblings).

Because of the exact nature of the trust, the Massachusetts Supreme Judicial Court ruled that Carl’s interest in the trust was not available to be assigned to his wife in the divorce proceedings. The court did note, however, that when the divorce judge reconsiders the division of property, she might want to assign more of the couple’s assets to Debbie because of Carl’s potential benefits flowing from the trust. Pfannenstiehl v. Pfannenstiehl, August 4, 2016.

Many of our clients are concerned about the scenario in Carl and Debbie’s situation — but from the other side of the equation. If you want to leave some of your property to your child, but worry about the possibility of divorce or other marital problems, what can (or should) you do?

Arizona, of course, is a community property state. That means that everything a married couple acquires during the marriage is presumed to belong equally to both spouses. One huge exception to that general rule: gifts and inheritances.

If you give or leave money to your married daughter in Arizona, it is not community property. It remains her separate property — unless, of course, she converts it to community property by putting her spouse’s name on the title (that’s not the only way to convert it into community property, but it’s the most common one).

What about leaving property to your daughter in a trust? That should help protect it even better against her spouse — and her other creditors. It’s hard to explain the original divorce judge in Carl and Debbie’s case, or the Court of Appeals decision that upheld it, but the final outcome should clearly be the one adopted by the high court in Massachusetts. A trust for your daughter should not figure in her later divorce — though it is possible to imagine that her divorce court judge might award slightly more of the couple’s property to her spouse if she has ready access to a substantial trust account.

Does it make any difference who is named as trustee of your daughter’s trust? The court in Carl and Debbie’s case thought it was worth noting that Carl was not the trustee of his own trust, but the outcome should not have been different if he had been. A trustee has a duty to all of the potential beneficiaries, and therefore can’t just act in their own interest. That means that even if Carl had been trustee (or co-trustee) of the trust established by his father, his access to the trust’s principal would have been limited.

Would it make a difference if there were other compelling financial concerns involved? It should not, and in that regard it might be worth noting that Debbie’s earning potential was found to be substantially less than Carl’s, and that the couple’s daughter is a Down Syndrome child.

Should it matter whether a trust beneficiary has a history of relying on the trust? It probably does not — note that Carl and Debbie more than doubled their earnings in the years in which the trust made distributions.

Are you concerned by the possibility that an inheritance you leave to your child might become an element in a future divorce proceeding? Talk to your estate planning attorney about your options, and don’t be surprised if you find yourself discussing a trust arrangement.

Does Your Personal Property Belong to Your Living Trust?

JULY 21, 2014 VOLUME 21 NUMBER 26

When you create a revocable living trust, you usually want to transfer most (maybe even all) of your assets to the trust — especially if one of the reasons for creating the trust is to avoid the probate process. A new deed to your home, a change in titling of your brokerage and bank accounts, perhaps even a new title for your car or cars are often part of the process. But what about your household possessions — furniture, art hanging on the wall, your priceless collection of antique tape dispensers, your stamp and coin collections?

Commonly (but not always) people who establish a living trust might also sign a document purporting to transfer all of their personal property to the trust. Usually this is not much of an issue, since there are no title documents for most of your personal effects, and your intended beneficiaries can just collect, disperse and/or sell the contents of your house.

But another purpose in executing a living trust is usually to reduce the possibilities for disputes among your family members. Your trust, after all, should include a comprehensive approach to your plans for distributing assets on your death. Even a well-drafted trust document, though, will not resolve all family disagreements.

Consider Cliff Cruz (not his real name). Cliff and his first wife had four children, all grown. After Cliff’s wife died in 2003, he moved to Arizona to be near some of his children — and here he met and married Geraldine.

Cliff and Geraldine took steps to arrange their estate plans. The signed a revocable living trust agreement, providing that on the death of either spouse the trust would be divided into two shares — one belonging outright to the surviving spouse, and one held in trust for the benefit of the surviving spouse but ultimately distributed to the deceased spouse’s children. They explicitly agreed that everything they owned, even those things they each brought into the marriage, would be treated as community property — which meant that each of them would henceforth own a one-half interest in all of their combined assets.

The couple also signed “pourover” wills, each leaving everything they owned to the trust upon death. They signed a deed transferring their home to the trust, along with transfer documents for all their other assets. Just to be thorough, they also signed a document which said that all of their personal property — household effects, furniture, contents of their home, and anything else — also belonged to the trust.

Cliff died three years later. Five days after his death, two of his children went to the couple’s home and removed four safes, all of Cliff’s gun collection and various other items, and took them to their homes. They argued that Cliff had given his children the contents of the safes and the guns during his life — before he even met Geraldine. In the safes: almost $400,000 worth of gold and silver coins.

Geraldine sued, arguing that her step-children had essentially stolen assets belonging to her as trustee and intended to form part of the trust for her benefit. The children responded claiming the prior gift, and arguing that the trust should be modified to reflect their right to the gold coins and guns. After months of legal maneuvering, the case was tried before a jury. Geraldine pointed to the documents and testified that she understood that Cliff had transferred everything to the trust; the children testified that Cliff had purchased all of those items as investments for the children, and had given them to his children (but held on to them for safekeeping) many years before his death.

If you were on the jury, do you know what you would have decided? Before you read on, stop a moment and see if you can make up your mind, or whether you need more information. If you need more information, what do you want to know?

After a three-day trial, the jury returned a verdict that two of Cliff’s four children had, indeed, taken property belonging to Geraldine and the trust. They entered a dollar verdict, rather than ordering return of the items; they therefore did not identify which items they believed were wrongfully taken. But the dollar amount of the judgment, just $15,000, made it hard to figure out what they thought belonged to the trust.

Geraldine appealed, arguing that the judgment made no sense. If the jury believed that trust property was taken by the children, she argued, then the judgment should have been more like $400,000.

The Arizona Court of Appeals disagreed. First, the appellate court noted, if there is any theory on which the jury’s verdict can be upheld, it will normally be confirmed. In this case, the fact that Cliff gave his children the combinations to the safes might have been sufficient proof of his “constructive” delivery of the coins and safe contents to the children prior to his marriage, even though he kept the safes themselves at his home. In that case, the jury verdict would make sense — and so it was affirmed. Covino v. Forrest, July 3, 2014.

What does Cliff’s estate plan tell us about good practice in other cases? For one thing, if you think you have given property to your children — or anyone else — during your life, you should make that clear. That is especially important if you still have some of the gifts in your possession. Especially in second-marriage cases, it would be really helpful if families talked about ownership and expectations early, before the death of a parent simultaneously raises the emotional level and removes an opportunity to simply ask for clarification. And, finally, just signing an assignment of personal property to your trust might not be enough, depending on your individual and family situation — you might be better served by sitting down and writing out your intentions and understanding.

Joint Tenancy with Right of Survivorship, or Community Property?

MARCH 24, 2014 VOLUME 21 NUMBER 12

Which is better? How should we take title to our house? How about our brokerage account?

These questions are really common in our practice. The answer is actually pretty straightforward, but we do need to lay a little groundwork.

Arizona is a community property state. That means that property held by a husband and/or wife is presumed to belong to them as a community. That presumption does not apply if the property existed before the marriage, or was received by a gift or inheritance. There are special rules for property you owned in a non-community property state before you moved here. It’s also possible for a married couple to enter into an agreement that changes the nature of community property, but those agreements are relatively rare.

Historically, there was one great disadvantage to community property ownership, and one great advantage. That is, there was one advantage and one disadvantage if you assume that the couple would never get divorced. If you have substantial separate property and are considering turning it into jointly-held property, is that advisable? That question is beyond our short essay today, and the answer depends on your comfort level with your spouse and marriage. We’re not particularly accomplished marital counselors, and we don’t have any facts for your personal situation.

But assuming you and your spouse live together more-or-less-happily until  one of you dies, here are the competing considerations to holding property as community property:

Advantage: Income taxes. Upon the death of one spouse, property held as community property takes on a new “basis” for calculating future capital gains. If you have stock that you bought at $1,000 and that you now sell for $10,000 (congratulations!), you have “recognized” $9,000 of gain and will pay income taxes based on that amount. But if you held that property in joint tenancy with your late spouse, it got a step-up in basis to his or her date-of-death value; assuming the stock was worth $10,000 on that day, your income tax is only on $4,500 of the total gain. But if you had held that stock as community property with your late spouse, there would be no capital gains tax on the sale at all.

Disadvantage: Probate. Until 1995, community property could not pass automatically to the surviving spouse. That meant that a probate was often required to transfer the deceased spouse’s community property interest to the surviving spouse. Since no probate was required for property held in joint tenancy (the “right of survivorship” part of joint tenancy means the surviving joint tenant receives the property without having to go through the probate process), most married couples opted for joint tenancy rather than community property.

In 1995, the Arizona legislature made the disadvantage to community property disappear — they created a concept of “community property with right of survivorship.” That means a married couple can have it all: they can get the full stepped-up basis for income tax purposes, but avoid probate, on the first spouse’s death.

Does that mean that all property should be titled as community property with right of survivorship? Almost, but not quite. There are a handful of problems that occasionally crop up and have to be considered:

  • Not every married couple intends to leave everything to one another. You can still get the full stepped-up income tax basis and leave your share of community property to someone else — your children from a prior marriage, perhaps, or another family member. In such a case it might make sense to hold the property as “community property” (with no right of survivorship) but have a will or trust to make provisions for each spouse’s share.
  • The income tax benefit does not always appear. Note that the benefit is not a direct tax savings, but only a potential savings. If you get a full stepped-up basis on property that you then hold until your own death, you haven’t really saved any tax money. But the community property benefit just might give you flexibility — you can decide to sell property after your spouse’s death on the basis of good investment advice, rather than the tax effect.
  • The option only applies (this is obvious, but we need to say it) to married couples. “Community property” is not available to anyone else. Is it available to same-sex married couples? We think so (see our articles on the subject over the last few months here, here and here), but we might turn out to be wrong about this.
  • The benefit may not even be necessary for some assets. No growth in your brokerage account? No benefit. You invest only in municipal bonds and certificates of deposit? Minimal to no benefit. But here’s the big one: most people’s biggest growth asset is their home — and there’s already a substantial ($250,000) exemption from capital gains taxes for a single (widowed) person selling their home.
  • Have you already established a trust as part of your estate plan? You may not need to go through the analysis, since the practical effect of your plan may be the same as the benefit of community property with right of survivorship — or better. Ask your estate planning attorney to review this with you.
  • There are sometimes costs to making the change. For real estate, you will need someone to prepare a deed (you can probably get it right on your own, but it makes sense to hire a professional). In addition, there are modest costs to record the new deed.
  • This only applies to Arizona property. No problem with your brokerage or bank account — they are Arizona property if you live here. Your vacation cottage in Montana, or your Mexican condo held in a land trust, are a different matter. But if your vacation cottage is in Alaska, or California, Idaho, Nevada or Wisconsin, you might be able to do something similar. Ask a local lawyer about the possibility.
  • We need to reiterate: if you have separate property and transfer it to community property with right of survivorship to take advantage of income tax benefits, you may have made a gift of half of your separate property to your spouse. Be careful, and make sure you know what you’re doing.

What’s your bottom line? Should you change everything you own from joint tenancy with right of survivorship to community property with right of survivorship? Maybe, but your home is the least urgent thing to tackle. Your brokerage account? Absolutely. Your summer cottage in another state? Check with your lawyer and ask her (or him) to find out whether the other state has community property with right of survivorship.

Note that none of this really helps you deal with retirement accounts, IRAs, 401(k) accounts, separate property you brought from another state or your complex estate planning intentions. For those, you really need to talk with your lawyer. Also, please be clear: we do not know the correct answer if you live in a state other than Arizona — talk to your local lawyer about that.

 

This is Huge: Feds Publish New Rules on Gay Marriage

SEPTEMBER 2, 2013 VOLUME 20 NUMBER 33

Just a few weeks ago we wrote about some of the uncertainties facing legally married same-sex couples living in states (like Arizona) that refuse to recognize the validity of their marriages. If a legally-married couple moves to Arizona, we wondered, would their ability to receive some of the tax benefits available to married couples change just because their new state did not recognize or approve of their marriage? We suggested that same-sex couples ought to be aware of the problem, but assume that they should be able to enjoy the same benefits (and burdens, for that matter) available to their married heterosexual friends.

Well, the United States government weighed in on the subject this week, and the positions taken by two different federal agencies made it clear that a valid marriage is a valid marriage — at least in the federal government’s eyes. The result? Same-sex couples still need to pay extra attention to their estate planning choices, but their choices will be much more palatable.

On August 29, 2013, the Internal Revenue Service released Revenue Ruling 2013-17. Its bottom line: if you are legally married, even though your current state of domicile does not recognize it, you will be treated as married for all tax purposes. Period. Income tax, estate tax, gift tax — it makes no difference. You are married.

In our earlier newsletter we talked about a couple, married in Massachusetts, who had moved to Arizona. Could they file their federal income taxes as “married, filing jointly”? Could they list one another as beneficiary on their IRA or 401(k) accounts, relying on the ability of a spouse to roll those benefits over into a new IRA? Would they get the benefit of a full step-up in basis for income tax purposes, just like other married couples holding community property? It was not clear a week ago. Today it is clear. The answer in each case is “yes” — though perhaps a qualified “yes” in one or two of those cases.

Why a qualified yes? Mostly because community property titling is a special case. Yes, there are federal income tax benefits for married couples titling their assets as community property — but the availability of that option is governed by state property law. Arizona is one of the handful of states recognizing community property designations at all, and it limits the option to couples it thinks are married. If a same-sex couple, legally married in another state, attempts to title, say, real estate as community property (or community property with right of survivorship), will Arizona recognize that title?

We are not sure, and so suggest that the safe approach is to create a trust (probably a joint, revocable trust), provide that all the assets in the trust are held as community property, and title most assets to that trust. That does mean that same-sex couples will end up paying somewhat more for their estate planning than their married heterosexual friends — but they will get the same result at a relatively modest cost.

The other notable change on the federal level involves long-term care arrangements for Medicare recipients. It is far less expansive than the big IRA announcement, but reflects the same general approach: married same-sex couples are to be accorded the same benefits as married heterosexual couples, at least on the federal level.

An August 29, 2013, announcement from the Department of Health and Human Services affects Medicare Advantage beneficiaries. It is not very far-reaching, but it is nonetheless important. In cases where one spouse is already admitted to a skilled nursing facility (what most of us call a “nursing home”), when the second spouse requires placement he or she must be permitted to choose the same facility. In other words, Medicare Advantage plans must have rules supporting spouses’ ability to stay together. And those policies must apply to same-sex married couples, too — even if their marriages are not recognized in the state where they live.

Why is this modest change important? Because, like the IRS declaration, it indicates that the federal government will be extending protections to validly married same-sex couples regardless of their state of residence.

Legal rights and responsibilities are evolving quickly for same-sex marriage. The first few states permitting same-sex marriages debated whether to even permit out-0f-state couples to marry. In the next wave of legal developments, it seemed clear that couples living in Arizona probably would not benefit from traveling to, say, Canada or Iowa to get married, only to return to Arizona and have their marriages all but invalidated. This week’s announcements make it clear that a committed same-sex couple should seriously consider whether they want to get married in a friendlier jurisdiction, even if they intend to return to Arizona to live.

The federal pronouncements also make it that much more difficult for states like Arizona to continue to resist the pressure to change. If a legally married same-sex couple, living in Arizona, wants to get divorced, do they have access to the Arizona court system? The current legal thinking in Arizona is that they might be able to seek annulment of their marriage (which, in Arizona’s legal view, never validly existed), but not a divorce (or dissolution).

Consider, for instance, the dilemma facing Phoenix-area resident Anne Armstrong (not her real name) earlier this year. She and her partner Roberta Reynolds had been married in California, but Anne wished to end the marriage. She filed a petition for annulment of the marriage in the Arizona Superior Court in Phoenix. Roberta did not respond, but the Judge Eartha K. Washington nonetheless refused to annul the marriage. Because same-sex marriages are invalid in Arizona, ruled the judge, there was nothing she could do to help Anne end her California marriage.

The Arizona Court of Appeals reversed that decision and sent the case back to the judge for further proceedings to annul the marriage and divide the couple’s property. Atwood v. Riviotta, May 16, 2013. While Anne’s legal problems were addressed, the decision left two huge issues unresolved: (1) what about same-sex married couples who don’t want to end their marriages, and (2) why should the legal process for ending same-sex marriages be different in the first place? Furthermore, the Court of Appeals resolution was by an unpublished decision, meaning it could not even be cited as precedent for other, similar cases as they arise.

What about resolution of child custody issues, or property divisions? What about bigamy laws, or other societal norms affecting married couples? If a couple is permitted to file income tax returns as married under federal law, why should it be different for state income tax returns? The pressure on Arizona (and other resistant states) is intense: it is time for our legal system to deal with changes sweeping across the country, and the federal government’s pronouncements this week will add to that pressure.

Simple Estate Planning for a Married Couple

AUGUST 12, 2013 VOLUME 20 NUMBER 30

Last week we saw a married couple in our office. The couple had come to us for estate planning. They did not have children with disabilities, or spendthrift sons-in-law or daughters-in-law. Their assets were not unusual (some Arizona real estate, a brokerage account, several bank accounts). Their net worth was well under the $5.25 million that would have made us want to talk about federal estate tax issues. They intend to leave their estates to one another and, on the second death, to relatives and a few charities. In short, they were a pretty typical couple.

This couple already held everything they owned as “joint tenants with right of survivorship.” That, of course, means that on the death of the first partner, the survivor would receive everything without having to go through the probate process. Ordinarily we would have told them that they ought to have fairly simple wills and Arizona powers of attorney. We would have suggested that they transfer all their real estate and brokerage assets into “community property with right of survivorship.” That’s a slight improvement on joint tenancy because on the first death the survivor gets a stepped-up income tax basis on the entire value of assets held as community property. It is an option that is only available to married couples, and it’s usually worth considering.

Though our couple was married, they did have one legal issue that complicates their estate planning. They are both of the same gender. They got married in another state, where same-sex marriages are recognized, and then retired to Arizona. They are looking forward to enjoying the sunshine, outdoor recreation opportunities, and casual lifestyle of The Grand Canyon State. Though Arizona was once known as The Valentine State (do you know why?), our state Constitution expressly invalidates this couple’s marriage.

Or does it? They have arrived in Arizona at a time of legal ferment. The U.S. Supreme Court has invalidated a federal ban on same-sex marriages; is invalidation of Arizona’s ban (and those in place in dozens of other states) far behind? And, more importantly for our couple, what are legally married gay couples supposed to do in the meantime?

Reasonable minds can differ on what our couple should do. In fact, we are fond of saying that if you get ten lawyers in a room and discuss legal issues, you will get at least twenty firmly-held, well-reasoned opinions. But here is what we discussed with our clients:

  • Consider creating a joint revocable trust. Declare in the trust that everything you own is community property, and file any future tax returns on that assumption. The worst that could happen would be that the IRS ultimately disagrees, and then you are back where you would be if you did nothing of the sort. BUT note that the establishment and funding of a trust is more expensive (by, perhaps, a factor of three or four), and opposite-sex married couples don’t have to go through this kind of silliness.
  • At least create reciprocal wills, and guard them more carefully than opposite-sex couples need to. If a couple whose marriage is recognized in Arizona never get around to making a will, or misplace their wills, it is likely that the default rules will follow what they wrote in their wills. If the marriage is not recognized, though, a missing will could mean biological family members of the deceased spouse take in preference over the surviving spouse — or at least that litigation is required to establish the validity of the out-of-Arizona marriage.
  • Critically important for gay couples, married or not, is signing of a document directing funeral arrangements and disposition of remains. Time and again we have seen same-sex partners shut out of funeral and burial arrangements, even by family members who professed affection for the surviving partner in the hours before death. The advent of same-sex marriages might turn out to have eased that kind of pain, but it may be yet another opportunity for litigation, and at a time of high emotional fragility.
  • Go ahead and try putting real estate and brokerage accounts in “community property with right of survivorship.” Expect a little different experience between stockbrokers and the County Recorder; the former is probably used to same-sex community property declarations, and the latter probably thinks it has a responsibility to uphold Arizona’s misguided law. Do you want to be a little bit subversive and act as an agent for positive change, albeit a small change? Talk with us — we like both of those ideas.
  • Review and update your plans more often than other couples need to. We usually counsel that estate plans have about a five-year life, and we expect to actually see clients again in about 7-10 years. Same-sex married couples ought to shorten that to 3-5 years, as there will be changes AND we want to have recent documents in the ultimate time of need (that’s a not-very-disguised euphemism for “when you get sick or die”).

We were very chagrined to have to advise this delightful couple that Arizona is so unwelcoming. We really want to help them secure the benefits of their marriage in Arizona. We can accomplish almost everything that an opposite-sex married couple can get with their Arizona-recognized marriage, except for the (admittedly small) income-tax benefit of “community property with right of survivorship” titling. But we can’t really tell our couple that they have a moral or legal duty to carry the torch for change in this arena, because the reality is that the benefit is modest for most couples. That’s because:

  1. Your real estate may well appreciate during your life, but if the only real estate you own is your residence then you already get a significant income tax avoidance opportunity (up to $250,000 in gain) without regard to your marital status. Be careful about relying on this as your sole tax-avoidance technique, but for most people it means that they will not ever pay taxes on increases in their home’s value anyway.
  2. Although capital gains in your stock holdings do not have the same partial exclusion opportunity, it is still easy to avoid paying income tax on the increased value by simply not selling the stocks. That means that an “unmarried” couple like our clients would have lost flexibility, not cash — still a negative, but not with as obvious a dollar cost.

For our part, we are looking forward to a time (we hope that it is soon) when these kinds of distinctions are no longer necessary. Meanwhile, we wish the very best for all our clients who have retired to The Valentine State.

 

Divorce Case Includes Useful Pointers for Elder Law Attorneys

JANUARY 28, 2013 VOLUME 20 NUMBER 4
At Fleming & Curti, PLC, we don’t spend much time reading appellate decisions about divorce, property division and child support. That’s because we don’t practice family law, and there’s plenty to keep up with in our chosen realms of law. But a recent decision from the Arizona Court of Appeals caught our attention. Although it arises from a divorce case, it involves a number of issues we frequently deal with.

Carl Gregor filed for divorce from his wife Evelyn Gregor (not their real names) in 2005 in Phoenix. Carl had been disabled while working for the federal government, and received a monthly payment from the Federal Employees’ Compensation Act. Evelyn, a retired teacher, received a monthly state retirement check. The couple had an adult son, Aaron, who was disabled. The divorce proceeded through a trial and an appeal in 2009; the appellate court sent the matter back for further proceedings, and another set of hearings was held.

After the new trial and entry of an modified Decree of Dissolution, both Carl and Evelyn appealed. For good measure, Aaron appealed as well — he argued that his mother should have been ordered to pay support for him because he was disabled. The Court of Appeals reviewed the competing arguments and addressed three items of interest to elder law and estate planning lawyers:

Evelyn’s “buy-out” annuity was community property. In her last year of teaching, and just before the first divorce decree was entered, Evelyn’s school district had offered long-time teachers a “buy-out” arrangement. It’s purpose was to get teachers to retire early, and it amounted to a one-year annuity, at the teacher’s current salary, if Evelyn would agree to leave her post before she was required to retire. She took the deal.

But was her one-year annuity community property? If so, then Carl would be entitled to receive some portion of her payments, or some property of roughly equivalent value. If not, then she could keep those monthly payments without having to share.

The trial court determined that the buy-out arrangement was akin to a severance package, intended to compensate her for future earning. Consequently, the annuity was not divided in the divorce decree. The Court of Appeals disagreed, finding that the annuity was more like retirement benefits, albeit not from the state retirement system.

The fact that the buy-out payments were not to be made until after the divorce was immaterial, ruled the appellate court. Carl was entitled to a credit in the divorce calculations for the payments Evelyn received. The precise calculation would need to be made by the trial judge, and so the Court of Appeals returned the matter for yet another evidentiary hearing to determine how to divide the payments.

Carl’s life insurance policies were at least partly community property. Carl held two whole-life insurance policies, on his own life. He testified that he had paid $40,000 in an initial payment on the policies, using an inheritance received from his mother’s estate (and, incidentally, that he had never told Evelyn about the inheritance or the policies while they were married). But he had made monthly premium payments of about $255 on the policies while the couple was married.

The trial judge ruled that Carl had produced enough evidence about the life insurance policies to overcome the presumption that they were community property, and awarded them to Carl alone. The Court of Appeals disagreed, and remanded this issue to the trial judge for another determination of the nature of the policies. Though they might not be entirely community property, ruled the appellate judges, some portion of the value of the policies belonged to the community and an equitable division needed to be made.

Aaron was not entitled to child support. Arizona law permits a divorce court to award support for an adult child if that child was severely disabled before reaching age 18. Carl sought an award of child support for the couple’s son Aaron, who lived with Carl. The trial judge denied the claim, finding that Aaron was currently disabled, but that there was insufficient evidence that he was severely disabled before his majority.

The Court of Appeals agreed with the trial judge on this one. Arizona law is clear, even though there is room for interpretation. The disability must be “severe,” and it must exist before the child reaches majority.

The evidence of disability produced for the trial court was really just a single letter from a doctor who had treated Aaron when he was 21. That letter said that his disability started when Aaron was 16, but it did not describe the severity of the disability during that time period.

There was also evidence that Aaron had gone to college, and lived on his own for at least some time. He had not applied for Social Security payments based on his alleged disability until after he turned 18. He lived with his father at the time of the divorce trial, but the appellate court noted that he was serving as his father’s caregiver. He had a driver’s license and took his father to appointments. He even drafted the pleadings in the divorce case for his father. Based on all the evidence before the trial court, the Court of Appeals agreed that no child support should be ordered. Gersten and Gersten v. Gersten, January 24, 2013.

Why are these divorce issues important to Arizona elder law attorneys? The characterization of life insurance and other less-common assets as community property or separate property can be important in estate planning as well as planning for long-term care needs. And we see a lot of adult children with disabilities — it’s important to understand what might be required of the parents of a disabled adult child when they contemplate divorce.

Retirement Account Is Community Property But Need Not Be Split Equally

MAY 21, 2012 VOLUME 19 NUMBER 20
Arizona is one of the nine U.S. states which recognize “community property” (a tenth, Alaska, allows couples to voluntarily create community property interests). The other eight community property states: California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

Mention community property to a lawyer who has never studied or practiced in one of the community property states, and you are likely to see a twitch at the corner of his or her eyes. There is much mystique about how community property works, but it is actually pretty straightforward: all property acquired during the period of a marriage is presumed to be community property, and therefore belongs half to each spouse. In the event of divorce, the courts will probably unwind the community interest by dividing each asset in half — though it may be possible (depending on state law) to segregate assets so that roughly half the total value of community property goes to each spouse.

But of course the devil is in the details. There are lots of ways in which the simple statement of community property principles can get confusing.

The probate estate of Frank Kerns (not his real name) demonstrated one such confusion. Frank left a widow, a son from his first marriage, and an Individual Retirement Account (an IRA). He and his second wife had been married for several years, and at first he had named his wife as the sole beneficiary of his IRA. At some point, however, he changed the beneficiary designation on his IRA, naming his son as beneficiary as to 83% of the account, and his wife as beneficiary as to the other 17%. That was how the beneficiary designation read when he died.

Frank’s widow brought an action in probate court, arguing that community property rules made one-half of the IRA hers — and that Frank could not change the beneficiary designation as to “her” half. She asked the probate judge to order that she was the beneficiary of her half, and that the maximum amount Frank could leave to his son was the other 50%. The probate judge agreed.

The Arizona Court of Appeals did not agree with Frank’s widow. Or, rather, the appellate court did not agree with the conclusion of the argument. Frank’s son and widow agreed that the IRA was community property, but the Court of Appeals adopted Frank’s son’s interpretation of what that meant for the IRA.

Some community property states have adopted what is often called an “item” theory of community property. Under that analysis, one-half of each community property item belongs to each spouse, and if that theory applied to Frank his widow would be right. He would not have the power to name his son as beneficiary for anything more than what we might think of as “his” share of the IRA.

But the Court of Appeals decided that Arizona has embraced an alternate approach, generally referred to as the “aggregate” theory of community property. Under that analysis, Frank owned one-half of all the couple’s assets taken together — but so long as his widow received at least one-half of the aggregate community assets, she could not complain about what he had done with “his” half of the aggregation. Since Frank’s widow may have received some other assets (perhaps by beneficiary designation, or payable-on-death titling), the appellate court remanded the case back to the probate judge for a determination of whether “her” share of the couple’s assets had been properly protected.

Frank’s widow also argued that IRA and other retirement accounts should receive special treatment. Retirement funds, she insisted, are intended to provide for the care of the beneficiary and his or her spouse — and it should not be permissible to direct them to children or others except in unusual circumstances. The Court of Appeals was not persuaded, holding that all assets left to a spouse are intended to help provide for the spouse. In re the Estate of Kirkes, March 8, 2012.

So is community property really hard to understand, or are the principles difficult to apply? Not really. States where community property principles are not relevant also have complications and exceptions. But the basic rules are clear in both kinds of states: in community property states, property acquired during the marriage is generally presumed to be community property unless it was acquired by gift or inheritance. Property owned before the marriage generally remains separate property of the spouse who brought it into the marriage — unless he or she does something to convert it into community property. And then there are those details.

Tax Identification Numbers for Trusts After Death of Spouse

MARCH 26, 2012 VOLUME 19 NUMBER 12
Here at Fleming & Curti, PLC, we keep tabs on what brings people to our website. We look at referring pages, at search terms and at a variety of other items. We are intrigued by what persistently tops the search-engine list. The most common search? It’s some variation of: “do I need a new tax ID number for my living trust?” (For those keeping score, the second-most-common question seems to be “can I leave my IRA to a living trust?“)

Why the enduring interest? Because the question is so much less complicated than people think it is. There is a surprising paucity of clear information about when you need to have a new tax ID number (an EIN, if you want to use the correct acronym). And much of the information out there is contradictory.

We have written about the question several times before. In 2009 we asked and answered the question: “Do you need a new tax ID number for your living trust?” Just last year we reviewed the question, along with some other reader questions, and provided a little more detail on when your trust needs an EIN. Since those two explanations the rules haven’t really changed — but your questions have gotten a little bit more sophisticated.

Several of those questions deal with the same basic scenario: what happens when a husband and wife have a joint trust, using one spouse’s Social Security number, and then that spouse dies? The answer will depend on what the trust provides.

First, a word about joint trusts for spouses: they are common in community property states (like Arizona), not as common in those states where community property principles do not apply. Remember, please, that we are Arizona lawyers, and so we write here about Arizona rules. Attorneys from other states are more than free to add their comments; we will post them as we receive them — but we are not vouching for the accuracy of their advice in states other than Arizona.

Let’s set up a scenario, drawn from our common experience: Husband and wife created a joint revocable trust, and their bank accounts, brokerage accounts, insurance — all of their assets, in fact — listed the husband’s Social Security number. They could do that because, as with a joint account outside of a trust, tax rules allow one owner’s identifying number to be used rather than having to use all owners’ numbers. But now the husband has died. What should the (surviving) wife do about the TIN (Taxpayer Identification Number)?

Before we answer, we need to know what happens to the trust on the death of the first spouse. Let’s assume, for a moment, that it remains in one trust, that the wife now has the power to amend or revoke it in its entirety, and that she is the sole trustee. In that case, the direction is easy: tell the bank, the brokerage house and the insurance company to change the name of the trustee from the couple to the wife, and to change the TIN to the wife’s Social Security number. How do you do that? Send them a death certificate and a letter instructing them to make the changes. Assume, incidentally, that they won’t — it will often take you two or three tries, several phone calls, and some wheedling to get the task done. But that’s what should happen.

What if the wife is not the sole trustee? Let’s say, for a moment, that the oldest daughter now becomes co-trustee with her mother, but that the trust remains revocable and amendable by the wife. In that situation, we have the same answer: switch to the wife’s Social Security number.

What if the wife has the power to revoke or amend the trust, but she is now incapacitated? The oldest daughter is the sole trustee, and isn’t sure what to tell the financial institutions. The answer is still the same: the trust is still revocable (even though there may be no practical way to revoke it if the only person with power to do so is incapacitated), and the wife’s Social Security number is the trust’s TIN (expect to have an argument with the financial institutions over this one). Is a bank trust department the successor trustee instead? Same answer — but with the ironic twist that the argument between trustee and financial institution will now occur between two branches of the same organization.

Sometimes a joint revocable trust becomes irrevocable on the death of one spouse. More commonly it splits into two (or sometimes three) portions, one (or two) of which are irrevocable. What happens then? The answer, as you might expect, is a little bit more complicated — and may not be the same in every case.

Generally speaking, an irrevocable trust that does not contain the assets originally belonging to the beneficiary is likely to need its own EIN. That may mean that one (sometimes two) of the trusts resulting from the death of one spouse needs a new EIN, and one just uses the surviving spouse’s Social Security number.

Let’s use a specific example: in our earlier scenario, after the death of the husband the joint revocable trust splits into a “Decedent’s” (sometimes “bypass”) share and a “Survivor’s” share. The Decedent’s Trust is irrevocable. Wife is the trustee, and she is entitled to all the income from the trust. She may even have the ability to distribute trust principal to herself, or to decide how the Trust is divided among the couple’s children at her death. But this trust is not  “grantor” trust — it gets taxed as a separate entity. Hence, it needs its own EIN, and it files its own tax returns.

Mechanically, the process of dividing the trust is a little more complicated than in our earlier scenario. An estate tax return may be required (although it may not). A division of trust assets needs to be completed (the assistance of a competent lawyer and a good accountant is essential here). The share to be assigned to the Decedent’s Trust needs to be identified, and then physically transferred into a new account — often titled something like “The Jones Family Trust — Decedent’s Trust” (yeah, we know — your name isn’t Jones. Stick with us anyway). And that new account needs to use the Decedent’s Trust’s new EIN.

Note that we said that the assets need to be transferred into the new account. Most financial institutions will insist on opening a new account, with a new account number, rather than simply changing the name on an existing account. But when the process is completed — however you and the financial institution get there — the Decedent’s Trust should be physically separated from the Survivor’s Trust, it will have its own EIN, and it will need to file tax returns. Note: it probably will not pay any tax as a separate entity — all its income will  probably be imputed to the surviving spouse.

Meanwhile, the remaining trust assets in our example will continue to use the wife’s Social Security number. It may not be crucial to change the name on that account to “The Jones Family Trust — Survivor’s Trust” (those Joneses — they end up will all the money anyway). If you long for clarity, we would certainly support a transfer of the Surivor’s Trust share into a new account, titled as part of that sub-trust, and bearing the wife’s Social Security number — even if it is not required.

Recall, please, that there are lots of variations on this basic scenario. Be careful about generalizing from this information to your precise circumstances. Our goal here is to give you some general notions about what needs to be done — we do not think of ourselves as a substitute for good, personalized legal advice. We think, in fact, that you should get some of that, because your situation might well be more complicated than you think it is. But we hope we’ve given you some idea of what your attorney will be asking you, and what he or she is likely to tell you.

We Take a Stab at Some Of Our Common Legal Questions

FEBRUARY 21, 2011 VOLUME 18 NUMBER 6
We get asked plenty of general legal questions. We try to give helpful answers, recognizing that we can not give specific legal advice to non-clients (and particularly to questioners from outside Arizona, where we are licensed to practice law). Often our best answer is “check with a local lawyer familiar with the appropriate area of law.” Unsatisfying, but it really is the right answer in many cases.

Still, we want to get general legal concepts out to the public. Why? Because we think it makes non-lawyers recognize when the legal problem they face is too complex for self-help, and it even helps make the questioner a better client when they do get to the lawyer’s office.

What kind of legal questions can we answer? very general ones. Like these, which are some of our most common questions:

Does my living trust need a new tax ID number? The best way to answer this is probably to explain when a trust doesn’t need its own “Employer Identification Number” (EIN — even if the trust isn’t an “employer,” that’s the kind of tax ID number it will get).

General rule: every separate entity requires its own TIN, whether that is a Social Security number (for you) or an EIN (for your corporation, trust, LLC, or whatever). First major exception to the general rule: if your trust is revocable, and you are the trustee, for tax purposes it is not a separate entity at all — you don’t need an EIN and, in fact, you shouldn’t get one.

Now let’s make it a little more complicated. If your trust is irrevocable, or you are not the trustee, the rules are a little harder to parse. The key question is whether your trust is a “grantor” trust. If it is, and if there is only one grantor (or one married couple), then it does not need an EIN. If it is not, or if there are multiple grantors, it must have its own EIN.

Note that whether or not the trust needs (or is even permitted to get) an EIN is not the same question as whether it has to file a separate tax return. That one is more complicated, and we’ll save it for another day.

Can a revocable trust be named as beneficiary of an IRA? Yes, but be careful. This is something you should discuss with your attorney or your accountant (or both).

Before we talk about naming your trust as the beneficiary, we have a question for you: what are you trying to accomplish by naming the trust as beneficiary? If your trust divides equally and distributes outright among a fairly small number of beneficiaries upon your death, why not just name those beneficiaries on the IRA as well as in the trust? Then you don’t have to figure out the rules on naming a trust as beneficiary, and you don’t have to keep wondering if you’ve done it right.

Maybe you have a child who is ill, or a spendthrift, or needs to have his inheritance placed in trust. In that case — and in a few other cases — it can make sense to name your trust as beneficiary of your IRA. Now you need to become familiar with the difference between what lawyers usually call “conduit” trusts and “accumulation” trusts. The former require distribution of any money received from the IRA’s minimum distribution requirements each year, and the latter allow (but do not require) the IRA distributions to accumulate. The distinction is important; the accumulation trust will require distributions on the basis of the oldest possible beneficiary of the trust. That is the result in most cases where a trust is named as beneficiary.

These same rules apply, by the way, for other tax-qualified accounts, like 401(k) and 403(b) plans. Some advisers will tell you it is not even permitted to name a trust as beneficiary of an IRA or qualified plan. They are wrong, but the rules are a little difficult to figure out in individual cases. Also, some account custodians (that is, the bank or financial institution where the money is held) may limit or even prohibit trusts as beneficiaries.

How does community property work in Arizona? Nine U.S. states are usually listed as the “community property” states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In addition, Puerto Rico recognizes community property, and Alaska allows couples to choose community property treatment of their joint assets.

But what does it mean to have property held as community property? In Arizona, it means that the property is jointly owned, that each spouse has an equal interest, and that either spouse has the right to manage the property on behalf of the community.

When one spouse dies, his (or her) half int0erest in the community property normally passes according to his will or, if he did not sign a will, to his children (including those who are also children of the surviving spouse). To avoid that result couples are permitted to specifically designate their property as “community property with right of survivorship.” If that title has been used, the surviving spouse receives the entire community asset on the first spouse’s death. Note that the different community property states treat the right of survivorship differently, and we are only describing Arizona’s approach here.

It is also possible for a portion of an asset to be subject to community rights. This might happen, for example, if one spouse brought the property into the marriage but mortgage payments were made during the period of marriage from community income or assets. This kind of calculation is usually much more important in divorce proceedings than upon the death of one spouse.

Property received by inheritance or gift, and property owned before the marriage, are not community property — they are the separate property of the recipient or owner. Couples can choose to convert their community property into separate property, and can even agree that property acquired in the future will be treated as separate property.

Thanks. But I have a different question to ask. Go ahead — pose your question as a comment here, and we’ll try to answer it. Don’t be too surprised if we tell you that it is too specific, or requires knowledge of another state’s laws, or we can’t answer it for some other reason. But we’ll try to be helpful.

One word of caution: do not give us a detailed fact pattern and ask us for advice. We simply can not provide individual legal advice — free or even for a fee — based on unsolicited e-mails or comments. You will not have any lawyer/client privilege for your recitation of the facts, and we will not be able to help with that kind of inquiry. We do welcome your general questions that give us a chance to explain legal principles, though.

Late-Life Marriage Leads To Property Dispute in Divorce

MARCH 15, 2010  VOLUME 17, NUMBER 9

Older individuals often get married, of course, and sometimes face legal issues as a result of separation or divorce. The legal problems associated with the end of a late-life marriage are not necessarily different from those faced by younger divorcing couples. A recent Arizona Court of Appeals decision addresses one difference that often occurs.

When Norman and Judy Flower married he was 76 and she was 55. She had a son from a former marriage, and each of them owned a home. Mr. Flower promptly transferred his home into joint ownership with his new wife; Mrs. Flower’s son was already on the title to her home, and she did not add Mr. Flower.

The couple lived together in Mr. Flower’s home for six months, while they fixed up Mrs. Flower’s residence. They took out a line of credit secured by Mr. Flower’s home and spent a total of at least $32,000 on Mrs. Flower’s home. They accumulated a total of $61,000 of debt during the marriage. After the work was done on Mrs. Flower’s home they moved into it, and her son moved into the jointly-owned home that had originally belonged to Mr. Flower.

A year after the marriage, Mr. Flower decided that his wife had been interested in him only for financial reasons and he filed a petition seeking an annulment. Mrs. Flower responded by asking for a divorce, and insisted that she was entitled to a half interest in what had been Mr. Flower’s home, all of her own (now improved) home, and no obligation to repay any of the costs of improvements to her home.

Arizona law, like that of many jurisdictions, assumes that the property division in a divorce proceeding will usually be roughly equal. The legal term, however, requires that it be “equitable,” and in rare cases that can mean something other than an equal division. The trial judge decided this was such a case.

Although the trial court denied Mr. Flower’s request for an annulment, it did grant the couple a divorce. The judge also returned Mr. Flower’s residence to him, although it required him to pay the majority of the debt the couple had accumulated. Mrs. Flower was awarded her home without any claim for the improvements made during the marriage, and she was ordered to pay $16,000 of the couple’s debts. Mrs. Flower appealed.

The Court of Appeals affirmed the unequal division of property and debts. Given the unusual facts of this case, ruled the appellate judges, the usual requirement of “substantially equal” division need not be applied. The appellate court noted that though Mr. Flower received his home, he was also required to pay most of the community’s debt incurred during a relatively brief marriage. Flower v. Flower, February 25, 2010.

Arizona, of course, is a “community property” state. Does that mean that the result in a state that did not apply community property rules would be different? Perhaps, but not necessarily. Most states apply some version of Arizona’s requirement that property division be “equitable” and assume that usually means “equal.” While Mr. and Mrs. Flowers did initially transfer his residence into “community property with right of survivorship,” the result in Arizona would not have been different if they had transferred it to “joint tenancy with right of survivorship.”

Is the result in the Flower case unusual based on unusual facts? Not really. The same day that the Arizona Court of Appeals decided the Flower property division issues, it also handled another, similar case. Retirees Carolyn and Lowell Inboden (the opinion does not give their ages) had married and purchased a vacant lot as joint tenants, but using $90,000 of Mrs. Inboden’s separate money from before the marriage. They then built a home on the lot, using $67,000 of her money, $46,500 of his, and a lot of sweat (they acted as their own general contractors).

When Mr. and Mrs. Inboden divorced a little less than two years after the marriage (and just a few months after the house was completed), the trial judge awarded her about three-quarters of the value of the home to reimburse her for her disproportionate contribution to its purchase and construction. The Court of Appeals reversed that result and returned it for further consideration.

In the case of the Inbodens’ property division, the appellate court was clear that the final result might well be an unequal division. The basis for any deviation, however, must be based on “equitable” principles, and not on a simple calculation to reimburse each spouse for their contribution of property that was previously separate. There is a presumption, difficult to overcome, that changes of title or transfers of assets are intended to be gifts, and those gifts can not be reversed if the marriage later falters. Inboden v. Inboden, February 25, 2010.

Why are these divorce issues “elder law” concerns? They are not, really — except that when older couples marry they are more likely to have property that they bring into the marriage, and less likely to have minor children. Consequently, if their later-in-life marriages fail they are perhaps more likely to present complicated property division issues and less likely to focus on child custody and support problems.

Of course, divorce is not the only venue for property division concerns. Even the popular press has begun to consider the possibility that later-in-life marriages might create property disputes between surviving spouses and children from prior marriages or relationships.

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