Posts Tagged ‘estate planning’

Top Ten Reasons to Skip the Living Trust and Sign a Will Instead

FEBRUARY 2, 2015 VOLUME 22 NUMBER 5

Last week we suggested some of the reasons why you might think about having a revocable living trust as part of your estate planning documents. This week we’ll try to turn it around, and give you ten reasons why you might prefer to have a will (“just” a will) instead.

Let us be clear about two important points before we begin. First, our views are not shared by all lawyers. Some — especially those practicing in states with famously simple probate procedures — are vigorously opposed to revocable living trusts. Arizona’s probate procedures are quite simple; they are much simpler, actually, than most people think they will be. We are not opposed to revocable living trust, though. We tend to think of the question as a cost/benefit analysis. The trust will almost always be a more efficient plan, but the initial costs may not be justifiable in your circumstances.

Which leads to our second point: the cost of establishing a revocable living trust will almost always be considerably higher than the cost of preparing a will instead. How much more costly will depend on your situation and will vary quite a lot from lawyer to lawyer, but the benefits of living trust need to outweigh those costs before you make the plunge.

With that background let’s see if we can come up with ten reasons to favor a will rather than a living trust:

  • 10.There’s some reason you really ought to subject your estate to the probate process. Probate in Arizona is much less formidable than people think, but most people still want to avoid it. But there are two good things that happen with probate: (1) court supervision of the management and distribution of your assets, which might actually be beneficial in some cases, and (2) clear resolution of any remaining claims against your estate. That last one is usually more important for professionals — if you are a doctor, or lawyer, or architect, it might be advantageous to intentionally require a probate of your estate to get protection against possible lingering malpractice actions, for instance.
  • 9. You really want to understand your estate planning documents. Trusts actually can be a little daunting to understand. We take pride in our ability to write legally sufficient provisions in something approximating the English language, but we know that even our documents can be hard to understand. That’s a bigger problem for trusts than for wills. We can overcome this problem, of course, but only if you want to participate.
  • 8. Your personal situation is completely stable. You say you’re widowed, and have just one completely child? And that your child is completely trustworthy, has already provided for her own children’s educations, and doesn’t need any help or support from you? Great. Your plan is likely to be very uncomplicated, and we probably can come up with a way to execute it without the cost or hassle of creating a trust. Of course, things change — let us know if your child’s situation changes or the simplicity of your personal and financial situations unravel.
  • 7. You love paper, and take good care of it. Do you have a notebook that includes recent statements from all of your accounts, together with your accountant’s, your financial planner’s, your attorney’s and all your doctors’ names and contact information. We love you. You might not need a trust because you’ve already done a lot of the organizational work for your family. Please keep that notebook up to date.
  • 6. You hate paper. Maybe you are the opposite of the person described above. You can’t even remember all of your bank and investment accounts, and have a big, unsorted pile of paper sitting on the floor next to the desk in your office. In that case, the creation of the trust — and the important task of transferring assets to it — might overwhelm you, and make the will a more attractive option. Of course, you are the person who would benefit most from the organizational structure of creating and funding a trust, but there’s no magical incantation we can attach to the trust to make it happen automatically.
  • 5.  You are thrifty. Do you think regular lawyer visits and the cost of estate planning are just too high? Do you suspect that all of this is just an attempt to get you to part with your hard-earned money? You might benefit from a trust, but you might also be anxious about whether you are being oversold. Even if a trust is a slightly better option, your desire to save the extra costs needs to be acknowledged.
  • 4. You have already completed beneficiary designations for everything. Great! You might well have worked around the value of a living trust, and at a much lower cost. Of course, you need to think about future changes. What happens if a named beneficiary dies? What about the possibility that you spend more from your bank savings than from your brokerage account in the next ten years? Or the reverse? What if there’s a new grandchild, or a marriage or divorce, in your family? Of course changes happen whether you have a will, a trust or beneficiary designations — but in the case of beneficiary designations, you might need to make changes to a dozen different accounts/assets. And you need to actually do it, promptly and completely. Beneficiary designations are a great alternative, but require your continued diligence.
  • 3. Your assets are uncomplicated. Maybe you have only a few different assets, and they are typical. You have a house, a single bank account, an IRA, a car and a single brokerage account? That’s pretty uncomplicated, and there might be other options (beneficiary designations, for instance). Oh, wait — you also have life insurance, and a half dozen government bonds? That starts getting a little more complicated. A small art collection? Three different banks? Hmmm.
  • 2. Your estate is worth less than $75,000. That’s a magic number in Arizona. That’s how much your beneficiaries can collect without having to do a probate proceeding. More good news: that figure is the amount subject to the probate process that you can transfer. In other words, if your house has a beneficiary designation, and your bank account has a POD (pay on death) entry, then your heirs can use the $75,000 rule to collect your car and that small credit union account. You might not need a trust to avoid probate.
  • 1. The odds of your estate plan “maturing” (that is, the odds of you dying) in the next, say, five years are very slight. If you are 25, married, and leaving everything to your spouse, most of the benefits of a living trust will only appear if the two of you die at about the same time. While that could happen, it’s not too likely. The additional cost of a living trust might not make any sense in your circumstances.

Does that help? We hope so. We do want to help demystify this decision.

Top Ten Reasons You Might Want a Trust, Rather Than Just a Will

JANUARY 26, 2015 VOLUME 22 NUMBER 4

Do you need a living trust? Even with an estate tax threshold of over $5 million (and double that, for most married couples)? That is the primary question posed by most of our estate planning clients.

For years the answer depended mostly on the size of your estate. Not that there were (or are now) any inherent estate tax benefits to having created a living trust, but it was easier to take advantage of the easy ways of minimizing taxes using a trust than otherwise. So most Arizona couples worth more than about $1 million were urged to establish a trust. Couples who hoped to be worth more than $1 million often took the step, too — on the chance that their assets might grow enough to create a possible estate tax liability.

Then the federal government started raising the tax level, ending up at $5 million and indexed for inflation (so that the threshold for 2015 is $5.43 million). They ultimately changed the rules for married couples, too, making it easier for a surviving spouse to use his or her deceased spouse’s exemption, effectively doubling the level at which estate taxes were a driving factor. The State of Arizona jumped into the act, too, by repealing its state estate tax altogether. That all means that for more than 99% of Arizona individuals (and couples), estate taxes are no longer an important reason to consider creating a trust.

Does that mean that no one needs a living trust any more? Not exactly.

First, let’s think about people who established a trust back when it was an important step — do they need to consider revoking their trusts now? No. There are almost no downsides to creating a trust, other than the cost and trouble of setting them up in the first instance. Even though it might be hard to justify setting up a trust now, the individual (or couple) who has already gone through that process should probably not undo their earlier work.

Should a person worth well less than $5 million ever create a trust? Yes — at least in some situations.

Let’s get right to the point: what are the top reasons you might want to create a trust? With thanks and a nod to our associate attorney Elizabeth N. Rollings, who created the original list, here are our offerings:

  • 10. You really, really hate the thought of probate. It’s not the monster you probably think it is, but that’s not to say it’s a lot of fun, or cost-free. We can try to persuade you that it’s not that important to avoid probate — or we can just help you avoid the process.
  • 9. You favor privacy. There’s not all that much public disclosure involved in the probate process, and most of what does need to be disclosed can just be shared with your heirs. But there are some things that get into the public record, like the text of your will and the names and addresses of the people to whom you have left money or property. Do you have unusual family dynamics, or a publicly recognizable name, business or assets? You might prefer to create a trust.
  • 8. You want to make it easier for your executor. We don’t actually use the term “executor” any more, but we know what you mean. It’s simply easier for a successor trustee to get control of your assets than it is for that same person when they are named as agent on a power of attorney. It’s also easier to arrange for an orderly transition as you are less able — from having your chosen administrator named as successor trustee to naming them as co-trustee, and dividing the job in a reasonable — and flexible — way.
  • 7. You have complicated assets. Most people don’t think their assets are complicated. “I just have Certificates of Deposit in the four Tucson banks that pay the highest interest rates,” you say. Oh, and then there are the government bonds. Plus a brokerage account at a national low-cost broker, and a rollover IRA. Did you remember to mention those almost-worthless oil and gas rights you just learned about from your grandfather’s estate? Complicated, complicated. Having a trust makes it much easier for someone to handle your assets for you — both after your death and while you are still alive but not functioning at the top of your game. Oh, and there may be income tax benefits to having your assets in the trust (though you — or your spouse — may have to die in order to get the tax benefits. So maybe we’ll soft-pedal those).
  • 6. You have complicated distribution plans. This one is related to the previous one, and — as with “complicated” assets — clients seldom think their plans are complicated. “I just want to leave everything equally to my three children,” you tell us. Oh, plus $10,000 to each grandchild, and a $100,000 gift to your church. Also, a list of personal property and who is to get it. And some thoughts about what should happen if, god forbid, one of your children should die before you. The more complicated your distribution scheme, the more you need to consider a trust. Why? Because your distribution will be more private, and it’s easier to adjust to changes in your future (should your church’s gift go up as your net worth expands, or down as you draw down your IRA?).
  • 5. You have real estate in more than one state. Probate, as we have said before, is not as difficult as you probably think. But if you have real estate in more than one state, we have to go through the process in each state. Some states are much more complicated and expensive than Arizona. So if you have your home in Arizona, a condo in California, a summer place in Wisconsin, and a timeshare in Virginia, you might want to think about a living trust. Even if you only have two of those, you might be a better candidate for a trust.
  • 4. You have professional children, or wealthy children. Your son is an architect, and your daughter is a physician. Why do they need their inheritances to be in trust? They don’t — but it’s an extra gift from you to put them in trust. You can help protect their inheritance from creditors, malpractice claims, even divorce proceedings. And you might be able to keep your assets out of their estates when they die, thereby reducing the amount of estate tax the grandchildren pay.
  • 3. You have minor children, or children (or grandchildren) under about age 25. Why 25? Recent research suggests that that’s about the age at which a child’s brain really matures, even though the legal system considers them mature at 18. Of course you get to choose the cut-off age, but we are urging people to think about 25-or-so for their planning. Even if your children are older, a share of your estate might go to grandchildren — and they could be younger than the cut-off age you choose.
  • 2. You have a family member who is just not good with money. Is your son (or, for that matter, his wife) a bit of a spendthrift? Is your youngest still trying “find” herself? You might want to provide some sort of management for that beneficiary’s share of your estate.
  • 1. You have a child or grandchild with a disability. Are they receiving public benefits like Supplemental Security Income (SSI) or Medicaid (in Arizona, AHCCCS)? You need to create a special needs trust for any share they will receive. Are they not on public benefits right now? You probably still want to consider a special needs trust, because you don’t know how things will change over time. The same rules apply for any person you plan to leave money to, including your long-time housekeeper’s son or the young woman who grew up with your kids and was treated like a member of the family. We just use “child or grandchild” because they are the most common recipients.

Any of those sound like you? Let’s talk about whether a living trust is the right choice. Oh, and if you don’t live in Arizona — talk to your own lawyer, who might rearrange the order, drop some of these points altogether, and add others.

Forgot to Make New Year’s Resolutions? We Can Help

JANUARY 5, 2015 VOLUME 22 NUMBER 1

First we’d like to apologize for not getting this to you last week. We know how hard you were working to prepare some good New Year’s Resolutions. You wanted some that you could actually count on satisfying, that would really be beneficial, and that would make you sound like a mature, responsible adult. We have some; feel free to adopt them now, and assure friends and family that you actually signed them before New Year’s Eve.

Time for “the conversation”

Have you talked about end-of-life treatment issues with your family yet? No? This would be a good time to do that. Any time would be a good time to do that.

We have previously suggested Thanksgiving as a possible day to plan on “the conversation.” That suggestion still holds — but really, any day (holiday or not) would be a good day.

You say you don’t need to broach this unpleasant topic, because your family knows what you want? You’re wrong. They don’t, unless you tell them. They might guess, but they will be guessing. Their guesses will probably be more conservative than your actual wishes unless you give them permission — by telling them what you want.

In fact, you can go further than giving them permission. You can (and should) give them instructions. Tell them what you want, and put it in writing. Sign a living will, a health care power of attorney, or both (“both” is the best approach here).

It’s actually not even enough to sign the advance directives — you still have to have “the conversation.” Why? Because you’re not only telling the person you designated as your agent, you’re also telling the rest of the family. You are telling them what you want, that you’ve really thought about it, and that you really did mean to name your agent as agent. You’re heading off family disputes and possible disharmony. Did we mention that if your family doesn’t know for sure what you want, the result is likely to be more aggressive treatment than what you’d probably choose?

Here’s a radical thought: during the conversation you might also want to listen. You might be surprised to find out that some of your family members have strong feelings themselves. They might be persuasive, or at least give you more to think about.

One anecdote from our cases: some years ago, we dealt with the family of a woman who had signed advance directives. She had named her Arizona daughter as agent. She had expressly instructed that she be kept at home, even if her doctors thought she should be hospitalized or institutionalized. She made it explicitly clear that her entire savings should be exhausted, if necessary, in keeping her at home.

When she lost her capacity to discuss her preferences or reason with visitors, a long-estranged daughter arrived from out of town. She insisted that the local daughter must have persuaded Mom to sign the documents, hoping to be able to stay in Mom’s house as long as possible. She claimed that Mom would never have signed the documents if she had been in her right mind at the time.

The result? A non-family member was appointed as guardian temporarily, while an investigation was undertaken. The guardian, worried about possible liability, moved Mom to the nursing home — where she died a few weeks later, before the final court hearing.

Though Mom signed all the documents she should have, and made her wishes clear, the result was exactly what she did not want. What could she have done differently? If she had talked with (or at least written to) her estranged daughter, would the outcome have been different? Possibly — it seems like the most likely possibility. The lesson? Have the conversation, and include even those family members who will not be in charge of the decisions.

Update your estate plan

This would be a good time to pull out your old will and trust, review them, and schedule an appointment with your attorney. Has the law changed since you signed your will? Perhaps. But more importantly, has your life situation changed? Do your children (now in their 30s, or 40s) really need to have a guardian named, as they did when you signed your will twenty-five years ago? Have you moved, or changed your assets significantly? Are you the rare parent who correctly predicted each of your children’s future capabilities, needs and proclivities?

Once again, “my family knows what I would want” just won’t cut it. Believe us — we see lots of families in litigation over things that might seem trivial. Don’t think it will happen with your family, since everyone gets along so well? We hope that’s correct, but it has not been our experience.

Since you signed your will and trust, have you put one child on as joint owner of your bank account (to take care of things if “something happens”)? Have any of your children gotten divorced, or married, or had children? Do you still want the child who lived close to you fifteen years ago to be your executor and trustee, even though you’ve moved across the country to be near a different child? Have you signed an Arizona beneficiary deed after hearing a presentation, or listening to a friend? All of those things affect, and need to be taken care of in, your estate plan.

Another anecdote from our cases: last year we dealt with the estate of a fellow who moved to Arizona from another state. He had a trust and a will there, and he put his new Tucson home in the trust’s name. Apparently, though, he decided that his trust was now invalid, since he had moved from the other state to Arizona. So he made no changes.

Meanwhile, he got married. One of his children (named in his trust as a beneficiary) had become estranged. He tore up his will (it was invalid anyway, he thought). The result? His new wife ended up with his entire estate, as he apparently intended — but only after payment of several thousands of dollars of court costs and legal fees, and an opportunity for his estranged child to object (she didn’t, thankfully). Meanwhile, if he had talked with a lawyer before he died, he could have spent perhaps 1/10 of what it ultimately cost to take care of his estate.

Insurance update

Do you have enough (or too much) life insurance? How about long-term care insurance? Shouldn’t you talk with someone about your insurance status, and see what needs to be changed?

Long-term care expenses, particularly, have changed a lot in the last few years. Long-term care insurance is a maturing market, which means that older policies need to be revisited — and people who have not gotten around to looking into the policies should set aside some time to do so. Soon.

We don’t give insurance advice directly (except to advise people that they need to get more information). We recommend you talk with a trusted agent, and make sure they have your entire insurance picture. Right after you make that appointment to update your estate plan.

Need more ideas?

Not all of your New Year’s resolutions need to be about legal issues. Two years ago we gave you some other ideas, and we offer them up for your consideration again this time. You’re welcome.

Managing Your Digital Assets With an Eye on Mortality

SEPTEMBER 22, 2014 VOLUME 21 NUMBER 34

For a while it was just an interesting academic problem: what would happen to your Facebook page, your Instagram photos, and your Pinterest collection if you died? And what about your e-mail account(s), your shopping login information and the passwords for all of those different online arrangements?

It became less of an esoteric question when several things started happening:

  1. More and more, people organize their entire lives online. You may be paying your bills, ordering medications, managing bank and brokerage accounts, and even posting automatic updates at various websites.
  2. Suddenly, some of those digital assets started having real economic value. Not only your airline frequent flyer miles, but the real dollar income from linking your Pinterest account (like pilot Dan Ashbach did) can add up.
  3. People started dying. Well, truth be told, they have been dying for a long time. But now some of them have LinkedIn, PayPal and Google Plus accounts. What happens to those accounts?
  4. Other people started losing the ability to manage their own affairs (again, that’s been going on for more than just a few years) — and family members started figuring out how to manage accounts, pay bills, and (oops) take money out of accounts online, anonymously and without any legal authority or oversight.

What does all this mean for your estate planning? It should be clear that you need to think about your online and electronic presence, and how to allow someone to take the appropriate actions when you become disabled or upon your death. “Appropriate” may mean something different to you than it does to your neighbor, and so it is also important that you make clear what you want done with your digital assets, and that you know about any legal constraints or limitations.

Let’s start with passwords. You know that you’re not supposed to reuse passwords, and that you should change your passwords on a regular basis. Maybe you have made the decision not to change the password for your favorite sandwich shop ordering site every sixty days, or to use the same password for your car rental and airline reservation accounts. Even so, you probably have a lot of passwords, and a challenging problem managing them.

Now think about getting those passwords to your spouse, or child, or successor trustee. Do you write them down somewhere? That would be very insecure, and a lot of work — you need to update the list every time you change a password (or add a new account). Where can you keep it that it is available and secure? A password-protected file on your computer? Which computer, and how hard is it to break the password protection on your favorite word processor, and what happens if your computer hard drive fails (as it most assuredly will, sooner or later)?

Take a look at password utility programs, like LastPass, or RoboForm, or Password Box (there are dozens of others). There are free ones (or at least free versions), but you might have to pay a few dollars (or even a few dollars a year). The best of them keep your passwords in an encrypted online space, and install in your local browser. Most even work on your iPhone or Android phone or tablet. Now you only have one password to remember, change and pass along — the password manager takes care of those changes for all the other passwords.

How do you pass along the password information on death or disability — without giving anyone access right now? Look into something called a “dead man’s switch.” The concept is borrowed from train locomotives. In the electronic world, it works like this: you set up an account, and it sends you a message every 30 (or 60, or 90 — you usually can change the the timing) days. You respond by telling the program that you’re still OK, and nothing happens for another cycle. But if you don’t respond, it decides something has happened to you, and it sends a message (which you have written in advance) to the recipient(s) of your choice.

You can see how that might make sense. You write a message telling your daughter the login information for your password management program, and a list of major accounts for her to look into. All you have to do is remember to update that message each time you change your password, and respond to the messages you get every month. The rest takes care of itself.

You can look into “dead man’s switches” at Stochastic Technologies, or the eponymous Deadman. Google even has one built into its accounts, called the “inactive account manager.” It’s not easy to find or activate (at least it seemed unnecessarily difficult to us), but it’s free and does just what we’re looking for, at least for one account.

Think about what documents and arrangements you need to prepare in advance. Should there be a provision in your power of attorney, your trust and/or your will about digital assets? Probably, but recognize that the law is still unsettled. One theory is that the person acting on your behalf may violate federal law if they log in as you — no one seems to know of any prosecutions for actions authorized by the account owner, but lawyers still hesitate to recommend that people skip across the law’s boundaries.

A good start: prepare an inventory of your digital assets. Do you have photos online? Documents? What is your password recording scheme? One of the best starter kits for dealing with digital assets is, surprisingly, a four-year-old article (as this is being written) laying out some of these issues. You can read Missouri lawyer Dennis Kennedy‘s practical suggestions from an American Bar Association magazine called Law Practice Today to get you started.

There are some new developments on the horizon. A national group, the Uniform Laws Commission, is proposing model legislation that would make it clear that you have the ability to give authority to someone else to manage your digital assets. For that matter, it would be a welcome addition to have a definition of “digital assets.” The proposed Uniform Fiduciary Access to Digital Assets Act is in the drafting stages now, and will need to be adopted in a number of states before it has any significant effect on practices. We’ll update you as that process develops.

What To Do About a Child Who Can’t Handle Money

SEPTEMBER 1, 2014 VOLUME 21 NUMBER 31

A reader asks: “could you do an article on how to leave inheritance to a son who is not good at handling money? Should I leave his portion to another son who is good at it? They are very close and would get along.”

First we have a disclaimer, then the answer, then an explanation.

The Disclaimer

We don’t know our reader’s life situation, or her son(s), well enough to give her actual legal advice. The answer we offer will be based on generalities, and might not apply to her very well. This is why one hires a lawyer — to get actual advice based on one’s real circumstances (oh, and for drafting of the documents — but that’s usually less important than the advice).

We do have some observations and suggestions to consider, but they are based on situations that we have seen before and our knowledge of law and human nature. They are offered not as an answer, but as an exploration of some of the alternatives our reader — and you, if you are in a similar situation — should think about.

The Answer

What you probably need, dear reader, is a trust for the benefit of your son who is not very good at handling money. Whether your son who is good at handling money will serve as trustee or not should be a question that you discuss with your attorney. But if you meant to ask whether you should just disinherit your son who is not good with money and give a double portion to your other son (expecting him to take care of his brother) — the answer to that question is a clear and firm “no!”

Some Definitions

(Special bonus section. It will help the explanation flow more smoothly.)

An arrangement where one person handles money for the benefit of another is called a trust. A trust can be formal, with lots of legalistic provisions and directions to the trustee, or very simple. You can simply hand a check to one person, saying “here, take care of this for your brother” and create a trust. But don’t — that’s a sure way to destroy familial relationships and transfer family wealth to lawyers. It is important to have an actual trust document.

A trust can be created in your will (in which case it is called a testamentary trust) or while you are still alive (in which case it is usually called a living trust, though some lawyers prefer the term inter vivos trust). The person who is entitled to receive benefits from the trust, whether right now or upon the death of the current recipient, is called a beneficiary.

A trust that prohibits the beneficiary from transferring his or her interest in the trust’s assets to another person is called a spendthrift trust. That doesn’t necessarily mean that the beneficiary is a spendthrift, though he or she may be.

The person who handles money for another is a trustee, and a trustee is a fiduciary. A fiduciary has an obligation to report the finances of the trust to the beneficiary (beneficiaries, actually — the people who receive benefits on the death of the current beneficiary may also be entitled to reports. But that’s a topic for another day).

If you create a testamentary trust (in your will, remember?), you have pretty much assured that your estate will need to go through the probate process in order to fund the trust. That’s not necessarily a bad thing, but it often comes as a surprise to clients. Avoiding probate while establishing a trust usually means a more expensive estate plan.

The Explanation

The question is deceptively simple, and the answers have a number of repercussions to consider. Can you simply disinherit a child who is not good with money? Yes, you can (at least in Arizona, and assuming the child is not a dependent or minor child). That might lead to hard feelings, and even litigation, but assuming you are competent and your wishes are clearly stated, the disinheritance should be effective.

At the same time, you can leave a disproportionate share of your estate to someone else. You can even tell them you expect them to take care of a sibling (or a grandchild, or a spouse, or anyone else you are disinheriting). But you can’t expect them to actually carry through. They may be saintly and responsible, but they are not immortal. Your son will probably leave his estate to his wife or children — and they might or might not carry through on his obligations. Or your son might have business reverses, or be sued by someone he injures accidentally, or … you can begin to see the variety of problems that could arise.

There’s a practical problem in addition to the legal/financial one. Your two sons get along well? We can tell you that cutting one out and telling the other to take care of his brother will end that positive relationship. The disinherited child will feel like he has to beg for something he is entitled to. The favored child will feel like he has been thrust into a parental relationship with his brother. Each will resent the other.

By creating a trust, you reduce that problem — but you do not eliminate it. The trustee son can now point to the document to explain his decision (“see? Mom said I was not to just turn the money over to you to buy as many cars as you thought you needed”), but there will still be a fundamental change in their relationship. You might want to consider making someone else trustee.

But who? The brother who already doesn’t get along with the beneficiary? (Don’t dismiss this idea so quickly — the question is asked half-humorously, but half-seriously.) The bank? Another family member (the cousin who is a bank officer, perhaps)? A professional (your accountant, your lawyer, your broker)? A professional fiduciary (they are set up in many, but not all, states)? Each of those choices has positives and negatives, and they are the topic for some future discussion here — and a more immediate one with the lawyer you hire to draft your trust.

Best of luck. It’s not easy to deal with your children’s different needs, abilities and expectations.

Home Refinance Can Foul Up Estate Planning

MAY 19, 2014 VOLUME 21 NUMBER 18

When our clients consider creating a revocable living trust, we usually explain that there are several benefits to that estate planning device. Chief among those benefits for most people: avoidance of probate on the death of the client. For married couples, there is usually no probate required on the first death anyway, so a living trust mostly protects against having a probate on the second death.

A few of our clients also see other benefits from living trusts. They may make it easier to minimize estate taxes on the death of the second spouse (though, frankly, current estate tax rules for Arizona residents make this a benefit for a very, very small portion of the population). They may make it easier to control the use of funds for heirs — though many clients are uninterested in imposing any restrictions on the inheritances they leave to children or others.

The living trust may have benefits beyond probate avoidance for a small number of our clients, based on their family situation, type of assets or the size of their estate. But for every client who decides on a living trust, the same two drawbacks need to be weighed against the benefits in their circumstances. First, a living trust is a more expensive estate planning option (how much more expensive? That will depend on individual circumstances, but typically between $1,000 and $2,000 more for most of our clients). Second, and the subject of this week’s cautionary story, is this: if you have a living trust, you need to keep that in mind for the rest of your life, and make sure that your assets get transferred to, and remain titled to, your living trust.

We were reminded of this issue by a typical client story we heard last month. A couple who have been long-time clients — we’ll call them Dick and Jane — created their joint revocable living trust a few years ago. They did it for the usual reason (to avoid probate on the second death), but also for a less-common reason — Dick had been diagnosed with early dementia, and the trust would make it easier for Jane to manage their joint assets as his capacity began to diminish.

After they created their trust, that’s exactly what happened. Dick became less and less able to make decisions, and more and more reliant on assistance with activities of daily living. In fact, Jane found that she had to hire help to take care of Dick in their home. Fortunately, she had a durable power of attorney and the living trust in place — she was able to take care of their finances and marshal them for Dick’s care needs.

Jane figured out that it would make sense for them to refinance their home mortgage. That might have been true just because of the current historically low interest rates — in Dick and Jane’s case, it also made sense to take out some additional principal from their home equity, so that Jane would have sufficient reserve to cover Dick’s growing care costs. It was a good thing that their home had been transferred to their joint trust, since Dick had lost the ability to sign refinancing documents. Because she was the sole trustee, Jane would be able to handle the refinancing by herself.

You might know where this story is going next. If Jane had called us, we could have warned her about the problem that was likely to arise. We don’t expect our clients to call us before making major financial decisions, but in this case it would have been good to hear from Jane. Why? Because the title insurance company insisted that Dick and Jane’s home had to be transferred out of the trust before the refinancing could be completed. And (possibly because the title company was based in Kansas, not Arizona) there was another problem in the documents: the title company’s attempt to create a joint tenancy between Dick and Jane did not comply with Arizona’s requirements. That meant that when Dick died a year later, his one-half interest in the family home had to go through the probate process.

To be clear, that result was not nearly as tragic as Dick’s medical and mental decline and ultimate death. In the scheme of things, the need for a probate proceeding — especially in a state, like Arizona, where probate is a relatively simple process — is more properly characterized as “nuisance” than “tragedy”. But the irony of Dick and Jane’s experience was that they intended to simplify things, and to save money for their heirs — and, despite their best efforts, the result was that Jane actually had to go through extra legal proceedings (since their home was originally in joint tenancy, there would not have been a probate on Dick’s death but for the refinancing following the trust). To be sure, if they had not created the trust and signed powers of attorney, Jane probably could not have refinanced the home at all without a court proceeding to establish authority over Dick’s share of the home, so the net effect was probably beneficial. But the disconnect between the estate plan and the title company’s odd insistence on taking the home out of the trust meant that Dick and Jane missed an opportunity to have their plan work perfectly.

Why do title companies insist on taking homes out of trust for refinancing? This has always puzzled us, too. Apparently, they think that the record is unclear about whether the trustees of a trust have the right to encumber the home with a mortgage — but they are not at all troubled about the trustees’ right to transfer the house outright. Why don’t the title companies then transfer the home back into trust? This one puzzles us, too. Until a decade or so ago, they would do so upon request. Now they typically fail to mention it to their clients at all. And why would a Kansas title company try to practice law in Arizona, creating a defective joint tenancy deed? We have no answer for this one.

Here’s the moral of the Dick and Jane story (or at least this tiny slice of their story — their real story is far, far richer than this one small glitch): if you have established a revocable living trust, be very cautious about titles to your property. Your home, your bank and brokerage accounts, and most of your other assets should probably be titled to the trust (talk to your lawyer — this is not always the case). Once things are titled to the trust, you have to be mindful of any changes you might precipitate, even (especially?) if you did not intend to make any change.

Here’s a Project For You: Write Your Own Obituary

APRIL 14, 2014 VOLUME 21 NUMBER 14

I have a new aspiration. I want my obituary to appear (at the appropriate time, of course — not before) in someone’s blog, newsletter, book or other publication as “one of the best obituaries ever” — maybe even to “go viral.” I’m just not sure I can count on my family to understand the importance of this goal. Maybe I need to write my own obituary now.

Turns out that idea is not novel. The recent death of Walter George Bruhl, Jr., in Florida highlighted the trend. Read Mr. Bruhl’s obituary, and the story about its preparation, and you will have to acknowledge that you wish you’d met him.

Of course excellent obituaries can be written by family members. Consider the moving and excellent obituary of Harry Weathersby Stamps, who died in March, 2013, in Mississippi. And note that it appears online on a site called “ObitOfTheDay.com” — the internet is truly a wonderful invention (one wonders whether Al Gore might be working on his own obituary). But back to Mr. Stamps: his wonderful obituary was written by his daughter, Amanda Lewis, a Texas attorney with a wonderful sense of humor and fond recollections about her father’s strengths and eccentricities. There are definitely benefits for family members who write memorable obituaries, but still there is something to be said for preparing your own.

So how to get started with writing one’s own obituary? It turns out that there are plenty of prompts, suggestions and ideas available. One online resource for the self-written obituary project suggests the question: “what do I want people to remember about me?” as a straightforward prompt. The result need not be humorous or whimsical — it might be heartfelt and moving (like actor James Rebhorn’s self-written obituary). It might be wry and revealing (like engineer Val Patterson’s contribution to the genre). Maybe you prefer mostly factual, with the occasional sly aside (like former Marine and ad man John E. Holden — whose short obituary generated enough interest to occasion a longer, much more detailed reminiscence from his local newspaper).

Something similar happened with Jane Catherine Lotter’s self-written obituary. After her death in Seattle in 2013, her obituary “went viral” and resulted in a New York Times article about her life, her death and her writing.

Here’s an interesting idea: try starting with a very simple statement, limited to just six words. That’s the premise behind “Not Quite What I Was Planning,” a 2008 collection of “six-word memoirs” from various contributors. There are even follow-ups: “It All Changed in an Instant” and other volumes in the series.

Most people, though, will want to write a longer version. Advice from one source: just get started. According to Obituary Guide (a resource for writing your own or a loved one’s obituary), getting your own on paper can be a help for family members and a chance to say what you want said about yourself. It also can be part of your end-of-life planning, including your living will, health care power of attorney, durable financial power of attorney, will and other documents.

It turns out that the self-written obituary is a trend. You can even order a book to help you get started (called, cleverly, ObitKit) and join “the hottest thing in dying.” Happy writing.

The iWill — Might It Be the Future of Probate and Estate Planning?

FEBRUARY 24, 2014 VOLUME 21 NUMBER 8

News reached us this month of a November, 2013, probate court order in Australia admitting an unusual will to probate, and it made us wonder if we should anticipate a digital future for estate planning. An Australian probate decision would have to be pretty unusual to get noticed around the world, but this one qualifies. The judge in Brisbane determined that the decedent’s last will was valid — though it was only on his iPhone.

Karter Yu committed suicide in September of 2011. Shortly before his death he created a number of documents on his iPhone, most of which were apparently farewell letters. One, however, looked very much like a will. It began with “This is the last Will and Testament of Karter Yu,” and it contained all of the provisions that one would expect to see in a will. It named an executor (what we in Arizona would call a personal representative), it included his address, and it gave directions for the distribution of his property. In the space where one might expect to see a signature on a printed document, Mr. Yu had typed his name, added the date and listed his address again for identification.

Queensland probate law, like Arizona’s (and most U.S. states’ laws), is descended from English common law. The old common law approach was clear: a will, to be valid, must be signed by the testator (the legal term for a person making a will) and witnessed by two individuals — and it must clearly indicate that it is intended to dispose of property at death of the signer. There may be additional details required in individual cases, and there are sometimes a handful of exceptions, but those remain the basic rules for making a valid will in most jurisdictions operating under English common law principles.

In Queensland, however, there is a relatively new variation. A document that does not meet the formal will requirements may still be admitted as the decedent’s will if:

  1. It exists as a document — and that includes any computer file stored on disc, tape or otherwise, provided that it can be produced or reproduced (i.e.: printed, or copied, or presumably even e-mailed), and
  2. It states the testamentary intentions of the decedent, and
  3. There is sufficient evidence that the decedent intended the document to be his or her will.

Looking at Mr. Yu’s iPhone document, the probate judge in Brisbane had no trouble determining that all three conditions were met. The will was admitted to probate, and his nominated executor appointed to administer his estate. Re: Yu, November 6, 2013.

This result might seem surprising to an Arizona probate judge — or lawyer — but was not necessarily a major extension in Australia. Just a year earlier, in a somewhat similar case, a New South Wales probate judge had admitted a word processing document to probate in Yazbek v. Yazbek, June 1, 2012. The decedent’s parents (who would have taken his estate if he had no will) insisted that he must have printed and signed the will document, then destroyed it — effectively revoking it as his will. The probate court found otherwise, and the unprinted document was admitted as the decedent’s last will.

Is a similar trend likely to develop in Arizona? Not likely, or at least not any time soon. Arizona’s probate law still adheres to the old English requirement: a valid will must be on paper (well, we suppose it could be on another medium — but it would have to be printed out), signed by the testator and witnessed. One notable exception, the “holographic” will, need not be witnessed — but it must be in the handwriting of the testator.

There is, though, a larger trend toward liberalizing the requirements for validity of wills. The National Conference of Commissioners on Uniform State Laws (NCCUSL) has developed and promoted the Uniform Probate Code — in fact, Arizona was one of the first states to adopt the UPC, in 1973. Though the UPC has been adopted in only a handful of states, it has been tinkered with regularly; the general trend in that tinkering has been to make it easier to approve questioned documents. The current (2011) version of the UPC permits the probate court to admit a “document or writing” that doesn’t comply with the requirements of English common law if there is clear and convincing evidence that the decedent had wanted the document or writing to be a will, a revocation, an amendment or a revival of a previous will.

Arizona has updated much of its version of the Uniform Probate Code, but not this provision (which, if you’re curious, is section 5-203 of the 2011 UPC). A handful of states have adopted the current version. Would Mr. Yu’s “iWill” be admissible in those states? It’s hard to be certain, but probably not — not because the idea would be unimaginable but because it’s likely that the file on the iPhone would not be characterized as a “document or writing.” But as public thinking about computer and internet files continues to evolve, you might reasonably expect that to change.

What does this mean for someone who wants to create a will on his or her iPhone? Don’t try it. The only thing certain is that you will assure the beneficiaries of your estate a high legal bill for the proceedings to determine what it means. Print the thing out, sign it before witnesses, and have them sign it, too. Better yet, hire someone who knows how to make sure your will is valid — like a lawyer — to prepare the will and supervise its execution.

Of course if you’re an Android user, everything is different. Just kidding.

Definitions For Common Estate Planning Terms

FEBRUARY 3, 2014 VOLUME 21 NUMBER 5

Judging from the questions we field online and from clients, there is a lot of confusion about some of the basic terms commonly used in estate planning. We thought maybe we could do a service (and make our own explanations a little easier) by collecting some of the more-common ones — and defining them. Feel free to suggest additional terms or quibble with our definitions:

Will — this is the starting point for estate planning. It is the document by which you declare who will receive your property, and who will be in charge of handling your estate. Note, though, that if you have a “living trust” (see below), your will may actually be the least important document in your estate planning bundle.

Personal representative — this is the person you put in charge of probating your estate. It is an umbrella of a name, encompassing what we used to call executors, executrixes, administrators, administratrixes and other, less-common, terms. If you use one of the old-fashioned terms in your will, that probably won’t be a problem — we’ll just call them your “personal representative” when the time comes. Note that your personal representative has absolutely no authority until you have died and your will has been admitted to probate.

Devisee — that’s what we call each of the people (or organizations) your will names as receiving something.

Heir — if you didn’t have a will, your relatives would take your property in a specified order (see “intestate succession” below). The people who would get something if you hadn’t signed a will are your “heirs.” Note that some people can be both heirs and devisees.

Intestate succession — every state has a rule of intestate succession, and they are mostly pretty similar. The list of relatives is your legislature’s best guess of who most people would want to leave their estates to. Think of it as a sort of a default will — in Arizona, for instance, the principles of intestate succession are set out in Arizona Revised Statutes Title 14, Chapter 2, Article 1, beginning with section 14-2101 (keep clicking on “next document” to scroll through the relevant statutes).

Escheat — that’s the term lawyers use to describe the situation where you leave no close relatives, or all the people named in your will have died before you. Escheat is very, very rare, incidentally. Note that the Arizona statute eschews “escheat” in favor of “unclaimed estate.” There is a different, but related, concept in the statutes, too: if an heir or devisee exists but can’t be found, the property they would receive can be distributed to the state to be held until someone steps forward to claim their share. That is not an unclaimed estate, but an unclaimed asset.

Pourover will — when you create a living trust (see below), you usually mean to avoid having your estate go through probate at all. If everything works just right your will won’t ever be filed, and no probate proceeding will be necessary. Just in case, though, we will probably have you sign a will that leaves everything to your trust — we hope not to use it, but if we have to then the will directs that all of your assets be poured into the trust.

Trust — a trust is a separate entity, governed by its own rules and providing (usually) for who will receive assets or income upon the happening of specified events. Think of a trust as a sort of corporation (though of course it is not, and it is not subject to all of the rules governing corporations). It owns property and has an operating agreement — the trust document itself. There are a lot of different types of trusts, and usually the names are just shorthand ways of describing some of the trust’s characteristics.

Testamentary trust — the first kind of trust, and the oldest, is a trust created in a will. Of course, a testamentary trust will not exist until your estate has been probated, so it is of no use in any attempt to avoid probate. But  you can put a trust provision in your will so that any property going to particular beneficiaries will be managed according to rules you spell out. Testamentary trusts are relatively rare these days, but they still have a place in some estate plans.

Living trust — pretty much any trust that is not a testamentary trust can be called a living trust. The term really just means that the trust exists during the life of the person establishing the trust. If you sign a trust declaration or agreement, and you transfer no assets (or nominal assets) to it but provide that it will receive an insurance payout, or a share of your probate estate, it is still a living trust — it is just an unfunded living trust until assets arrive.

Trustee — this is the person who is in charge of a trust. Usually we say “trustee” for the person who is in charge now, and “successor trustee” for the person who will take over when some event (typically the death, resignation or incapacity of the current trustee) occurs. There can, of course, be co-trustees — multiple trustees with shared authority. Sometimes co-trustee are permitted to act independently, and sometimes they must all act together (or a majority of them must agree). The trust document should spell out which approach will apply, and how everyone will know that the successor trustee or trustees have taken over.

Grantor trust — this is a term mostly used in connection with the federal income tax code, but sometimes used more widely. In tax law, it means that the trust will be ignored for income tax purposes, and the grantor (or grantors) will be treated as owning the assets directly. Most living trusts funded during the life of the person signing the trust will be grantor trusts — but not all of them. Outside of tax settings the term “grantor trust” is often used more loosely, and it can sometimes mean any living trust whose grantor is still alive.

Revocable trust — means exactly what it sounds like. Someone (usually, but not always, the person who established the trust) has the power to revoke the trust. Sometimes that includes the power to designate where trust assets will go, but usually the trust just provides that upon revocation the assets go back to the person who contributed them to the trust.

Irrevocable trust — a trust that is not a revocable trust. Oddly, though, a trust can have “revocable” in its name and be irrevocable — if, for example, Dave and Sally Jones create the “Jones Family Revocable Trust,” it probably becomes irrevocable after Dave and Sally die. Its name doesn’t change, however.

Special needs trust — any trust with provisions for dealing with the actual or potential disability of a beneficiary can be said to be a special needs trust. Usually, but not always, a special needs trust is designed to provide benefits for someone who is on Supplemental Security Income (SSI), Social Security Disability (SSD) or other government programs. Sometimes the money comes from the beneficiary, and sometimes from family members or others wanting to provide for the beneficiary.

There’s more. A lot more, actually. Has this been helpful? Let us know and we’ll add to it in coming weeks. In the meantime, a reminder: ask your estate planning lawyer for help with these concepts. Don’t be embarrassed that they seem complicated — they are complicated.

Why You Might Want to Create a Trust for Your Kids

NOVEMBER 25, 2013 VOLUME 20 NUMBER 45

This conversation comes up a lot with our estate planning clients. “So, you’re leaving your entire estate equally to your three kids,” we say to our client. “Do you want to leave it outright or would you consider putting it in a trust for them?” The two most common responses:

  1. “No, my kids are all OK. They can manage money and would be insulted if their inheritance was left in trust.”
  2. “No. If they can’t manage their inheritance then I can’t help them. I don’t want to try to control things after I’m gone.”

Then we explain that creating a trust is actually a good thing for the kids — but it’s usually hard to convince clients. So let’s try it here, and then we can just hand them this newsletter.

Why consider a trust for your child’s inheritance? It may be a real benefit to them, protecting their inheritance from their creditors, spouses — even estate taxes. Let’s look at each of those concepts briefly.

One common concern we hear: “we love and trust our daughter, but though we like her husband he doesn’t really have any money sense.” There’s good news for that client: even though Arizona is a community property state, inheritances start out as separate property. In other words, the money you leave to your daughter is not immediately available to her husband, even in a community property state.

But wait. It’s really easy for your daughter to turn that separate property into community or joint property. All she has to do is add it to her joint banking account, or add her husband to the account title. Once it has become joint property, it is difficult to return it to separate property status. If your son-in-law or daughter-in-law is a “spendthrift,” that can expose your estate to loss after your death.

By creating a trust for your child’s inheritance, you make it easier to keep the property separate from spouses, and more likely to pass to your grandchildren on your child’s death. Sadly, divorce is very common: you can help keep the inheritance from being considered as part of the property to be divided if your daughter does divorce.

Let’s consider creditors. “Our son is a doctor,” you say, “and he has plenty of money.” Ah, but professionals are vulnerable to future malpractice lawsuits, and anyone can have even a substantial estate drained by an auto accident or medical crisis. Creating a trust for your son can help protect the inheritance from lawsuits, creditors, and bankruptcy.

How about taxes? If your daughter is a successful professional, she might well have a taxable estate on her death. That could be true even though she is not particularly close to that figure today. If estate taxes do kick in, they start at a very high 40%. And though we tend to ignore state estate tax considerations in Arizona (we don’t have a state estate tax at all), other states do impose taxes, even on much smaller estates. You may have settled in Arizona for good, but your children may move several times before picking their final residence — and that may subject them to a state estate tax.

If you leave your daughter’s inheritance in trust, you can fairly easily arrange to keep it out of her “estate” for tax purposes. Even though she is worth, say, $3 million, and you are only going to leave her another $500,000, the math is compelling: by the time she dies, that $500,000 could mean $200,000 or more in additional tax liability to her estate.

So there are good reasons to leave an inheritance in trust, even though all your children are responsible and your estate is modest. But aren’t there some serious downsides? Doesn’t it mean a lot of additional costs and imposition of a bunch of difficult rules? Not really.

Depending on your family circumstances, you might even name your son trustee of his own trust. Or make your son trustee of the trust for your daughter, and make her trustee of his trust. Or make your daughter (you know, the one with her CPA who works for the bank) trustee for all the kids’ trusts. In other words, creating a trust does not mean you have to incur professional trustee fees — though it might actually make sense to name a non-family trustee. We can talk about those options.

The trusts for your children will have to file tax returns each year. That will in fact mean a small additional cost. But the total amount of income tax paid need not increase — it should be fairly easy to assure that each trust’s income is taxed to its beneficiary, rather than paying taxes at the (often much higher) trust rates. We can talk about those issues, as well.

What about your son’s access to the money? Do you think he might want to use his inheritance to pay off his mortgage, or to allow him to put more away for retirement, or to send your grandkids to college? You can give him the power to demand money from the trust, or give the trustee direction to follow those kinds of requests. Let’s talk about how much control you want to give each of your children over the trust while they are alive. And on their death, you can even give your children the power to name which of their children (or spouses, or charities, or whomever you want to permit) will receive the remaining trust’s assets. This concept, incidentally, is sometimes described as a “dynasty” trust — which makes it sound like a very fancy, expensive idea only for rich people.

Cost? Setting up a trust for each of your children will likely increase the cost of your estate planning — but by a pretty small number, in most cases. We do this a lot, and so we already have a library of provisions and ideas to draw on. We almost always charge flat fees for our estate planning work, so we can tell you upfront how much additional cost such provisions will add to our fees — and we predict that you will be at least mildly surprised at how little cost it adds.

Oh, and these principles apply even (perhaps especially) if you are leaving your estate to grandchildren, nieces and nephews, or anyone other than your children. The illustrations we use are not intended to limit the point by gender, either — whenever we say “son” you can substitute “daughter” and the point is still valid.

©2017 Fleming & Curti, PLC