Five years ago the Arizona Legislature adopted an interesting new law. Modeled on a similar law in Missouri, the “beneficiary deed” statute permitted property owners to designate who would receive their property on death—much like a “payable on death” bank account. Now the state legislature has revisited beneficiary deeds, and made them even more flexible and useful.
One unanswered problem arose a handful of times under the previous law. What would happen if a person named to receive property by a beneficiary deed died before the original property owner? If, for example, a parent signed a beneficiary deed to “my two children, John and Mary,” and Mary died before the parent leaving children of her own, did that mean that her children would receive her share, or that son John would own the entire property on the parent’s death?
Effective this fall (the date is not yet set and won’t be known until the legislature adjourns) beneficiary deeds can solve that problem. Under a law signed by Governor Napolitano on March 24, 2006, all new beneficiary deeds must include a paragraph indicating which of two choices the owner prefers. The language required by the new law:
If a grantee beneficiary predeceases the owner, the conveyance to that grantee beneficiary shall either (choose one):
[] Become null and void.
[] Become part of the estate of the grantee beneficiary.
There are still a number of important issues to remember in the use of beneficiary deeds, and it will not be appropriate in every case to use this approach to transfer property. With some of the following limitations in mind, however, it may be that the beneficiary deed is a simple, inexpensive and useful method to avoid probate, especially in small estates. Among the remaining limitations for beneficiary deeds:
They are not available in every state. As of this writing, only Arizona, Arkansas, Colorado, Kansas, Missouri, Nevada, New Mexico and Ohio permit the use of beneficiary deeds.
An individual using a beneficiary deed will need to coordinate his or her estate plan as to multiple assets—it may, for instance, be necessary to keep track of beneficiary designations on multiple properties, several bank accounts, and a number of insurance policies and brokerage accounts. Anyone with more than a handful of assets should probably consider a living trust instead.
A beneficiary deed can be changed by a surviving owner, so in the case of a husband and wife (for example), the final distribution is not set until the second death.
The beneficiary deed provides no estate tax planning benefits for larger estates.
And what about individuals who signed an Arizona beneficiary deed before the new law was passed? Nothing in the law requires them to change their deeds, but they would be well-advised to consider updating the language to clarify what would happen if a beneficiary died before them. For those who might sign a beneficiary deed between now and the effective date, the best approach is less clear. Both the existing law and the new version require that beneficiary deeds be “substantially in the following form”—and then the form changes. Our advice: if you plan on signing an Arizona beneficiary deed in the next few months, expect to sign an updated version this fall.
Revocable living trusts have become immensely popular for estate planning in the past few decades. Once used primarily for commercial endeavors (like railroads, steel manufacturing and the like) and management of the assets of only the wealthiest families, trusts have in recent years become commonplace. As a result, the law governing living trusts has evolved more quickly during that time period than in earlier centuries, and new laws have been adopted to clarify trust rules and direct administration of trusts. One major rewrite of trust law, the Uniform Trust Code, has been adopted in a handful of states—and both adopted and repealed in Arizona within the last year.
Several other states, including Kansas, adopted the Uniform Trust Code very quickly after it was proposed. Lawyers expected the new law to generate a flurry of litigation, as the courts interpret the effect of trust law changes. One of the first of those new court cases has been decided by the Kansas Supreme Court.
At issue was the trust established by Eula M. Somers, who died in 1956 (the Trust Code applies even to long-standing trusts). Ms. Somers directed that $100 per month should be paid to each of her two grandchildren, Susan Somers Smiley and Kent Somers, who were then 7 and 5, respectively. When both of them die, the trust is scheduled to terminate and the balance is to be distributed to the Shriners Hospitals for Children.
At Ms. Somers’ death the trust held $120,000. Because the monthly payouts were small, the trust grew to over $3.5 million by 2001.
The Uniform Trust Code permits income beneficiaries (like Ms. Somers’ grandchildren) and remainder beneficiaries (like Shriners Hospitals) to agree to terminate trusts in at least some circumstances. An agreement to terminate the trust may not, however, violate a “material” trust provision.
The grandchildren and the hospital agreed that if they could each receive $150,000 in cash the balance could go to Shriners Hospitals right away. Firstar Bank, the trustee, declined to go along with that agreement because it argued that Ms. Somers’ inclusion of a “spendthrift” clause—prohibiting her grandchildren from assigning any trust income—was a material provision.
The Kansas Supreme Court agreed, and declined to permit termination of the trust. It did, however, direct the trustee to distribute all but $500,000 of the trust’s assets to Shriners Hospital, reasoning that the remaining amount would be plenty to fund the grandchildren’s monthly payments. The court also ordered payment of the grandchildren’s attorneys’ fees of over $55,000. In the first court test of the Uniform Trust Code, as it turned out, not much changed in the law of trust administration. Estate of Somers, May 14, 2004.
Arizona’s legislature first adopted the Uniform Trust Code in 2003, but lawyers in this state almost immediately raised concerns about subtle changes in trust law that would have been brought to the state with the new Code. One of the most common complaints was that the Code might allow beneficiaries to join together to terminate trusts, thereby frustrating the intentions of the original creators of trusts and, in some cases, subjecting trust assets to claims of creditors and possibly even resulting in disadvantageous tax treatment.
Less frequently discussed, but still a concern raised by the Code, is the possible effect on “special needs” trusts established for beneficiaries who receive public assistance from programs like Supplemental Security Income, Medicaid and AHCCCS/ALTCS (Arizona’s Medicaid programs). Because of the controversy, the legislature has repealed the Uniform Trust Code in Arizona; no plans are currently underway to revisit the new law, even with changes that might make it more palatable to its opponents.
Almost every state is facing a serious budget crisis in the current economy, and Kansas is no exception. Kansas’ governor projects a $750 million shortfall in the coming year. Last month the Kansas Supreme Court did what it could to help by deciding that Mary Miller would not qualify for Medicaid assistance because of a trust set up by her husband.
When Edward Miller wrote his will in 1978, he may have been thinking about the possibility that his wife might go into a nursing home sometime in the next quarter-century. That may have been why he directed that a trust be established for her benefit, with their daughter as trustee. Mrs. Miller would be entitled to receive all the income from the trust, but principal distributions would be controlled by the trustee. Mrs. Miller signed a document at the time consenting to the trust arrangement.
Mr. Miller died seventeen years later, and the trust was set up as he directed. Mrs. Miller went into a nursing home four years later. Although she had no assets, her husband’s trust was valued at $190,000 and she was receiving monthly income payments of $1,000.
Mrs. Miller applied for Medicaid assistance with nursing home care, but Kansas’ Medicaid agency decided that the trust should be counted as an available resource despite the fact that she had no control over it. The agency reasoned that she would have been entitled to insist on receiving about half the trust principal when her husband died—if she hadn’t consented to the terms of his will seventeen years earlier.
After the Medicaid agency denied her eligibility Mrs. Miller appealed all the way to the highest court in Kansas. Last month that court decided that the Medicaid agency was right, and that Mrs. Miller had effectively created her own trust by acquiescing in her husband’s estate planning arrangement. The Court, quoting itself from an earlier decision, noted that “public assistance funds are ever in short supply, and public policy demands they be restricted to those without resources of their own.” Miller v. State of Kansas Department of Social and Rehabilitation Services, March 7, 2003.
The approach implemented by Mr. Miller is, despite the Kansas Supreme Court’s disapproval, quite plainly contemplated by federal law. The Court’s zeal to save taxpayers dollars is also shortsighted. Mr. Miller did have another option when he wrote his will. He could have simply disinherited his wife, which would have resulted in her achieving Medicaid eligibility; without the trust contained in his will, the couple’s children would also have saved the monthly income checks now being made to the nursing home for the rest of Mrs. Miller’s life. The other cost forced on individuals by the Kansas decision is less clear, but it becomes increasingly important to secure good legal advice in order to protect as much of an individual’s (or a couple’s) estate as possible from the high cost of nursing home care. The cost of that legal advice itself ultimately comes from nursing home payments and therefore increases the cost to Medicaid programs.
