Posts Tagged ‘revocable trusts’

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.

Determining Which Court Has Jurisdiction Over Your Trust

JANUARY 13, 2014 VOLUME 21 NUMBER 2

In the past four or five decades there has been a tremendous growth in the use of trusts (usually, but not always, revocable living trusts) for estate planning purposes. Once very rare, they are now very popular. Perhaps as many as half of our estate planning clients choose to create a trust, and to transfer most or all of their assets into the trust’s name. Of course, one of the primary reasons to create a trust is usually to avoid probate court, or (in fact) any court involvement in handling your estate.

In about the same time frame, Americans have become very mobile. In the 1950s and 1960s, it was common — and usually expected — that most people would live, work and die in the same community where they were born. Today it seems rare not to have moved once, twice or even more times, both before and after retirement. In fact, U.S. Census Bureau figures suggest that the average American will move about a dozen times during her lifetime; at age 45, that average drops significantly, but still indicates about three more moves.

What do these two trends have to do with one another? Any lawyer can tell you: it’s often hard to figure out what court will have jurisdiction over trust disputes.

Wait — wasn’t the primary reason to establish a living trust based on a desire to avoid court? Yes, but things happen. Disgruntled family members do sometimes challenge trusts (though probably less often than they challenge wills). Trustees do steal funds, or mismanage them. Beneficiaries sometimes do believe that the trustee has misbehaved, even when she hasn’t. Trusts end up in court.

But which court? And what state’s laws apply to interpreting a trust when there is a dispute?

Here’s a general rule: a trust’s “situs” is usually where the trustee lives, not where the trust was written, or where the beneficiary lives, or even where the trust says it will be interpreted. “Situs” is not precisely the same as jurisdiction, but you can think of it as where the trust “lives.” And that, generally, is where the courts have jurisdiction over the trust and its trustee.

Let’s take a typical case to explain this legal principle. Allen and Melinda, a married couple, live in Alaska. They create a revocable living trust, naming themselves as trustee. The trust says that Alaska law applies. Upon the death of either Allen or Melinda, the surviving spouse remains as trustee. The trust is fully revocable by both of them, or by the survivor upon the death of either. So far, so good: Alaska courts are probably the only ones with jurisdiction — and even Alaska courts probably can’t do much with the trust while Allen or Melinda lives, since the trust is fully revocable.

Upon the death of both Allen and Melinda, though, the trust changes. By its terms, it becomes irrevocable — and their son Dave takes over as successor trustee. Dave lives in Arizona. A share of the trust continues, with Dave as trustee, for the benefit of Deborah and Diane, two of their other children. Deborah lives in Alaska, and Diane lives in Delaware (of course). If Diane thinks Dave is mishandling the trust, where does she hire a lawyer, and where will that lawyer end up filing a lawsuit? Delaware, where she lives? That doesn’t seem right.

But wait — maybe it will be Deborah (the one who stayed in Alaska) who consults a lawyer. It might make more sense for her to initiate any lawsuit in Alaska, since that’s where their parents lived, the trust was written and at least one beneficiary lives. Plus the trust says Alaska law applies.

Those are essentially the facts of a recent Arizona Court of Appeals case (though the names of everyone in the family, and most of the states involved, have been changed). Before we tell you the answer, we’ll pause for a moment for you to decide whether Arizona has jurisdiction over Allen and Melinda’s trust.

You’ve made up your mind? Okay, but hold on to that thought. We’ve misled you, ever so slightly. While Deborah and Diane are unhappy with Dave’s management of the trust, neither of them has filed a lawsuit at all. It’s actually Dave who has filed something with the court — he has filed a request that the Arizona court look over his administration of the trust, and bless the actions he has taken. If it works, it would prevent Deborah and Diane from challenging him later. Dave has done this relying on a provision of Arizona law permitting trustees to affirmatively seek court review of their administration of the trust.

The probate court where Dave filed his trust accounting action dismissed the petition, deciding that Dave should return to the state where the trust was written and Deborah lives. The Arizona Court of Appeals disagreed, ordering the probate court to go ahead and review Dave’s accounting. Arizona courts have jurisdiction, said the appellate judges, because Dave lives in Arizona and the trust is actually administered in Arizona Matter of the Lavery Living Trust, December 10, 2013.

There are still unanswered questions here. If Deborah had filed something in Alaska before Dave filed in Arizona, could the Alaska courts have made Dave go there to defend his actions? It’s not clear from the facts laid out in the opinion, but perhaps. Could Diane have made Dave defend himself in Delaware? Probably not, though that wasn’t an issue being decided in the Arizona court proceeding. In the Arizona court proceeding, whose law will apply? It’s not completely certain, but probably Arizona law will govern trust administration questions and Alaska law will govern any interpretations to be applied to the trust’s terms.

Trust jurisdiction and where to have a trustee’s actions reviewed is a somewhat unsettled area of the law. It is also very dependent on the facts of an individual case. Want to challenge a trustee, or are you a trustee seeking approval of your actions? Talk to your lawyer about situs, jurisdiction, governing law and the difference between those concepts.

How To Avoid Probate — And What Doesn’t

APRIL 23, 2012 VOLUME 19 NUMBER 16
Let us try to demystify probate avoidance for a moment. Note that for the purposes of this description, we are not going to argue with you about whether avoidance of probate is good, bad, desirable or a foolish goal — we start here with the assumption that probate avoidance is important. Another day, perhaps, we will discuss with you whether you ought to be concerned about probate avoidance.

Definition of terms first: probate is the court process by which your estate is settled and distributed to your heirs (if you have not made a valid will) or your devisees (if you have). Confusingly, “probate” is also the term applied (in most states) to the court where probate proceedings, guardianship, conservatorship and sometimes even civil commitment and adult adoptions are conducted. We are not talking here about how to avoid probate court altogether, but just about how to keep your estate from having to go through the probate process upon your death.

Arranged (more or less) from least desirable to most, here are some of the ways to avoid probate of your estate upon your death:

Die poor. In Arizona, an estate consisting of up to $75,000 of personal property can be collected by the people who claim to be entitled to it without the need of a probate court proceeding. The affidavit for collection of personal property is widely available and usually free. Your survivors can use it to transfer title to your auto, or to collect small bank (or other financial) accounts. The statute providing for collection of small estates also provides a mechanism for the surviving spouse to get a decedent’s last paycheck, and for beneficiaries to transfer title to real property up to another $100,000 in value. Most other states have a similar law, but with dollar limits that vary widely. [Note: the small estates numbers were updated to the figures listed here by the Arizona legislature in 2013.]

Give it all away. One sure-fire way to avoid probate: give everything to your kids (or whomever you want to receive your stuff) now. The main problem with this approach should be obvious — what if they won’t let you live in your house any more, or withhold the interest you counted on them returning to you each month? Things change: you might change your mind about leaving everything to that child, or to all your children. The child you transfer assets to might marry someone you don’t trust. Worse yet, that child might die — leaving you at the mercy of his or her spouse and children. Maybe you and the child you give your stuff to will end up disagreeing about when you need to go to a nursing home, or whether you ought to get married late in life, or even take in a roommate.

As an aside, it amazes us how often clients come to us after having given everything to their children. Things so often do not work out as planned. This is a very poor way to handle your estate planning — but it would avoid probate. We hear that those new-fangled strap-on jet packs avoid traffic jams, too — but we don’t recommend them as a means of getting to the doctors office.

Joint tenancy. People often refer to this method of holding title by its formal name: “joint tenancy with right of survivorship.” That makes the value of the title pretty clear — the surviving joint tenant(s) own the deceased joint tenant’s portion of the property upon death of one joint tenant. You can have more than two joint tenants — upon the death of any one, the survivors’ interests all increase. We liken this arrangement to a tontine — a lovely idea that combines the best elements of estate planning and lotteries.

Lawyers generally discourage the use of joint tenancy in estate planning. The problems are less obvious than simply giving away your stuff, but they are still real. You might later decide that the child you established the joint tenancy with should get a larger or smaller share of your estate — but the joint tenancy is always, by definition, an equal ownership interest with all the other joint tenants. People who favor joint tenancy as an alternative to good estate planning invariably, in our experience, seem to think it would be OK to name just one child as joint tenant, and to trust her (or him) to divide the property among siblings. That often works just fine — but it often leads to family disputes when the children have different expectations or understandings.

Other problems with joint tenancy: you subject your property to the creditors, spouses and business partners of the child you put on your title. You lose the power to refinance your home, to cash out your certificate of deposit, or to liquidate your government bonds — more accurately, you lose the power to do those things unless your joint tenant will also go to the title company or the bank with you and sign willingly.

Lawyers tend to dislike joint tenancy, except in one circumstance. Many people own their property in joint tenancy with spouses (homes are especially likely to be titled in that fashion), and we lawyers generally think that is alright. In Arizona, there is another alternative between spouses that we like a little better: community property with right of survivorship. That conveys some income tax benefits to a surviving spouse while still avoiding the necessity of any probate on the first spouse’s death.

Beneficiary designations. You probably have a beneficiary (maybe multiple beneficiaries) named on your life insurance policy, on any annuities you have been talked into buying, and on your retirement account (if there is any death benefit included). Did you know that you can do the same thing with bank accounts, stocks and bonds, and even (in Arizona and a handful of other states) real estate?

  • POD (payable on death) bank accounts — you can designate a POD beneficiary (some banks use the acronym ITF — “in trust for” — and it means the exact same thing) who has no current interest in your account but receives it automatically upon your death. You can even name multiple POD beneficiaries. And you can do this at banks, credit unions, savings and loans. Caution: if you go to your bank and say “I heard that there’s a way I can put my son’s name on my bank account” the clerk will almost always hand you a joint tenancy signature card. Make clear that you’re talking about POD designations — they are used less commonly but are a better fit for most people.
  • TOD (transfer on death) for stocks and bonds — there is a designation similar to the bank POD account for stocks, bonds, brokerage accounts and mutual funds. It is usually referred to by its acronym, TOD. It is actually more flexible than the POD designation available to banks — it allows you to designate what happens if a TOD beneficiary should die before you, for instance. Talk to your stockbroker about this titling arrangement if you think it might be a good idea for you — but talk to your lawyer first.
  • Beneficiary deeds for real estate — this one is available in only about a dozen states, but Arizona is one of those. It is like a POD or TOD designation for real estate — including your home. It only works on real estate located in Arizona or one of the other beneficiary deed states. The beneficiary deed conveys no current interest in your property, but avoids probate and vests directly in your beneficiary upon recording of your death certificate. You and your spouse can, for example, own your home as community property with rights of survivorship but upon the second death automatically transfer to your children in equal shares (with provisions about what happens if one of them should not survive both of you) upon the second death. We have written about beneficiary deeds in Arizona before, and our earlier explanations are still valid (even though our newsletter style has been updated).

What’s wrong with these beneficiary-based devices? Two things, at least: (1) they don’t provide for what happens if you make life changes that effectively adjust your estate plan (if, for instance, you live off of one account that was to go to one or two children, and thereby reduce their share of the estate) and (2) they make it hard to change your estate plan (if you decide to disinherit a child, for instance, you have to make sure to change all of the operative documents and titles). But in the right circumstance, beneficiary designations can effectively transfer your estate without probate — they act as a sort of a “poor man’s” trust.

Trusts. Which gets us to the most efficient way to avoid probate for most people — the living trust. To be clear, the trust doesn’t really avoid probate at all — but your trust assets do not have to go through the probate process and so anything you have transferred during life to the trust will avoid probate. It is the “funding” of the trust that avoids probate, not the trust itself.

So there you have it. Probate avoidance in a nutshell. But wait — what’s not on that list? Did you notice? There is so much confusion about the missing item, which does not avoid probate:

Making a will. Preparing and signing your will is a good thing to do. It avoids intestate succession, which might not be right for you. It designates who will be appointed by the court to act as your personal representative. It can name the person who will be your children’s (or your incapacitated spouse’s) guardian. It can even create a trust. But it does not avoid probate.

Your will is instead instructions to the probate court. It has no effect unless and until it is admitted to probate, which another way of saying that a court has determined that it really is your last will. Clients frequently say: “thank goodness I’ve signed my will today. Now I can sleep better knowing my children won’t have to go through probate.” We say: “sit down. We have some more talking to do. Obviously we have failed to get you to understand the distinction between wills and probate avoidance.” Then we talk about living trusts.

We have more information in our YouTube channel on this subject: .

Did that help? Do you have a better idea for probate avoidance (we’ve left a couple of less common methods off)? We’d love to hear from you.

Trustees Are “Owners” of Home for Lien Protection Purposes

SEPTEMBER 19, 2011 VOLUME 18 NUMBER 33
It’s frankly a little hard to explain why trust lawyers get excited about the subject of this week’s article. After all, it seems to be about who will pay for the new doors in a home renovation in a pricey suburb of Phoenix. The bill was large — $8,276.10 — but hardly astonishing. Let’s see if we can convey some of the excitement.

Richard and Kristen Williamson owned their home in Scottsdale, Arizona, just west of McDowell Mountain Regional Park. They had also created a revocable living trust. Just as they should, they had transferred the title to their home into the trust’s name.

But what does that mean? In Arizona, at least, that usually means that the trust “settlors” (the people who create the trust, sometimes also called “trustors” or “trust creators”) sign a deed from themselves as owners to themselves as trustees. So Mr. and Mrs. Williamson had transferred their home by just such a deed — and the Maricopa County Recorder’s office indicated that ownership of the home now belonged to “Richard M. Williamson and Kristen A. Williamson as Trustees of the Williamson Family Trust.”

Then the Williamsons — again quite properly — went about living their lives. In June, 2005, they decided to construct an addition on their home. They hired a contractor, Freedom Architectural Builders, to do the work. Their contract was unremarkable; it spelled out what the contractor would do and how funds would be released, in stages, as work progressed.

Almost two years later the work had progressed to the point that it was time to put doors on the addition. Freedom Architectural Builders sub-contracted with another company, PVOrbit, Inc. (it was doing business as Fountain Hills Door & Supply), to actually provide the doors and hinges. PVOrbit did what it was supposed to do, delivering doors and hinges to the home and sending its invoice to Freedom Architectural Builders.

Before the bill for doors got paid, however, Freedom Architectural Builders got into serious financial trouble. It notified Mr. and Mrs. Williamson that it could not complete the work on their home, and it walked away from the project. The Williamsons ended up hiring a new contractor to finish the work.

The Williamsons had no separate contract with PVOrbit or Fountain Hills Door & Supply, so they ignored demands for payment for the doors. Besides, they argued that they had already paid Freedom Architectural Builders for the doors, that they had to pay over $30,000 more than the total contract price to get the work done, and that PVOrbit’s complaint was with the contractor.

PVOrbit responded by filing a lien against the Williamsons’ home. The lien — often called a “materialman’s” lien or “mechanic’s” lien — can be unilaterally filed by someone who has provided materials used on real or personal property without having been paid. There are some specific rules about how such liens may be filed, and they vary from state to state. In Arizona, there is one important (for our purposes) limitation: such a lien can not be pursued against a home actually lived in by its owner.

Mr. and Mrs. Williamson sued, asking that PVOrbit be ordered to remove the lien and pay their attorneys fees and costs. At about the same time, PVOrbit sued the Williamsons and Freedom Architectural Builders for the doors they had installed. The two lawsuits were consolidated. Freedom Architectural Builders filed bankruptcy and was dismissed as a party in the consolidated lawsuits.

PVOrbit argued that the Williamsons were not owner/occupants of their home. The home, according to the door supplier, actually belonged to the Williamson Family Trust, not Mr. and Mrs. Williamson. Besides, said PVOrbit, the Williamsons shouldn’t be allowed to get away with not paying for the $8,276.10 worth of doors and hinges — to allow that would be to unjustly enrich them. The trial judge was not impressed with either argument; he dismissed the PVOrbit lawsuit and granted the Williamons $6,000 in fees and costs against the door company.

Admittedly, trust lawyers tend to be easily excited, at least when it comes to arcane issues like this question: who actually owns property titled to a trust? The Arizona Court of Appeals has probably raised the level of excitement (and agitation) among trust lawyers by upholding the trial judge in the Williamson/PVOrbit litigation, but with a slight twist. The appellate court has decided that because the deed says “Richard M. Williamson and Kristen A. Williamson,” the Williamsons are in fact owners of their home — even though the rest of the title qualifies their ownership interest: “…as trustees of the Williamson Family Trust.” It is a technical reading of the relationship of the Williamsons as individuals to the Williamsons as trustees. Williamson v. PVOrbit, Inc., September 1, 2011.

There is actually a perfectly good basis on which the Court of Appeals could have relied. Trust law has for centuries allowed for a distinction between the “legal” ownership of property (what the Williamsons as trustees held) and the “equitable” ownership of the same property (what the Williamsons held as trust beneficiaries). The appellate court could have decided that the statute protecting owner/occupants of homes was satisfied if the ownership interest is a beneficial one. That would have solved the problem.

What difference does it make? Well, what if Mr. and Mrs. Williamson — for whatever reason — decided to let their successor trustees take over. Now ownership might be held as “Skip and Marcy Jackson as Trustees of the Williamson Family Trust.” (Note: we don’t actually know who is successor trustee of the Willaimsons’ trust, and we don’t know anyone named Skip and Marcy — we just like the sound of it.) Would that mean that Skip and Marcy would have to move in with the Williamsons to protect against materialman’s liens? That would be silly — so long as Mr. and Mrs. Williamson are beneficiaries of the trust they created, they have the equitable ownership interest and the right to be, well, owner/occupants.

One other thing about the Williamson case strikes us. It may work to the advantage of people who worry about buyers’ title insurance policies. Some have suggested that transferring your home into a living trust could arguably be a transfer that voided your title insurance coverage. If the Williamson decision is valid, that argument would be a lot easier to strike down.

All right — can you see why we got excited?

How To Revoke Your Revocable Living Trust, Will or Power of Attorney

AUGUST 8, 2011 VOLUME 18 NUMBER 29
Last March we told you a good story about revocation of a living trust, though we cautioned you not to use the same method. A year before that we told you about another colorful character and how he revoked his will. Both of those court cases made us scratch our heads about the behavior of the individuals, but it occurs to us that we might never have told you what you should do to revoke your will or trust. Let us take care of that oversight now.

Please remember that we only practice law in Arizona. What works here might not work, or might not work exactly the same way, elsewhere. Your best bet is always to talk with a competent local attorney about how (and whether) to revoke a will or trust — or, for that matter, a power of attorney or other planning document you might have signed. With that caveat, here are some thoughts on how it might be done:

Revoking a will

The usual way to revoke a will is to sign a new one. It is very uncommon for an individual to want or need to revoke a will without making new arrangements for disposition of his or her property. Somewhere in your will — probably in the first paragraph or two — there is probably language that says something like “I hereby revoke all other prior wills I have signed.” That’s all it takes.

It is also possible to revoke a will by physically destroying the original document. Actually, Arizona law says you can do this by committing a “revocatory act” on the document. That can include burning, tearing, or other physical acts of destruction on the will or on a part of it. There are two keys here: you must intend to destroy the will, and you must do it yourself (though it is permitted to instruct someone else to do it in your presence). It is not an effective approach to call up your brother on the telephone, ask him to go down to the basement where the will is located, tear it up and report back to you — it must be done in your “conscious presence.”

Another way to revoke your will is more subtle: you can misplace it. If after your death no one can find your original will, and it is apparent that it was once in your possession, the law presumes that you must have destroyed it. That is only a presumption — we might be able to overcome it by showing, for instance, that you told everyone your will was completed and in a safe place shortly before your death. Obviously, a better choice is to keep track of your original will, and tell your heirs and family where to find it.

Another way to “revoke” your will: get married, or divorced, or have children. Actually, these life changes do not really revoke your will under Arizona law, but they can effectively rewrite your will — and in some circumstances can change your entire estate plan. There is a presumption in either case that you just didn’t get around to making appropriate changes in your will. Once again, you can overcome that presumption by taking appropriate action. There is a high likelihood that the law’s presumption will not be accurate as applied in your facts, so after marriage, divorce or birth of a child you should get together with a lawyer to make sure your estate plan is in order.

Revoking a trust

When a client asks about revoking a revocable living trust, our first question is not about “how” but “why.” There are very few disadvantages to having a revocable living trust — the two primary problems are the cost of setting one up and the difficulty of transferring assets to the trust. If you have already incurred both the cost and the difficulty of funding, it probably does not make sense to revoke the trust. Instead, let us talk with you about revising the trust to remove whatever provisions trouble you. Is it just that you don’t want your former girlfriend’s name to appear in the document? OK — we can probably “restate” the trust, which will involve replacing the entire trust document with a new one without the offending name.

For whatever reason, perhaps you just want to revoke your revocable living trust. After all, “revocable” is in the name, right? How do you do it?

First, you look at the trust document. Does it tell you how to revoke it? Perhaps it requires a written revocation, and maybe even it calls for the signature of the trustee (these are common but not universal requirements). If the trust tells you how to do it, follow the trust’s instructions.

Is it enough to tear up the trust? No, not under Arizona law. How about misplacing the trust document? No, a missing trust does not create a presumption of revocation in the way that a missing will would do.

How about getting married or divorced, or having children? This one involves a little more nuance. Your trust might take care of the children part — a well-drafted trust will usually make provision for the later birth (or death) of a child, or even a grandchild. Sometimes that provision is by one of the legal shorthand terms “by right of representation,” “per stirpes” or even “per capita.”

Marriage may not be covered in the trust document or Arizona’s default law. Divorce is covered by the same default statute as we described above for wills — but with the added wrinkle that if your trust is a joint trust between you and your spouse, it is a little harder to figure out what happens in individual circumstances. The message here: if you have any of these big life changes (marriage, divorce, birth or death of a child or other beneficiary) get in to your lawyer’s office as quickly as you can to make the appropriate changes to your revocable living trust.

Powers of attorney

How do you revoke your power of attorney? If you have never shared the document with the named agent or anyone else, you can revoke it by simply tearing it up and throwing it away. If you have shared it, you should write a separate letter to everyone who has seen it indicating that you are revoking the power. Make sure any new power of attorney you sign deals with the older one(s): it may not be enough to just rely on the most recent document, since they don’t automatically revoke older powers of attorney in the same way that wills do.

Keeping track of power of attorney documents and formally revoking older ones is important for another reason. Unlike trusts and wills, revoked powers of attorney are still valid to the extent that your agent acts without knowledge of the revocation. Save everyone a lot of heartache, expense and confusion by having an attorney prepare your new powers of attorney and properly revoke older versions.

One final note: you can see that the effect of having older, revoked documents around can be serious and can vary between the different types of documents. Help us keep your estate plan straight, and your life uncluttered. We know that you paid good money for those old documents, and that it is hard to throw them away. Just do it. If we prepare your new estate plan, we will offer to help you revoke and destroy the old documents (and all those drafts and copies we lawyers sent you), and we’ll volunteer our shredder to make it discreet and effective.

When Is a Living Trust More Appropriate Than a Will?

JUNE 6, 2011 VOLUME 18 NUMBER 20
Last week we answered a pair of questions from our readers and solicited others. Almost immediately we received an excellent question:

What are the factors you look at to determine if a client is best served w/ a will and durable power of attorney or a living trust? In other words, what are the key factors that would lead you to recommend a living trust?

Let us start with a quick disclaimer: the answer to this question is significantly different from state to state. What is true in Arizona may not be the same in other states — and some states will be wildly different. Even for lawyers in the same state there is significant difference of opinion; we are fond of saying that if you ask ten lawyers for their opinions you are bound to get at least fifteen strongly-held, well-reasoned views. Disclaimers aside, what follows is our take on the question.

We think most people do estate planning for one or more of these four reasons:

  1. To minimize taxes. Usually, but not always, that means estate taxes.
  2. To avoid probate, or (more broadly) to simplify matters for their heirs or successors.
  3. To control the way their assets are used after their death.
  4. To make it easier for someone to handle their affairs in the event of their own incapacity or disability.

Which does better at each of those tasks, a will and powers of attorney or a revocable living trust? In almost every case the trust will handle each of those tasks better than a will and powers of attorney. But that is not really the right way to address the question. Since trusts are somewhat more expensive to prepare (assume your lawyer will charge from three to ten times as much for preparation and “funding” of a trust as for a will and powers of attorney) and involve some extra effort, the analysis really becomes one of cost vs. benefit. Will the extra expense and effort of creating a living trust generate enough savings of time or money for heirs that it will turn out to be the right choice?

For most people, the answer is unclear. There are a handful of our clients for whom the trust is unquestionably the right technique, and another handful for whom the trust is not harmful but simply too much legal help for a problem that doesn’t exist. But most of our clients fit into the large middle ground — it would not be foolish of them to opt for a living trust, and it would not be foolish of them to avoid the expense and trouble now and let their heirs deal with it later.

So how do those four estate planning goals relate to the will vs. living trust question? Here’s what we think:

Taxes. Few people need to worry very much about estate taxes these days. With a federal exemption set at $5 million, and no Arizona state estate tax at all, only a tiny fraction of clients have estates large enough to make their decisions on the basis of tax effect.

It is true that the federal estate tax is scheduled to return to the $1 million level in 2013. It is also true that the Arizona legislature could decide to reimpose an estate tax (though most people think that highly unlikely). But for most people, even a taxation level set at $1 million would not make any difference in their planning.

But that’s not the end of the inquiry about taxes. Even if your estate is large enough for you to worry about estate taxation, there is no inherent tax benefit in living trusts. There used to be a way for married couples to lower their combined estate tax bill if their total estate was over the taxation level, but even that has changed (though of course it might change back in 2013). Bottom line: estate tax concerns simply do not drive the trust vs. will question in 2011 the way they did in, say, 1999. And if you are unmarried, or if you are married and your combined estate is less than about $1 million, you simply do not care about estate tax considerations.

Probate avoidance. Arizona’s probate process is not nearly as complicated as its reputation would suggest. It is also not nearly as expensive. Have you read stories about estates that have gone entirely to the lawyers because of a messed-up probate system? Yes, it does happen — but not really because of the system so much as because of family disputes over the validity of documents (including, increasingly, living trusts).

That said, most people will say that even a modest probate cost and time spent in lawyers’ offices would be something worth avoiding. What you need is a solid estimate of what it would cost to probate your estate if you relied on a will instead of a living trust, so that you can compare that cost to the cost of opting for a living trust. It is too hard to generalize about either expense, but we are prepared to go this far: in Arizona, the cost of preparing a living trust (and “funding” it — transferring all your assets into the trust’s name) will almost always be less than the cost of probating your estate later. But not necessarily by much.

There are some other points to be made here. If you own real estate in more than one state, your will must be probated in each of those states (unless you create a living trust or other probate-avoidance mechanism for some or all of those properties). That can drive the expense up considerably, and certainly complicates things for your family. On the other hand, if you have less than $50,000 worth of personal property and no real estate at the time of your death, no probate proceeding is likely to be needed anyway, since there is a “small estates” affidavit mechanism to avoid the probate process.

In general terms, larger estates tend to be more complicated to administer. More complex estates are better candidates for a living trust. So if you are wealthy, probate avoidance is more likely to be a concern for you — and especially if you have unusual assets, or real estate in multiple states, or other uncommon kinds of property issues.

One special consideration here: if you are married, you are probably comfortable putting most or all of your assets in “joint tenancy with right of survivorship” or designating your spouse as beneficiary. You might not feel the same way if you are single; it is not quite as easy (or advisable) to put your children or other beneficiaries on your bank and stock accounts as joint owners. So single people are usually better candidates for living trusts as a means of avoiding probate.

Control. We use the word advisedly. That’s what you might want to do with your funds, even after your death. Are you in a second marriage, with children from the first marriage, and a desire to provide for your spouse but ultimately pass most of your estate to those children? Maybe you have a spendthrift son (or a son who has married a spendthrift). Perhaps your daughter is disabled, and receiving government benefits she would lose if you left her an inheritance outright. Or maybe you want your money to be a retirement fund for your children, or to encourage your grandchildren to get an education, or some other laudable goal you are trying to achieve.

How can you address all of those issues? By putting your money in trust, with a trustee who has been instructed on how you want the money to be used.

You don’t have to create a living trust to put your money in trust. Instead you can create a trust in your will — what we lawyers call a “testamentary” trust. But it will cost you more, and the difference between the cost of a will (with your testamentary trust) and a living trust will shrink. So if you need (or just want) to control the uses of your funds after your death, you will be a better candidate for a living trust.

Your own incapacity. This is why you should sign a power of attorney. It is simultaneously one of the most important documents in your estate plan, and the single most dangerous one. But the cost of going through the courts (in a probate-like proceeding called a conservatorship) is almost always high and the invasion of privacy significant.

There are some times when a power of attorney just won’t solve the problem, though. Plus it is hard to predict when those times arise. Banks, title companies, the federal and state governments — none of them are required to accept the power of attorney. If you sign a living trust and transfer all of your assets to it, though, the problem becomes simpler and narrower: if your successor trustee can show the item the trust calls for (like a letter from your doctor, for instance), then the successor trustee just takes over. There will probably be somewhat fewer problems administering your affairs with a living trust than with a power of attorney.

We don’t want to overstate this benefit, however. It is almost never valuable enough to justify creating a living trust all by itself. As far as we are usually willing to go on this score is to suggest that, if one or more of the other categories make you a good candidate for a living trust, this one might put you over the top.

There’s one more category of living trusty candidates we can suggest: those who are more likely than others to (how can we say this gently?) “use” their estate plans in the next few years. In other words, the older you get the better of a candidate you become for a living trust.

So who should be considering a living trust as part of their estate plan? Look over the explanations above, and you will see that you are a better candidate for a living trust if you:

  • are older
  • are not married
  • are wealthy
  • have children who are not children of your spouse
  • have complicated assets, and especially if you
  • have real estate in more than one state
  • have beneficiaries with special needs, inability to handle money or other similar considerations

Again, we caution you against putting too much stock in these descriptions or applying them to your situation without good legal counsel. But look over this list of considerations and think about what they say about your estate planning needs. Share them with your own lawyer and ask for a thoughtful, critical evaluation. Your family and heirs will be glad you did.

How To Revoke Your Revocable Living Trust. Not.

MARCH 14, 2011 VOLUME 18 NUMBER 9
Let us be clear right up front. The California Court of Appeals ultimately agreed that Steven Wayne Stoker had successfully revoked a will favoring a former girlfriend. He also successfully revoked the trust created at the same time as that original will. In a sense, our headline is incorrect, since Stoker’s technique worked. But why in the world (other than for the good story thereby bequeathed to your children) would you ever use this technique to straighten out your estate planning? The right approach: talk to your lawyer, explain what you have already done and what you want to accomplish, and leave the revocation method in the hands of professionals.

Back to our story, which is admittedly both instructive and entertaining. Steven Wayne Stoker signed a will in 1997. In it he left some items of personal property to friends, but the residue (and bulk) of his estate was to go to the Steven Wayne Stoker Revocable Trust, which he had signed that same day. The trust named his girlfriend, Destiny Gularte, as trustee and beneficiary.

According to later testimony Mr. Stoker and Ms. Gularte had an angry argument several years later, and they separated permanently. One night about eight years after signing the will and trust, he apparently had a conversation with another friend about estate planning, and he resolved to change his will. At Mr. Stoker’s request the friend took down what Mr. Stoker dictated:

I, Steve Stoker revoke my 1997 trust as of August 28, 2005. Destiny Gularte and Judy Stoker to get nothing. Everything is to go to my kids Darin and Danene Stoker. Darin and Danene are to have power of attorney over everything I own.

Mr. Stoker signed this document, but (though two friends watched him sign it) no one signed as a witness. Mr. Stoker apparently did not notice that his friend had misspelled both Darrin’s and Danine’s names — the court record is silent as to who introduced those errors. Then he took out the original 1997 will, urinated on it, and set it on fire.

Three years later Mr. Stoker died, but without having done anything more formal to clarify his estate plan. His signature and his actions in 2005 raised a number of legal questions:

  1. Had he revoked the 1997 will?
  2. Was the 2005 will valid?
  3. If the 2005 will WAS valid, what effect did that have on the 1997 trust?

The California probate judge — who had listened to the testimony and assessed the credibility of the witnesses — found that the 2005 will expressed Mr. Stoker’s actual wishes, and that the 1997 will and trust had both been revoked. The California Court of Appeals agreed, and upheld the finding that Ms. Gularte would not receive anything from his estate.

It is important to note that state law differs, and that Arizona law would assess these actions differently — even though the outcome might ultimately be similar. Indeed, California had adopted changes in its probate laws in 2009 making it easier to show an individual’s intent even though the precise procedural rules might not have been followed. That change in law made it possible for the probate court to enforce Mr. Stoker’s apparent intent despite his not having secured two witnesses’ signatures, not having formally revoked his revocable living trust, and having taken an unusual approach to the revocation of his prior will. Estate of Stoker, March 3, 2011.

Would the same result be reached in Arizona? Perhaps, but for different reasons. Ideas to explore in an Arizona probate proceeding might include:

  • Arizona permits “holographic” wills without witnesses, but requires the important parts to be in the testator’s own handwriting. Mr. Stoker’s will probably would not have complied with this requirement, since the handwriting was almost all his friend’s — even though he might have dictated the words.
  • Arizona does have at least one court case allowing witnesses to sign later — even after the death of the person executing the will. Here there were apparently two actual witnesses, though they had not signed the document at the time. Could they sign attesting that they had witnessed the will even after Mr. Stoker’s death? Perhaps.
  • On one point there is no question. Arizona permits revocation of an old will by any “revocatory act.” There is little doubt that urinating on and then burning the will would meet that requirement. (The appellate court, noting the practical difficulty of using this technique, observed that “we hesitate to speculate how he accomplished the second act after the first.”)
  • While there is little doubt in Arizona that the successful revocation of his 1997 will would prevent transfer of additional assets to his revocable living trust after his death, it is less clear what would happen to assets he might have already transferred into the trust’s name. The California court opinion is unclear about whether there even were any such assets; if there were, Arizona law might lead to a different result. But even that is uncertain, since Arizona adopted a change in trust law as part of  the Arizona Trust Code effective in 2009. Under the new provision, the court can usually treat any document as a trust amendment if it “manifest[s] clear and convincing evidence of the settlor’s intent.”

Mr. Stoker did leave his children a pretty good story, regardless of how much property and money they might have received. But our recommendation remains: if you want to make changes to your estate plan, the relatively small cost of getting professional assistance will pay off in the long run. We do endorse Mr. Stoker’s revocatory act: it left a convincing impression of his intent and wishes.

Different Types of Trusts for Different Purposes

JANUARY 17, 2011 VOLUME 18 NUMBER 2
We frequently are asked to explain the differences between different types of trusts, or to analyze a trust with no more information than its type. Confusion about the differences is widespread, and we hope to provide a little clarity to consideration of trust types.

Before we embark, we have three caveats:

  1. We are not trying to list every possible type of trust here, but just those our clients most often encounter. We may expand this list over time.
  2. Just because you believe your trust is, for example, a “spendthrift” trust does not necessarily make it so. Even if the name of the trust includes one of these categories, it might be inaccurate. The type of trust is determined by the language of the trust itself, and it may take some close reading to identify a trust’s correct categorization.
  3. Most of these categories are neither magical nor exclusive. Just because we can categorize a given trust as a “spendthrift” trust, for example, it does not necessarily mean that it will be protected against all of the beneficiary’s creditors. And just because a trust is a “spendthrift” trust does not mean it could not also be a “special needs” trust, a “bypass” trust or some other category.

With that out of the way, let’s get started on a partial list of common types of trusts you might encounter (or create):

Spendthrift trust. This trust is protected against the creditors of a beneficiary. The trustee can not be compelled to make distributions to a beneficiary, or to the beneficiary’s creditors. This does not necessarily mean that the trustee is not permitted to make such distributions (after all, it might be in the beneficiary’s best interests to pay his or her debts). Even very strong spendthrift language might not be effective against some types of creditors in some states. Common exceptions adopted by state law include child support and alimony obligations or governmental debts. State laws vary widely on these lists.

“Third-Party” Special Needs trust. These trusts are usually specialized spendthrift trusts created for a beneficiary who suffers from a disability. The language of the trust will usually include a clear expression of the intent that the trust’s monies should not interfere (or not interfere too much) with the beneficiary’s public benefits, like Supplemental Security Income or Medicaid. The variation here from state to state, and from beneficiary to beneficiary, can be tremendous, so be very careful about generalizing when discussing third-party special needs trusts.

“Self-Settled” Special Needs trusts. Just to keep the confusion level high, there are also special needs trusts created by the beneficiary himself or herself. Of course, a beneficiary with a disability may have to act through a court proceeding, a guardianship or conservatorship, or a parent or grandparent. But whoever signs the actual documents, if the money in a special needs trust comes from the beneficiary’s own resources (like a personal injury settlement, or an unrestricted inheritance) then the special needs trust will be treated as a self-settled trust. That means the rules will be more difficult, both as to creation and administration of the trust. Can a self-settled special needs trust also be a spendthrift trust? What an interesting question you ask.

Bypass trust. Sometimes these trusts are called “credit shelter,” “exemption,” “decedent’s,” or just “B” trusts, but all of those names are pretty much interchangeable. The basic premise of a bypass trust is that a married couple arranges to take full advantage of the federal estate tax exemption amount, so that they can pass up to twice that amount to their heirs on the second death. That means that on the first spouse’s death a portion of the couple’s assets transfers to the bypass trust irrevocably, with some limitations on the use of the money during the surviving spouse’s life.

Bypass trusts are a special breed just now. Because the new federal estate tax law allows a married couple to retain both estate tax exemption amounts without having to create a bypass trust, there are a lot of trusts out there that may not still be needed. If both spouses are still alive it may be time to change the documents. If one spouse has already died the problems are more complicated. About the time we all figure this out (in two years) the estate tax provisions are scheduled to end automatically. We will have to wait most of those two years to find out if bypass trusts will fade out of existence.

Revocable trusts. Any trust that can be revoked — by anyone, but usually by the person who established the trust — is “revocable.” You may sometimes see the phrase “revocable living trust,” which means the same thing. If the only person who can revoke the trust has died (or become permanently incapacitated) then the trust has become irrevocable. Even if the name of the trust includes the word “revocable” (as, for instance, “The Smith Family Revocable Trust”) it may now be irrevocable.

Irrevocable trusts. The flip side of a revocable trust is, obviously, an irrevocable trust. The category just means that no one has the power to revoke the trust. That does not mean it will go on forever — if the assets held by the trust are spent or distributed, it ceases to exist even though it was irrevocable.

Grantor trusts. This term is most important in considering federal income tax liabilities, but it is often used more broadly. In a nutshell, a grantor trust is one in which the person who established the trust has retained one or more of the elements of control listed in the federal income tax code. Most important (but not the only ones) are: the power to revoke the trust, the right to receive the trust’s income and/or principal, and the role of trustee. Grantor trust rules are actually quite complicated, and are sometimes subject to some interpretation — fortunately, the shades of meaning don’t show up very often. Most trusts are either quite obviously grantor trusts or quite clearly not.

Those are some of the most common terms you might see to describe trusts. In a future Elder Law Issues we will tackle some of the less common ones, like “Crummey” trusts and ILITs, QTIP and QDoT trusts, and — well, feel free to ask us to try to describe/define your favorite trust category.

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