Posts Tagged ‘Trusts’

Upon Death of a Loved One, Some Things to Address

APRIL 8, 2013 VOLUME 20 NUMBER 14
More than three years ago we wrote about what you need to do when a family member dies. Our focus was on the immediate things that need to be dealt with: securing the house, taking care of pets, forwarding the mail. We thought we would get back to things that needed to be dealt with in the week or two after death, but we never managed to get back to the topic. Let’s look at some of the follow-up items now.

To make it a little easier for you, we have prepared a checklist. It is not intended to be exhaustive (though we think it is pretty thorough), and not every item will be applicable in every case. Sometimes you may need to make adjustments — such as when your family member had a living trust, and no probate proceeding will be necessary, or if you have been responsible for managing their bill-paying for several years before the death. Still, we think it will help you organize the papers, questions and information you need to properly take care of the legal and financial issues that will arise.

A couple more caveats:

  • Please remember that we live and practice in Arizona. This checklist may not be accurate, or as useful, if you live somewhere else, or your family member died somewhere else.
  • Several items on our checklist encourage you to collect information of various kinds. In most cases, that’s so that your visit to our offices will be more productive. Sometimes it is to help you answer questions from heirs, creditors or others as you get more deeply into administering your loved one’s estate. If you do collect forms, mailings, etc., keep them in a central place for several years after you have concluded the estate administration.
  • Where we indicate that you should keep track of your time and expenditures, we really mean that you should — and from the very beginning of your work. Even if you have no intention of charging a fee, we strongly recommend that you keep track.
  • If you are not the person who will be in charge of the decedent’s estate, that does not prevent you from printing out the checklist, monitoring progress by the person who is in charge, and figuring out how you can be helpful.

How quickly do you need to get to the lawyer’s office to review what needs to be done? Usually it is not the most pressing issue, but you should expect to make an appointment within about two to four weeks. If you are the surviving spouse, it probably can wait longer. If you are in town for a short time you might well want to meet right away, at least briefly. But here’s another reality: when you call, you may be looking at a two-week wait before an appointment. That gives us time to schedule you, and to get a questionnaire out to you to help with the collection of information. Usually nothing can be done for a week or two anyway. So don’t wait two weeks to call for an appointment, and then expect it to be immediate.

Do you need to see the lawyer who prepared the will or trust? No. It may be more comfortable and efficient, and the lawyer might have even kept the original documents (we do not usually do that at Fleming & Curti, PLC, but many law firms do). But there is no need to return to the decedent’s lawyer. It probably does make sense (in most cases) to meet with a lawyer in the community where your family member lived and died.

How long will the process take, and how much will the lawyer charge? It’s really impossible to generalize in any useful way. You might well be surprised at how little it costs. On the other hand, we regularly see family members who think there will be no need for a probate or any costly legal proceedings, only to find out that something was wrong in the estate setup, or something got changed or overlooked.

What are some of the more important points in our checklist? Here are a few we’d like to highlight:

  • Assembling a list of bank accounts, annuities, stocks, bonds, mutual funds, brokerage accounts and real estate will speed the process up immeasurably. It will likely also make it much easier for the lawyer to realistically estimate the cost and time to get the probate (or trust) administration completed. Same for creditors.
  • The funeral home will help you determine how many death certificates you will need, and how to get them ordered. You might not have visited with us yet, but here’s a practical reality: if you order them through the funeral home, you will get them faster and more cheaply. If we have to get them later it will be time consuming and more expensive. So when you’re figuring out how many you need, estimate high.
  • At some point we’re going to need names and addresses for all the heirs and beneficiaries. For some we will also need dates of birth and even Social Security numbers. You can speed the process up if you start collecting that information.
  • Forwarding the mail is critical. It needs to get done, and it is often the easiest way to get information about assets and bills.

One last point we want to make: if you had a power of attorney for the decedent, it is no longer valid. While a “durable” power of attorney survives even if the signer becomes incapacitated, no power of attorney survives the signer’s death. Do not sign checks, make credit card charges, or do anything else using the power of attorney.

Call us to discuss what needs to be done next. We will be very sorry to hear of your loss. We are here to help.

 

Can a Person with Dementia Sign Legal Documents? (Part 2)

MARCH 4, 2013 VOLUME 20 NUMBER 9
Last week we posed the question, and then mostly wrote about competence (or capacity) to sign a will. We promised to explain more about the level of competence required to sign other documents. So let us now tackle that concept.

A person with a diagnosis of dementia may well be able to sign legal documents, at least in Arizona. We suspect that the answer should be pretty much the same in other states, but if you are curious about your own state you should check with a local attorney about how competence is determined.

Generally speaking, competence or capacity is usually analyzed situationally. That is, the question will be answered differently depending on the nature of the document and the circumstances of the signing. The general rule: the signer has to have sufficient understanding to know what the document is, and the effect of the signing.

What kinds of documents might be involved? There are a variety of contexts in which capacity can be difficult to assess, including (but not limited to):

  • Ability to sign a contract — say to buy a car, or build a home.
  • Understanding of a power of attorney, which might give the authority to another person to sign future documents.
  • Competence to sign a trust, which might have elements of agency (like a power of attorney) and testamentary effect (like a will).
  • Capacity to get married (which is, after all, a specialized kind of contract).
  • Ability to make medical decisions — including refusing medication, or either seeking or declining mental health treatment.

Each of those situations, and the dozens of others that might arise, will be judged differently, because the nature and effect of the act will be different. But we can generalize about several of the important rules that cut across types of documents:

  • Minority is presumptive incapacity. That is, a person under age 18 does not have the legal ability to enter into a contract, get married, sign a trust (or will), or make medical decisions for themselves. There are, however, exceptions — a contract for “necessaries” (food, shelter, etc.) may be enforceable if signed by a minor. An “emancipated” minor may be able to do some things that an unemancipated minor can not.
  • It may not be necessary to have capacity to do the underlying thing before giving the authority to someone else. What? Let us explain: a person who might not have the capacity to enter into a complicated contract might still have sufficient capacity to sign a power of attorney giving someone else the power to sign the contract.
  • Arizona’s legislature has decided that the capacity level required to sign a trust should be the same as testamentary capacity, as we described last week. That may mean that someone who does not have sufficient capacity to sign a power of attorney could nonetheless sign a trust, which gives even broader authority to the trustee. Odd result, but mostly theoretical, as it’s hard to find someone in just that circumstance.
  • Generally speaking, most observers think that the capacity to sign a will is a lower level of competence than contractual or other forms of capacity. But it might not be that hard to describe someone who adequately understands the nature of a power of attorney but does not have an understanding at the level of testamentary capacity.
  • There are few legal ways to determine capacity in advance. Challenges to capacity are almost always initiated after the signing is completed — and often after the signer has died, or become completely and undeniably incompetent. That means that evidence of capacity (or lack of capacity) is often being reconstructed well after the fact.

It’s also important to remember that we are writing here about competence/capacity, and not necessarily about the validity of documents signed by someone with dementia. In response to our article last week, one reader wrote to us:

“You covered dementia issues very clearly. Thank you! But what about the issue of undue influence in the presence of known dementia where, in principle, the demented person otherwise possesses testamentary capacity? How does the mix of those two aspects play out?”

It’s a very good point. There is a difference between capacity (or competence) on the one hand, and undue influence on the other. Dementia might make a given signer incapable of signing a document, or their competence may be sufficient to sign. But that same person might be made more susceptible to undue influence because of their dementia.

What do we mean? Let’s give an example — drawn from our considerable experience with the distinction. An elderly widower, living alone, has a diagnosis of dementia. He is nonetheless charming, witty and perfectly able to discuss his wishes. He can recall the names of his three children, and of his seven grandchildren. He can report their ages, the cities they live in and their careers (or status as students) — and he is mostly correct, though sometimes his information is two or three years out of date.

This gentleman’s daughter lives in the same city, and is the one who oversees his living arrangements and care. She does his shopping, hires people to check on him daily, takes him to doctors’ appointments, writes out his checks (he still signs them) and otherwise helps out. She also talks to him endlessly about how his other two children don’t deserve to end up with his house and bank accounts, how she really ought to be the one who benefits from his estate, and how his late wife (her mother) always wanted her to inherit everything. Eventually he agrees to sign a new will and trust, mostly to stop her constant harangues.

Was he competent to sign the new estate planning documents? On the facts as we’ve given them here, probably yes. Was he unduly influenced? Very likely. Was that influence facilitated (and the proof made easier) because of his dementia? Absolutely.

When did the daughter’s behavior cross the line? The legal system isn’t actually very helpful, since the answer is defined in a circular fashion. Her influence was “undue” when it resulted in her wishes being substituted for his. It was not necessarily objectionable (at least not legally) when she told him what she wished he would do, what her mother had wanted, or what was fair. But at some point she may well have turned ordinary familial influence into “undue” influence.

We hope that helps explain this complicated and nuanced area of the law. But we want to leave you with a completely unrelated, but important, note: Kieran Hartley York joined the Fleming & Curti family (literally) on Sunday, March 3. We are delighted to have met the little guy, and look forward to great things from him in the future.

Lawyer, Acting as Trustee, Challenged for Self-Dealing

DECEMBER 3, 2012 VOLUME 19 NUMBER 44
One of the great advantages of a trust can be the ability to bypass court supervision and review. One of the great disadvantage of a trust can be that it bypasses court supervision and review. A recent California Court of Appeals decision highlights the problem nicely — and at the same time provides a warning for trustees.

California attorney Douglas Mahaffey represented Tom Matthews (not his real name) in a personal injury action in 1992. He helped Matthews recover a $3.5 million settlement, and then agreed to act as trustee, handling his client’s money. One concern lawyer and client shared was Matthews’ possible exhaustion of the funds; they agreed that a separate trust would be set up to protect $356,967 for the benefit of Matthews’ daughter Katrina (not her real name). Mahaffey would act as trustee of that trust, as well.

Four years after Katrina’s trust was set up, Mahaffey loaned himself $210,000 from the trust. He signed a note, with an indicated rate of 8%. There was no security for the loan — Mahaffey did not pledge his home, his office or business, or any other assets to protect the trust from default. His law firm did guarantee the note, indicating that if he did not make payments the firm itself would be liable.

Mahaffey did not make payments on the loan, and did not tell anyone about it at the time. Later Matthews, the father of the trust beneficiary, found about it, and Mahaffey asked him to sign a a set of documents ratifying what Mahaffey had done with his, Matthews’, money. After Katrina reached her majority she found out about the loan and sued Mahaffey.

A California judge agreed with Katrina that Mahaffey should not have loaned himself the money, but also that his motivation included a desire to “protect” Katrina’s money from, among other things, the possibility of litigation brought by Matthews against Mahaffey. Nonetheless, the judge removed Mahaffey as trustee, ordered him to repay the loan immediately, and added interest of almost another $200,000, and imposed additional interest of $110/day for each day the sums remained unpaid.

The California appellate court reviewed the record (after Mahaffey appealed) and concurred with the outcome. The appellate judges noted that “the trial judge went easy on Mahaffey.” The court notes a number of items in the litany of objections to Mahaffey’s administration of the trust:

  1. The loan was self-dealing, even if Mahaffey motivation was not abjectly self-interested. He should not have loaned trust money to himself.
  2. The interest rate (8%) was slightly less than the “prime” interest rate at the time. That made the self-dealing more obvious and problematic.
  3. The fact that the note called for no actual payments — not even interest — for 10 years, and that it was unilaterally extended by Mahaffey when it came due, further showed his self-dealing. In fact, no payments were made on the note at all until 2002, and then only interest payments were made up until the time of trial.
  4. The failure to adequately secure the loan was another strike against Mahaffey. The significance of that failure was not truly evident until after the trial; the appellate court notes that Mahaffey and his law firm filed for bankruptcy after the judgment was entered but before the appeal was decided.
  5. The opinion is replete with information about another trust Mahaffey administered — the trust for Matthews, holding the rest of his lawsuit settlement proceeds. It turns out that Matthews separately sued Mahaffey for mismanagement, but that lawsuit had been dismissed because it was filed too long after Matthews learned of the items he later complained about.

It is easy to criticize what is appears to be obvious self-dealing by a trustee after the fact. What happens time and again, however, is that trustees reach a tipping point by degrees — first rationalizing that they will pay interest rates above what the trust could get in other investments, then by adding the thought that they are good credit risks, then by rationalizing that it saves everyone time, money and taxes to keep the transaction in the trust “family.” The right answer: just say no. If you are a trustee, do not borrow money from the trust. Period.

As the Court of Appeals noted in this instance: “It is strong poison for attorneys who double as trustees to make loans to themselves.” Indeed. It is equally strong poison for any other trustee, though attorneys face the additional risk of losing their law licenses as well as being removed and surcharged for self-dealing. Although the appellate opinion does not indicate what has happened or might happen, Mahaffey could still face discipline or even disbarment by the State Bar of California. Grunder v. Mahaffey, November 7, 2012.

A critical reader might note that nothing about the description here explains our introductory observation. Trusts ordinarily do not have to be supervised by any court — that is one of the primary selling points for trusts, in fact. We generally agree. The cost of posting a bond, filing periodic accountings with a court and giving formal notice can be high, and there is often no need to seek an independent review of trustees’ behavior. But there is a trade-off involved. If the informal and extra-judicial alternative of trust planning is being considered, there really ought to be some way to monitor the trustee’s behavior.

Could Matthews, in the story told above, have demanded accountings, and more closely followed Mahaffey’s actions? Undoubtedly. Would that have prevented the self-dealing, or at least caused it to be cured earlier? Perhaps. But the very advantages of trusts (privacy, lack of formal accounting requirements and limited independent oversight) can often lead to the largest risk inherent in trust administration.

How is a thoughtful planner to respond? Pick your trustees carefully (you might, for instance, want to know how often the trustee acts in that capacity), and then provide a monitoring mechanism (accountings to a trusted third person, perhaps). It can be a challenge to balance efficiency and risk.

Special Needs Trusts: How Much Trouble Are They to Manage?

SEPTEMBER 3, 2012 VOLUME 19 NUMBER 34
I’m thinking about setting up a special needs trust for my son, who has a developmental disability. Will it mean a lot more work for my daughter, who will be handling the estate?

It’s a fair question, and one we hear a lot. No one ever asks: “could you please give us the most complicated estate plan possible?” Everyone wants things as simple as they can be.

When you think about providing an inheritance for your child — or anyone, for that matter — with a disability, there are some realities you just have to deal with. Those realities almost always lead to the same conclusion: a special needs trust is probably the right answer. There are a number of answers to the “can’t we keep it more simple?” question:

  1. In most cases there’s going to be a trust, whether you set it up or not. If you leave money outright to a person suffering from a disability, someone is probably going to have to transfer that inheritance to a trust in order to allow them to continue to receive public benefits. The trust set up after your death will be what’s called a “first-person” (or “self-settled”) trust, and the rules governing its use will be more restrictive. There will also have to be a “pay-back” provision for state Medicaid benefits when your son dies — so you will lose control over who receives the money you could have set aside. Even if no trust is set up, there is a high likelihood that your son will (because of his disability) require appointment of a conservator. The cost, loss of family control and interference by the legal system will consume a significant part of the inheritance you leave and frustrate those who are caring for your son. If you prepare a special needs trust now it sidesteps those limitations.
  2. The trust you set up will not be that complicated to manage. People often overestimate the difficulty of handling a trust. Yes, there are tax returns to file, and summary accounting requirements. Neither is that complicated; neither is anywhere near as expensive as the likely costs of not creating a special needs trust.
  3. Your daughter can hire experts to handle anything that she finds difficult. There are lawyers, accountants, care managers and even trust administrators who can take care of the heavy lifting for your daughter — or whomever you name as trustee. The costs can be paid out of the trust itself, so she will not be using her portion of the inheritance you leave, or her own money. Yes, they add an expense — but they can actually help improve the quality of life for both your daughter the trustee and your son with a disability.
  4. Your daughter does not have to be the trustee at all. We frequently counsel clients to name someone else — a bank trust department, a trusted professional, or a different family member — as trustee. That lets your daughter take the role in your son’s life that she’s really better suited for: sister. If it is right for your circumstance, you might even consider naming her as “trust protector.” That could allow her, for instance, to receive trust accountings and follow up with the trustee, or even to change trustees if the named trustee is unresponsive, or too expensive, or just annoying. Trusts are wonderfully flexible planning devices — but that does mean you have to do the planning.
  5. If your son gets better, or no longer requires public benefits, the trust can accommodate those changes. Depending on your son’s actual condition and the availability of other resources, you might reasonably hope that he will not need a special needs trust — or at least might not need one for the rest of his life. The good news: your special needs trust will be flexible enough to allow for the use of his inheritance as if there were no special needs. The bad news: that is only true if you set up the trust terms yourself — the trust that will be created for him if you do not plan will not have that flexibility.
  6. Simply disinheriting your son probably is not a good plan. Sometimes clients express concern about the costs and what they perceive as complicated administrative and eligibility issues, and they decide to just leave everything to the children who do not have disabilities. “My daughter will understand that she has to take care of my son,” clients tell us. That’s fine, and it might well work. But do you feel the same way about your daughter’s husband? What about the grandkids and step-grandkids who would inherit “your” money if both your daughter and her husband were to die before your son (the one with the disability)? What about the possibility of creditors’ claims against your daughter, or even bankruptcy? Most of our clients quickly recognize that disinheriting the child with a disability is not really a good planning technique.
  7. But who knows what the public benefits system, the medical care available, or my son’s condition might look like twenty years from now? Indeed. That’s exactly why the trust is so important.

What does that mean for your planning? If you have a child, spouse or other family member with special needs — OR if you have a loved one who may have special needs in the future — your plan should include an appropriate trust. The cost is relatively small, and the benefits are significant. There are really only three downside concerns for special needs planning:

  1. The cost. But the cost of not doing anything is probably higher — and the opportunity loss from failure to plan is especially high.
  2. The nuisance value. Yes, that does mean you need to go see a lawyer. Need a place to start? Look at the membership of the Special Needs Alliance. There’s likely someone near you who understands the importance of special needs planning.
  3. The name. Don’t want to tag your loved one as “special needs”? Then don’t. Call your trust The John Doe Maximum Opportunity Trust. Or the Panorama 2012 Trust. Or Green Acres Fund. With your lawyer’s help, customize the language of your child’s trust to speak in your voice, and to identify what you think is important. Take advantage of the flexibility offered by trust planning.

 

Claimant Must Prove Undue Influence, Lack of Capacity

AUGUST 27, 2012 VOLUME 19 NUMBER 33
It has been some time since we wrote about the concepts of undue influence and lack of testamentary capacity — and the differences between these two legal concepts. A recent Minnesota appellate case strikes us as a good opportunity to revisit challenges to wills and trusts based on allegations of mental shortcomings.

Linda Samson (not her real name) was a widow, living in her own home in Minnesota. She had two children, a son and a daughter. She and her late husband had created a living trust several years before her husband’s death; it provided that after the second spouse died, the remaining estate would be divided into three shares. One share would go to the couple’s daughter, another to their son, and the third to their son’s wife.

In 2003 Linda was diagnosed with “early-state Alzheimer’s disease.” In 2006 she signed an amendment to her trust deleting both her daughter and daughter-in-law (and leaving everything to her son). In 2008 she signed two deeds to her home — one transferred her home out of the trust and into her name alone, and the second one transferred her home from her name into her son’s name (but reserving a life estate for herself).

Between her initial Alzheimer’s diagnosis and 2008 Linda’s medical records periodically referred to her memory loss but indicated that she was stable. She continued to live at home, though with some assistance. She had a sharp mental decline in the summer of 2008, and by fall of that year a home health agency was recommending 24-hour care. She moved into a nursing home in the spring of 2009, was enrolled in a hospice program and died in June of that year.

Linda’s daughter objected to the 2006 amendment to Linda’s trust and to the 2008 transfer of her home. She argued that her mother lacked the capacity to sign either of those sets of documents, and/or that her brother must have unduly influenced their mother to his own benefit (and her detriment).

The probate judge heard testimony from several people who knew and/or treated Linda. Two expert witnesses hired by her daughter, both doctors, had reviewed Linda’s medical records but had never met her. They testified that her capacity was obviously diminished, and that it would have been possible to unduly influence her.

On the other side, the lawyer who prepared the trust amendment and the deeds to her house testified that, though he had not met his client before, she seemed to be able to explain her reasoning for the changes and she knew who her children were and what she was doing. He testified that she had told him that it saddened her that her daughter was not very involved in her life, but that she was pleased at the extra care and attention she received from her son and his son, her grandson.

Both the initial and the follow-up sets of appointments with the lawyer had been arranged by Linda’s son, but in both cases (he testified) it was at her request. Although the lawyer had met with both Linda and her son initially, further discussions were with Linda alone; the transfer of the house had actually been initiated by the lawyer rather than either Linda or her son. The lawyer pointed out that it didn’t really change the disposition of her estate at all, since Linda’s son was already the sole beneficiary of her trust estate.

There was one odd moment, according to the lawyer’s testimony. During one of the interviews with Linda he sought to establish that she knew her family members and the relationships (a key part of the standard for determining testamentary capacity). When he asked Linda about her daughter, she said that she was sorry that they were not closer, that the daughter was on her third husband (in fact, her husband had just died), and that her daughter had suspected that she, Linda, had had an affair with the husband. When the lawyer expressed surprise and asked follow-up questions, Linda dismissed the idea and said she had gotten confused; that had been the plot of a biblical story she had read.

After trial, the probate judge ruled that Linda’s daughter had not proven that her mother lacked testamentary capacity OR that her brother exercised undue influence. The judge noted that the supporter of questioned documents has the burden of proof that the documents were executed properly. After that, though, the contestant of a will or trust has the burden of proving allegations of undue influence or lack of testamentary capacity. Linda’s daughter introduced testimony that there could have been undue influence, and that Linda’s capacity might be suspect — but her burden had been to prove that there was undue influence, or that Linda actually did not understand what she was signing.

The Minnesota Court of Appeals agreed, upholding the probate judge’s ruling. The appellate judges had the same understanding of the burden of proof, and saw no reason to set aside the probate judge’s findings. Linda’s last trust changes, and the transfer of her home to her son, were both upheld. In the Matter of the Smith Living Trust, August 20, 2012.

This Minnesota case is not the most eloquent on the subject, and of course it would have little or no precedential value in Arizona. The opinion is also “unpublished,” which means that the Minnesota Court of Appeals decided that it should not be cited as precedent even in Minnesota itself. Still, there are several reasons we like the decision and call attention to it here:

  • It is a nice exposition of the “burden of proof” issue, pointing out that many will and trust contests lose not because the proponent of the document prevails but because the contestant fails. Generally speaking, the person who challenges a will, trust, deed or other estate planning document has to overcome the presumption that the signer was competent and knew what he or she was doing.
  • It describes the sorts of things a good lawyer should do to protect the validity of documents he or she prepares. The lawyer met with Linda alone (we would have liked it even better if he had never met with Linda and her son together, but at least he dealt primarily with Linda directly), the deed change was prompted not by Linda’s son but by the lawyer himself, the lawyer could testify that he routinely took steps to assure that his clients are competent and aware of what they are doing.
  • On the other hand, the contestant had to rely, as is often the case, on inference and reconstruction. The contestant’s two expert witnesses had never met Linda, and their opinions were consequently guarded (they said that she was susceptible to undue influence, but they could not testify to the extent of any influence they might suspect).
  • Perhaps most importantly, the opinion makes clear that even someone with a long-standing diagnosis of dementia might still be able to sign estate planning documents. Testamentary capacity (the ability to sign a will) is not immediately compromised by virtue of a dementia diagnosis; Linda had carried her diagnosis for several years but still had the capacity to understand the nature of her trust change, to identify her family members and to describe what assets she wanted to pass to her son. The fact that she had one episode of fairly serious confusion did not prevent her from signing her new trust.

Some Persistent Myths About Probate Exploded

JULY 2, 2012 VOLUME 19 NUMBER 25
It’s a slow week (with the Fourth of July holiday breaking it up on a Wednesday) and it’s too hot to think about actual controversies this week. So let’s take a minute to clear out some longstanding items we’ve been meaning to get around to. One thing we’ve meant to do for quite a while is to try to explode some common myths about legal issues — and particularly about the probate process. Here are some of the mistakes we most commonly hear from clients, questioners and (occasionally) professionals who have given not-so-good legal advice to our clients:

If you want to avoid probate, you should sign a will. Sorry, but that doesn’t help. Upon your death a probate proceeding will have to be initiated to transfer property owned in your (individual) name alone, with not beneficiary designation. Property that doesn’t meet that description will ordinarily not need to be subjected to probate. Signing a will does not change that answer in any particular. For that matter, merely signing a trust does not change the answer, either. The way a trust can help you avoid probate is by creating an entity which can become the owner of your property; that entity (the trust) does not “die” with you, and so assets transferred to its name should not be subject to the probate process. But it is the funding of the trust (that’s what lawyers call the process of retitling your assets to the trust’s name) that avoids probate.

There is one significant exception to the rule that everything in your name has to go through probate on your death. In most states there is some sort of simple affidavit process to bypass probate for small estates. The definition of “small” varies, though. In Arizona it is (for most purposes) $50,000; if you die with assets of over that $50,000 threshold in your name alone, with no beneficiary designation, your estate will be subjected to probate.

What do we mean by that “in your name alone, with no beneficiary designation” phrase? Only property that is not held as joint tenants with right of survivorship, community property with right of survivorship, or as POD (payable on death) or TOD (transfer on death). Be careful about those ownership options, however — avoiding probate may not be worth the problems you can create by changing ownership of property.

Probate avoidance is critically important for everyone. There are two ways in which this common belief is mistaken. First, there are a small number of circumstances in which probate may actually be beneficial. Second, for the greater majority of people who ought to be thinking of probate avoidance, the cost of implementing, managing and periodically reviewing probate avoidance plans is sometimes simply not worth incurring.

Let’s deal with the first one first. When is probate actually a good thing? There are very limited circumstances where it is a good idea — but those circumstances do sometimes appear. One is where the decedent had potential claims that might be asserted against her or his estate. A good illustration: a deceased professional (doctor, lawyer, architect, accountant, nurse) who might have an unknown malpractice claim. Filing a probate, and publishing notice of that probate in local newspapers, can help cut off those uncertain and potential claims. Note, though, that in Arizona and some other states you can actually publish notice to creditors without needing to open a probate, so that argument in favor of probate is further limited.

Here’s a better one: when you are managing the affairs of someone who has died, and you know there will be disputes about what you have done, you might prefer to have the entire process supervised by the court. That doesn’t come up very often, but sometimes it can be very beneficial to your peace of mind to know that everything you do has already been blessed by the judge who has the authority to review your administration, your bills and your proposed course of action.

Let’s deal with the other side of the coin: probate avoidance is often not worth the trouble or expense. With updated probate administration rules (like those in place in Arizona for nearly forty years now), the cost, hassle, and public disclosure associated with probate proceedings have all been dramatically reduced. The cost of preparing, funding and monitoring a probate-avoidance trust may simply be more than the cost of probate itself.

Lawyers try to talk clients out of doing probate avoidance in order to protect their future probate fees. Let’s imagine for just a moment that we lawyers are as venal as that assertion suggests. So here we are, with (say) twenty years of professional life ahead of us, and you come visit us at age 60. Which is better for us: (1) we collect, say, $2,000 from you right now in order to create a probate-avoidance trust plan, or (2) we collect $500 from you today and cross our fingers that you will die before you turn 80 so we can get another $2,500 in probate fees — for which, incidentally, we will have to do quite a lot of work. Do you begin to see just how insulted we are by this popular myth?

There are a number of other reasons we lawyers might actually be better off if you sign the probate-avoidance trust, incidentally. In five years, when you come to see us to make changes, amending your trust will probably generate slightly more in legal fees than creating a new will would be. And we do count on seeing you in five years — no matter how well your estate plan is crafted, you should assume that it needs to be reviewed at about that time. Your interests and ours are mostly in alignment: we both want to get the right estate plan for you, at the most appropriate cost, and not opt either for more expense than you need or less coverage than you are entitled to expect.

I don’t need to do estate planning because my family knows what I want. Really? How do they know? Have you had a big family meeting where you detailed your wishes to everyone at the same time, and gotten them to agree that they understand and will follow your wishes? Did their wives, husbands, children and grandchildren all agree? (Because, you realize, one or more of your immediate family members might actually die before you do.) Did it all get reduced to writing to make sure everyone remembers the agreement twenty years down the road? If you did all that, congratulations — and you’ll be one of the few people we consult with who appreciate how much simpler it actually is for you to sign a real estate plan. We are also, incidentally, trained to probe the things you didn’t think about — like what happens if your estate is significantly larger or smaller, or if the kinds of assets you own are quite different, at your death? What happens if you loan (or have loaned) money to one or more of your children? How about naming a back-up personal representative? Did you even realize they are called “personal representative” instead of the more common — and inaccurate — “executor”? All of that, and more, is what you get when you hire a professional — like, for example, us.

So what’s your favorite probate myth? Let us know, and maybe we’ll continue the explosions after the Fourth of July holiday.

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.

Challenge to Three-Year-Old Trust Reformation is Dismissed

JANUARY 9, 2012 VOLUME 19 NUMBER 2
With the increased emphasis on (and use of) living trusts for estate planning, we lawyers are seeing more and more cases in which an old trust needs modification. Perhaps the tax laws have changed since a parent or grandparent died. Maybe what once made sense is less defensible in light of modern investment thinking, or the cost of living has caught up with what once seemed like a generous bequest. Family dynamics, always fluid, can change the reasonableness of a decades-old estate plan. Everyone knows someone whose family was once considered wealthy, and now is considerably less so. Any of those scenarios — and dozens of others — can be the basis of a desire to change something that seemed set in stone when the plan was adopted.

That’s when lawyers begin talking about trust reformation or modification. In recent years we have begun talking about decanting — pouring the contents of an older trust into the vessel of a new trust document. Not every state permits decanting, though, and state laws vary in how they approach modification of trusts. That can lead to uncertainty, family friction and even litigation.

Take, for instance, the recent Indiana case involving the trust — and the family — of John and Ruth Rhinehart. In 1997 Mr. and Mrs. Rhinehart established an irrevocable trust for the benefit of their daughter, Julie R. Waterfield. They placed $4 million in the trust, and provided that at least $100,000 per year would be paid to their daughter. When she dies her trust will divide into three new trusts — one for each of her children. Each of those trusts will pay $25,000 per year to the grandchild for whom it is set up.

That was certainly a generous gift, and should help provide for the welfare of the Rhinehart’s daughter and grandchildren for decades. In fact, the trust has grown — as of 2009 it was worth about $22 million. What could possibly be wrong with the Rhineharts’ largesse?

Sometime shortly after the trust was created, Julie Waterfield made a pledge to Indiana University – Purdue University Fort Wayne (IPFW). She promised the University $1.5 million so that a new recital hall could be built in the campus’s new music building — a building, incidentally, named after her parents.

There was only one problem with her pledge. By late in 2002, stock holdings she had expected to use for the donation had become worthless. It appeared that the only way for her to meet her pledge would be to increase the annual payments from the trust established by her parents. She would need not $100,000 per year, but more like $275,000.

She and her lawyer approached the trustees about how to reform the trust to permit the larger distributions. Everyone agreed that if she could get the approval of all of the future beneficiaries, the trust could be modified. The trustees engaged Ms. Waterfield’s lawyer to complete the process, and he filed a court proceeding seeking an increase in the distribution. The Indiana court approved the increase, conditional on getting all eighteen potential beneficiaries — current, future and contingent — to sign consents.

At a family meeting in December, 2002, all three of Ms. Waterfield’s children signed the agreement to reform the trust. One of them requested a copy of the full agreement, and the trust’s lawyer sent him a copy a few days later. Ms. Waterfield’s distributions were increased and, presumably, her pledge fulfilled.

Three years later, two of Ms. Waterfield’s children expressed concern about the increase in their mother’s distributions. They argued that their signatures on the agreement to reform the trust had been obtained by fraud, and they brought suit against their mother and the corporate co-trustee of the trust. Ms. Waterfield and the trustee argued that it was too late — that the statute of limitations on such an action ran out two years after the change was approved. In any case, they insisted, there was no injury to Ms. Waterfield’s children: there would be plenty of money available to fund their annual $25,000 distributions. The trial judge agreed and dismissed the lawsuit.

The Indiana Court of Appeals agreed. The appellate judges noted that both sons’ signatures were on the agreement, that they acknowledged they had gotten a letter from the lawyer which claimed it enclosed a copy of the agreement, and that it strained credulity to think that they would have failed to ask for the referenced enclosure if it had not in fact been in the envelope with the letter. In other words, their cause of action — if they had one — was known to them at least by the date of that letter. In Indiana, the statute of limitations on such an allegation of breach of fiduciary duty is two years — the Waterfield children waited more than a year too long before filing their lawsuit.

Furthermore, according to the appellate judges, the growth of the trust to $22 million — despite several years of increased distributions to Ms. Waterfield — adequately protected her sons’ interest so that they were not injured by the trust reformation. The Court of Appeals rejected their argument that the trust itself was injured by what they insisted was fraudulent behavior. The beneficiaries do not have the authority to bring their action on the basis of injury to the trust, but must show injury to themselves, according to the Court. Matter of Waterfield v. Trust Co., December 30, 2011.

Would the answer have been different in Arizona? Possibly. But it is more likely that the process itself would have been different in Arizona. With adoption of the Arizona Trust Code (a version of the Uniform Trust Code) it has become easier to modify or reform a trust. Some modifications can be done without the court’s involvement at all. Perhaps more importantly, it has become somewhat easier to clearly begin the running of the statute of limitations on claims against trustees under Arizona’s new law.

Some More of Our Readers’ Questions Answered

MARCH 7, 2011 VOLUME 18 NUMBER 8
Two weeks ago we answered some of our readers’ frequent questions, and we solicited more. We heard from several of you with good questions of general interest. Among those (with identifying information and some details stripped out):

My wife and I do not have any obvious family member to handle our estates. Whom should we name as executor? Most (but not all) married couples will leave administration of their estate in the hands of the surviving spouse after the death of one spouse. Most (but not all) will name one or more of their children to act in the case of simultaneous death, or upon the second death. But what are your choices if you do not want to name your children, or if you have no children?

Of course you can name other family members to handle your estate. Some clients even name parents, although of course it is uncommon for parents to live longer than their children. Siblings, grandchildren, cousins can all be good candidates. Cousin Emily, the lawyer in Illinois, might be a perfectly good candidate. Same for nephew Dale, the CPA in California.

Some clients — occasionally even those with children — may choose to have a professional named to handle their estate. In that case there are at least four types of choices to consider:

1. Bank trust offices. Not all trust companies are related to banks, so we do not mean to limit the choice to bank trust companies — but the image of a bank officer acting as trustee is at least a little bit familiar to most. The good news: it is likely that your bank trust department will still be around, even long after your death. Even if it changes names, or merges with another bank, it will still exist and be identifiable. We can safely predict what the bank trust office will look like, and how it will make its decisions, even well into the future; we have several centuries of experience to draw on in describing how a trust company works.

There are two problems with trust companies for many of our clients. First, the banks have begun to set their fees and selection criteria to favor larger estates. For many banks, that means that they are not interested in acting if your estate does not exceed a million dollars in value — though many banks’ minimums are half that, and banks will often accept estates that are less than their stated minimums.

The other objection we often hear to naming a bank: they tend to be an expensive option. To administer a continuing trust, most banks will charge between 1% and 1.5% of the value of the trust each year (although the precise figures vary widely and are often negotiable). To handle the administration of an estate that will be closed in a year or so, the bank may charge 3%-5% of the value of the estate — or more, if there are complicated assets, difficult administration issues or a modest estate.

Banks also tend to be very conservative organizations, with plenty of rules and a complicated decision-making hierarchy. They may decline to handle real estate, for example, or have a very methodical and inflexible approach to investments or to making distribution decisions. For many clients that is exactly why the banks are a comfortable choice. For others, that can make them look less attractive.

2. Professional fiduciaries. In recent decades an industry of non-bank private fiduciaries has grown up in Arizona (and in many other states). There is even an organization of professional fiduciaries — the Arizona Fiduciaries Association. If your estate is too modest to interest the banks, or if you anticipate that there will be a need for a lot of personal oversight (if, for example, you want to set up a special needs trust for your child who has a disability), the non-bank fiduciaries may be an option.

The good news: the ranks of professional fiduciaries include social workers, accountants, lawyers, money managers, and individuals with a variety of backgrounds and interests. There is a high likelihood that you can locate someone who will be a good fit for your personal situation.

There are a number of problems with naming professional fiduciaries to handle your estate, however. First, the individual fiduciary is probably (we might even say “likely”) mortal. They might not outlive you, in fact — and they probably won’t still be around to handle the trust you set up for your great-grandchildren. Unlike the centuries-long experience with bank trust companies, we do not yet know what the professional fiduciary industry will look like decades into the future.

Private fiduciaries can also be expensive. Many private fiduciaries will charge hourly rates (which tends to save some of the expense, though it can actually increase the cost). Some will charge amounts similar to those charged by bank trust companies — though they may provide additional services, like care management, in those similar costs.

3. Other trusted professionals. Many of our clients choose to name their accountant, or their investment adviser, or their lawyer, to handle their estate. Yes, that can sometimes mean they name our office, and we are willing to name ourselves in documents we prepare — though we encourage clients to think of us as a last choice.

The good news: if you name someone who has already been involved in your life you increase the likelihood that the “fit” will be good. As you continue to work with the person named in your estate plan, you can periodically re-assess that fit and modify your estate planning if it becomes an issue. You will also have a fairly good idea of how rates are set, and whether the costs are reasonable.

As with other non-institutional fiduciaries, one big problem with the professional adviser is (how do we say this delicately) a general lack of immortality. Your accountant’s firm may continue for years after your own accountant dies (or retires), but are you comfortable in predicting that it will have the same values, principles and personality?

4. Friends. Sometimes clients name long-time friends to handle their estates. They may reason that friends’ values and reliability are known quantities. Friends, in turn, are likely to know your values and to make decisions in a way that you would have approved, had you still been around to monitor the administration of your estate.

The good news: friends tend to be less expensive than most of the professional choices, and there is indeed a high likelihood that they will know your family situation and personal values. If you name a close friend, however, you should periodically pull out your estate plan and reconsider whether it remains the right selection — our personal relationships do tend to fluctuate over time.

The bottom line: there often is not a perfectly obvious answer. It can be challenging to balance costs, availability (over the long term) and suitability to come up with the best choice to handle your estate. And we haven’t even discussed the differences between naming a personal representative for your will (the more modern term for the commonly-used “executor”), a trustee for your trust (what many people actually mean when they say “executor”) and an agent for your power of attorney (the role that is often most important while you are still alive). Maybe another day. In the meantime, keep those questions coming.

Uniform Transfers to Minors Act Accounts in Arizona: A Primer

JANUARY 31, 2011 VOLUME 18 NUMBER 4
One question we are frequently asked: isn’t it a good idea to set aside money for a child or grandchild, and isn’t a UTMA (Uniform Transfers to Minors Act) account a simple way to do that? OK — that’s really two questions. Our answers: Yes, it is a good idea to set aside money. Yes, the UTMA account is a simple way to do it. Don’t set up a UTMA account, however, until you understand the consequences.

There are confusing issues about UTMA accounts. Sometimes the confusion is heightened by the fact that each of the 48 states which have adopted versions of the UTMA Act has changed it a little bit — so what is true in Arizona may not be true in another state (and vice versa). Rather than indulge in all that confusion, however, we are going to tell you in straightforward language what to watch for in Arizona. Be careful about applying these principles to other states’ UTMA acts.

First, the good news. Here are the positive things about Arizona UTMA accounts:

  1. They are inexpensive to set up and to administer. They do not require a lawyer, and avoid courts and formal accounting requirements altogether. All you have to do to create an Arizona UTMA account is to include the name of a custodian, the name of the beneficiary, and the letters UTMA in the title. This will work: “John Jones as custodian pursuant to the Arizona UTMA for the benefit of Marie Smith.”
  2. A UTMA account can simplify the gifting of substantial amounts of money by multiple family members. Set up an account for your 2-year-old, and all four grandparents can put $13,000 each into the account each year (using 2011 numbers — the maximum non-taxable gift may go up next year or in future years).
  3. They automatically end at 21, so the money will not be tied up indefinitely. One of the points of confusion: sometimes UTMA accounts end at 18 in other states, and in some circumstances in Arizona. But if you are putting your money into an account for a minor in Arizona, the end date is age 21.
  4. They encourage regular savings by simplifying the process. Open an account with, say, $1,000, and put $50/month into the account. You won’t save a fortune in 15 years, but you will have $10,000 that you wouldn’t otherwise have saved without this discipline. Plus the earnings and growth on the investment, as a bonus.
  5. If the minor receives public benefits like SSI or Medicaid, the money will usually not be treated as “available” (and therefore reduce or eliminate benefits) until age 21.

Of course it’s not all good news. Here are some problems or limitations:

  1. The money in the UTMA account will need to be reported on the minor’s FAFSA (Free Application for Federal Student Aid) form when applying for student aid — and it will be treated as completely available to the student. In other words, the very existence of a UTMA account may prevent receipt of needs-based student aid.
  2. The income in the UTMA will be taxed at the minor’s parents’ income tax rates. Unless, of course, there is so much money in the minor’s name that his or her rate is higher — then the UTMA account will be taxed at that higher rate.
  3. The minor may have to file an income tax return if the UTMA money produces significant income. The UTMA account may be used to pay any income tax due, and the tax preparation costs, but it will require that a return be prepared.
  4. At age 21 the (former) minor is entitled to receive all the money. Period. It doesn’t matter if he or she has become a drug addict, a spendthrift or a cult member.
  5. If the (former) minor receives public benefits like SSI or Medicaid, at age 21 the UTMA account becomes an “available” resource and may compromise those benefits.
  6. If the UTMA custodian is the parent of the minor (which is by far the most common arrangement), then there may be additional complications in how the money can be used and/or what tax effect the money might have. Since a parent has an obligation to support his or her minor children, the UTMA account generally can not be used by a parent/custodian in ways that reduce or satisfy that support obligation. If, on the other hand, the donor of the money acts as custodian, he or she may not have gotten the money out of his or her estate (which is usually one intention on the donor’s part).
  7. Although UTMA accounts are usually seen as simple mechanisms avoiding lawyers and conflict, the custodian still has an obligation to give the minor (or his or her guardian) account information. Thinking of giving a divorced and non-custodial parent money for the benefit of his or her minor child? Know that you are inviting a dispute between the custodial parent and the UTMA custodian over how the money is invested and spent (or not spent).
  8. What happens if the custodian dies or becomes incapacitated? There is no easy mechanism to select a successor custodian; it may require a court proceeding to name a successor. A fourteen-year-old minor may be able to select his or her own custodian, which could raise concerns for a thoughtful donor. (Note: Arizona law does allow the current custodian to name his or her own successor custodian, but few do. If you are planning on setting up a UTMA account, insist that the custodian select a successor.)
  9. What happens if the beneficiary dies before reaching age 21? The money goes to his or her estate — which may require a probate proceeding (if the total is over $50,000 in Arizona) and usually means that the money will be split between the child’s parents. That may be fine, but it may not be what the donor intends or wants.
  10. The effect of interstate proceedings is unclear. If you live in New Mexico and set up a UTMA account in an Arizona bank with an Arizona custodian for a minor who lives in Iowa, what happens when your custodian moves to Wisconsin? What courts might the custodian have to answer to, and whose law applies in the case of a disagreement? Fortunately, this problem seldom arises — there are few legal proceedings involving UTMA disputes. But they do happen, and increasingly so in an increasingly mobile society.

What are your alternatives to a UTMA account? Consider 529 plans for educational purposes, and separate trusts if the money is intended to be for more general use. For a child who earns income an IRA might even be an appropriate choice — if the child earns $3,000 in a given year, he or she can contribute up that amount to an IRA (and the source of the money does not have to be the earnings). Talk to your financial adviser and your lawyer about the cost of the various options, the problems they raise, and the best alternative in your circumstances.

©2017 Fleming & Curti, PLC