Frequently Asked Questions

Why should everyone have a complete set of Will or Living Trust documents?

If you die without a Will OR Living Trust, the State Probate Court decides some very personal and important matters such as: who manages and inherits your estate, who will raise your minor children. In addition, if you have minor children, they will receive their inheritance at age eighteen (18).

A complete set of documents should also include a General Durable Power of Attorney, Healthcare Power of Attorney and a Living Will.

How do I know which is better for me - a Will or Living Trust?

If your assets are less than $50,000, a Will is generally sufficient. The assets can be passed to your heirs without probate (court action). However, everyone in Arizona who owns real estate or who has minor children, and has life insurance or a retirement account is better off with a Trust.

If your assets exceed $50,000 (equity in home, land, bank accounts, investments, cars, and personal property), you may want to consider a Living Trust. In Arizona, without a Trust, estates are subject to the expense and time of probate when the total value of either personal property or real estate exceeds $50,000. This does NOT include any accounts with beneficiaries (including POD and TOD assets).

What is probate?

Probate is the legal process of using the court system to pass legal title of the assets of a deceased person to the deceased person's heirs. Probate is usually required in all cases when a person dies, with or without a Will, if they have real property with more than $50,000 in equity or $50,000 of other property. Assets that have beneficiaries, i.e. life insurance, IRA's, retirement plans and some bank accounts with Pay of Death (POD) provisions are NOT subject to probate and those assets DO NOT count toward the $50,000 of real or personal property.

If an estate is subject to probate, in most case it requires hiring an attorney to process the paperwork. There are numerous documents that have to be filed to open up the estate: a notice to creditors has to be published in the paper to give creditors of the deceased person 4 months to make claims against the estate; inventories, appraisals, and accountings have to be filed. Closing documents have to be filed once the estate is fully administered, and all the assets in the estate are distributed and all debts of the decedent are paid.

Probate generally takes anywhere from 9 to 18 months; and the average cost is 7 percent of the value of the estate in attorney's fees, court costs, administration expenses and advertising costs. A person with a $100,000 estate should expect probate costs to average $7,000.

Virtually all of these probate expenses and delays can be eliminated with a Living Trust.

What is considered real property and what is considered personal property?

Real Property is land and all the structures on the land including houses, buildings and any other permanent structures or fixtures that are attached to the land and usually not removable when someone vacates the real property.

Personal Property is all other property that is not real property.

Common Misconceptions

The most common misconception about Wills is that they avoid probate. NOT Correct. A will does NOT avoid probate.

The most common misconception about Living Trusts is that many people think that they don't need a Living Trust unless their estate is over $600,000. NOT Correct.

There are two important numbers to recognize: the point at which an estate is subject to probate AND the point at which an estate is subjected to FEDERAL ESTATE TAX.

Without a Living Trust, smaller estates are subject to probate IF they exceed $50,000 (unless there are pay-on-death beneficiaries). IN ADDITION to probate, an estate may be assessed Federal Estate Tax if it exceeds the exemption amount of $1.5M.

NOTE: In determining the value of the estate for Federal Estate Taxes, death benefits on life insurance and retirement accounts are also included, along with all your other assets.

Many people think they will lose control of their assets if they are in a Trust. NOT Correct.

You continue to have the same flexibility and control over your assets that you had before the Trust.

Mistakes parents with minor children often make

They name their minor children as beneficiaries on life insurance policies.
They name their minor children as beneficiaries on retirement accounts, IRA's, Pension Plans, 401K's, Annuities, etc.
They put their children's names on their bank accounts or on their real estate.

Children under age 18 cannot be paid life insurance proceeds or the proceeds from any type of retirement account, nor can they hold legal title to bank accounts, real estate, motor vehicles or other property. If you have done this and something happens to you while your children are under age 18, the Court will have to appoint someone to collect the money and other assets and hold them for your children until each child turns 18.

If you have a Living Trust, you can name the trust the beneficiary of life insurance and retirement plans, and you can have the trust own your bank accounts and real estate. Then if something happens to you, your trust will receive all of the life insurance and retirement funds, and the person you designate to manage your trust will distribute the funds to or for the benefit of your children as you set forth in your trust (subject to IRS MRD regulations). This is an important area to coordinate with your financial advisor.

Mistakes parents with adult children often make

They put their children's names on bank accounts and other investments.
They put their children's names on their real estate.

If you place your adult children's names on your bank accounts, investments and real estate and someone sues your children, you place all those assets in jeopardy of being seized by your children's creditors. Additionally, your children may end up with a lower tax basis in your assets after you pass away; and if they ever sell those assets, they would have to pay more in taxes. You may also need your children's permission to sell, refinance or borrow on those assets.

If I already have a Will or Living Trust

Is it necessary to have a Trust updated periodically even if YOU don't have any changes?

It is always a good idea for YOU to review your Trust and know what it says. You may want to update (amend) the Trust if you need to change your beneficiaries (add, delete, modify percents or amounts, etc.), change the age of distribution to minors (if applicable), and/or change the person that would manage and distribute your estate if you (and spouse if married) were incapacitated or deceased.

If you have purchased real property since the preparation of the Trust, you should make sure that the property has been put into the Trust (with a Deed). If new bank accounts or investments have been opened, they should also be in the name of the Trust. Any other assets over the probate amount (in AZ $50,000) should also be titled in the name of the Trust. Examples might be a Motor Home, Boat, etc.

Beneficiaries on Life Insurance should be reviewed to be sure they are current and consistent with your wishes. It is important to have contingent beneficiaries in the event the primary beneficiary predeceases you. If there are minor children, the Trust can be named as the contingent beneficiary.

Retirement accounts (401k, IRA, etc.) should also be reviewed periodically for proper beneficiary designations. This process could also involve your financial advisor(s), CPA and Plan Administrator. Beneficiary designations and the Trust should work in harmony to achieve your goals. You will want to know what options are available to you and the tax consequences of each option.

Laws periodically change that could impact not only your Trust but also your beneficiary designations. Therefore, it is recommended that you have your Trust reviewed periodically to ensure compliance with the law(s) and consistency and harmony with the retirement plan beneficiary designations.

If I had my Trust prepared in another state, do I need to have it changed to Arizona?

A Trust is usually "valid" in all states IF it was valid in the state in which it was drafted. HOWEVER, laws change that could impact the Trust and its effectiveness. Also, Arizona is a community property state; administration and application of the Trust in non-community property states may not achieve the same result; and conversely Trusts prepared in other states (for example, common law) may not achieve the desired result in Arizona. Your circumstances or desires may also have changed regarding disposition of your assets, naming of individuals to act for you (Successor Trustees, Powers of Attorney, Guardians, etc.), age of distribution to minors. Any of these changes could necessitate an Amendment to your Trust. It is recommended that you have your Trust and related documents reviewed periodically. (Note: Retirement plan beneficiaries should also be coordinated with the Trust. You should always know the options available to you and the tax consequences of each option. It is also important to discuss these options with your plan provider and accountant.)

Other changes may be needed:

Your Power of Attorney (for any assets outside the Trust) may need to be redone for Arizona. Many states have specific requirements regarding Powers of Attorney. Arizona changed its requirements in 1998.

If you have purchased a house or opened new bank or investment accounts, they should be in the Trust. The house should be transferred to your Trust with a Deed. Bank accounts, investments, etc. can simply be opened in the name of the Trust.

How do I make changes to my Trust?

Changes to a Trust are made with Amendments. An Amendment must be signed and notarized. Changes should not be handwritten on the original Trust document.

If my circumstances have changed (married, divorced, want to add or delete beneficiaries, etc.), how do I change my Trust?

An amendment can be prepared to make any of these changes. An Amendment must be signed and notarized. Changes should not be handwritten on the original Trust document.

If my Trust was prepared a number of years ago, do I need to have it reviewed?

First, YOU should periodically review your Trust to ensure that there have not been any life-changing events (for example: births, deaths, adoptions, marriages, divorces, retirement, a dramatic change in financial status, etc.) that would require a change to your Trust. Determine whether you need to change the beneficiaries or the distribution amounts or terms to those beneficiaries. Should a change be made regarding who will manage your trust estate if you become incapacitated or who will distribute your trust estate upon your death.

Second, your Trust may need to be reviewed by an attorney or competent estate planning professional to determine if there have been any changes in the law that could impact your Trust and/or current circumstances. It is also recommended that you consult with your accountant regarding tax consequences, etc. Some Trusts may actually be "out of date" because your circumstances may have changed and/or the laws may have changed. Trusts can be easily amended to incorporate needed changes. It is also important to ensure that your Trust and retirement plan(s) work together to achieve the most advantageous tax impact.

You should also have a new General Durable Power of Attorney prepared (for business and financial matters). Arizona law changed in 1998 regarding Powers of Attorney. If your Power of Attorney was prepared prior to that time, it may not be effective now.

What you should know about Life Insurance proceeds and Estate Taxes

Most people know that life insurance proceeds generally pass income tax free to the beneficiaries named in their life insurance policies. What most people don't know, is that life insurance proceeds, even though paid to your beneficiaries upon your death, are usually included in your estate for federal estate tax purposes.

If your life insurance puts your estate over your federal exemption ($1.5M), then you can protect your life insurance proceeds from federal estate taxes by placing your life insurance in an Irrevocable Life Insurance Trust (ILIT).

If your estate is in excess of $1.5M without including life insurance, then you can purchase life insurance, place it in an ILIT, and the money from your life insurance trust can be used to pay your federal estate taxes with no taxable consequences to the beneficiaries of the life insurance trust.

What is the NUMBER ONE mistake people with existing Living Trusts make?

They fail to put all of their assets in their Trust. This results in probate for those assets left out of the Trust that exceed the nonprobate limit, before they can be passed on to heirs.

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