A Living Trust Defined
A "living trust" in Arizona is an estate planning document in the world of probate law. A living trust is a document signed during someone’s lifetime – a living one. When a living trust is created, the person creating the trust is called the "trustor" or a "grantor." The trust usually names the person establishing the trust as a trustee. However, if the trustor has passed away or otherwise can’t serve as the trustee, the trust document typically states who takes over. A living trust can also designate a successor trustee who collects money and manages the trust after the trustor passes away.
Many people create living trusts in Arizona . In fact, it is one of the more popular topics my office gets inquiries from clients on. Most people think they need a living trust if they have real estate titled in their name.
One of the main reasons people establish a living trust is to transfer their real estate into the trust. Or, even transfer all of their assets into the living trust. Why? Because they want to avoid having their assets pass through a court-supervised process called probate after they die. What we find out, however, by working with people on estate planning matters, is that most people don’t understand how a living trust works and the process called probate.
Living Trust Benefits in Arizona
The advantages of a living trust in Arizona, or a revocable living trust, include the following:
Avoiding Probate
In Arizona, living trusts do avoid some or all of the probate process, depending on the funds in the trust. For example, an estate plan with a simple $100,000 revocable living trust and beneficiary designation will avoid the probate process. The $100,000 house passes to the beneficiaries outright under the terms of the revocable trust. But the estate plan with the $100,000 revocable living trust, and no beneficiary designations, will likely go through the probate process.
Most practitioners recommend putting significant assets in a revocable living trust to avoid a full blown probate process (notice to creditors, inventory and appraisal, accounting to the court, etc.) If a client owns a house worth $500,000 or more, it likely makes sense to put that property into a trust to avoid probate.
Beneficiary designations are essential to avoid probate. Arizona has a simplified, "small estate procedure" for estates under about $75,000, and liens for the property value under about $50,000. In what follows, we are talking about estates larger than these numbers.
Confidentiality
Probate procedure guarantees the assets of the estate are public, since the entire inventory of property is filed with the court and is available to the general public upon request. For clients who would prefer not make all of their assets public knowledge, the living trust procedure is confidential.
Flexibility
On the other hand, sometimes clients desire flexibility with their assets, instead of asset control by trustees. For example, revocable living trust assets can be controlled by the beneficiaries, or the settlors. A trustee is somewhat of an outsider, who enforces the provisions of the trust, but does not necessarily know the beneficiaries or settlor well.
In most cases of standard "revocable living trusts", the settlors (usually husband and wife) can also be the trustees of the trust assets, or retain full control over the assets. If there is a change in health or circumstance, the settlors can convert the revocable trust to an "irrevocable trust", if so desired.
Control over assets is important to most families. Whether or not a trustee is desirable or beneficial is a crucial analysis to help clients with their estate plans. A "trustee appointee" as opposed to a real trustee may be a good idea to implement maximum flexibility and control for the settlor(s).
Key Arizona Requirements for a Living Trust
Before going into the advantages of living trusts, it’s important to understand that states impose rules and requirements for establishing any kind of trust. A valid living trust involves the voluntary transfer of an individual’s property from their name into a trust that is set up for that purpose, and referred to as the grantor, donor, settlor or trustor. The idea behind this transfer is to allow a person retaining control of his or her property to have it distributed to named beneficiaries (which honorable persons often are not present upon that person’s passing and thus opening the estate) without the stress of additional legalities or risks to the estate.
The trustor is the creator of the trust. The transfer document in the form of a Contract should clearly establish the grantor’s intention to create a trust and name the trust the grantor intends to create. The trust can be established in a single act or a series of acts that after the settlor completes, the trust does not require any further acts. In the separate document, the trustor identifies the property being assigned to the trust and the intent to transfer legal title to the property to the trustee.
There are specific legal requirements unique to Arizona that require the trustor to comply to have a legally valid living trust. If either condition is not met, the trust can become invalid. While Arizona does not require witnesses to a living trust, at least two are required for a will, which is the most common legal document that may be handled by the probate court.
Revocable and Irrevocable Trusts: An Overview
For those unfamiliar with trusts, one of the first questions is typically: so what is the difference between a revocable and an irrevocable trust, and why do I need to know? In Arizona, as in many states, the terms are used to describe how a trust can be dissolved, modified, or revoked.
In a revocable trust, the trustmaker does not forfeit control of the trust over time. It means that as a trustmaker, you can terminate the trust at any time. Some reasons to favor a revocable trust include: In an irrevocable trust, on the other hand, the trustmaker cannot make changes to the trust document and/or terminate it. While such a trust offers less flexibility, it can benefit an estate in several ways: So, how do you decide whether a revocable or irrevocable trust is more appropriate? "In other words," advises Phoenix estate planning attorney Gary S. Naegeli of the Law Offices of Gary S. Naegeli, "the choice between revocable and irrevocable trusts boils down to a matter of control versus protection of assets." As a trustmaker and the primary beneficiary of your personal and revenue-producing assets, you will naturally seek to maintain control of those assets for as long as you can. But if you are no longer able to serve as the trustee of your own estate – whether due to age, incapacitation, or death – then it is important to consider an irrevocable trust. This prevents your assets from being subjected to probate or being lost to taxation or creditors. Deciding which trust type will suit your particular needs best requires careful consideration of your individual financial situation and that of your heirs.
Funding Your Arizona Living Trust
A living trust ultimately only governs those assets which have been placed in the trust. This is called "funding" the trust. As such, funding the trust is a critical step in the process and one that cannot be forgotten. There are several simple steps involved in funding your living trust:
- Real property – A deed must be signed that transfers your real property (land, home, etc.) to the trust. Generally, this deed would be known as a quit-claim deed or bargain and sale deed. You cannot transfer recorded property to a living trust without use of a deed.
- Bank accounts – You may simply ask your bank for instruction on how to change your bank accounts to the name of the trust. Most banks will comply quite readily with a customer’s request to add a successor trustee, and this should not be a long, involved process.
- Stocks and bonds – Contact the transfer agent listed on the stock certificates and follow their instruction on putting the stocks into the name of the trust.
- Motor vehicles – You will need to contact the MVD to obtain the proper instructions and forms for placing a motor vehicle in the name of the trust. Selecting the successor trustee at the MVD is especially important if co-owners of a vehicle are also named as your agent.
Once the assets are in the trust, you may direct those assets in your trust as you wish.
Common Arizona “Living Trust” Myths
An Arizona "living trust" is a type of trust. Some states call them "revocable trusts" or "inter vivos trusts," but all are the same fundamentally.
Some people mistakenly think that living trusts in Arizona require the use of a lawyer, that they "don’t work," and that "all my property will be probated later anyway." These and other misconceptions can cause people to consider other estate planning options which may not be right for them. People who are making decisions about their financial future should check facts against fiction rather than rely on myths and misunderstanding.
For example, many people in Arizona believe that private probate is preferred over public probate. Care to guess how many formal probate proceedings are private? That would be zero. All Arizona probate proceedings are open to the public. "Private" or "confidential" probate is a myth. If someone told you there is such a thing, they were misinformed or trying to sell you something .
Also, as mentioned above, you don’t have to use a lawyer to create a living trust in Arizona. If you have legal knowledge, you can do your own estate planning. If you don’t, you can try to do it on your own, or simply hire the work done by a skilled and experienced attorney. The choice is yours.
One of the main estate planning misconceptions is that all estate planning consists of simple wills and straightforward trusts. Simple wills are simple basically because they work just fine for most people and for most situations. For those who need it, living trusts are more sophisticated devices for managing property on a day-to-day basis during life (while the planner is fully competent) and for transferring that property at death to heirs (without probate). A trust that is effective in protecting your assets is not synonymous with a trust the law requires you to create. People who need to keep some or all of their assets out of reach of creditors should learn more about asset protection planning and about their options.
Selecting a Trustee for a Living Trust
When creating an Arizona living trust, you must select a trustee. Even if you choose yourself currently, unless you life to 300 years old (in which case you will have chosen the best trustee!), there is a good chance you will need someone else to who will serve as your trustee at some point in the future. For most people the choice is pretty simple. For others who have either a complex family situation or have a lot of assets, it can be a tough decision.
Trustee Defined: The trustee is a person or institution who the trust maker chooses to administer the trust in accordance with the terms of the trust. The administrative duties of a trustee include record keeping, reporting, coordination with tax and financial advisors, and making investments and distributions in accordance with the terms of the trust. While the duty to administer a trust can be delegated to an agent, the ultimate responsibility lies with the trustee. In Arizona, there are specific duties that need to be followed and that can be enforced by your beneficiaries if they are not. A special fiduciary duty is extended to the trustee in the administration of the trust, and even a slight deviation can have serious repercussions.
Arizona Laws: As administered by A.R.S. § 14-108, the duties of a trustee generally include the following:
Grandma may love your dog Billy, but does she have any experience administering a trust and reading financial statements? Definitely, a trust is an excellent mechanism to help ensure that your family will be cared for, but choosing the right trustee is critical.
How to Amend or Revoke an Arizona Living Trust
Amending or revoking an Arizona living trust is relatively simple, provided the correct procedures are followed. Courts closely review the rules to ensure that trustors are not creating assets out of thin air through amendments. For this reason, if one grantor attempts to alter a joint trust and does not have the other’s written consent, an amendment will not be recognized. An individual may alter his or her own half of a joint trust, but only through appropriate legal procedures.
Like creation, amendments to a trust must comply with Arizona statutes. If the trustor has failed to properly follow statutory procedures when making changes to the trust’s terms, the courts may decide the amended terms are legally invalid. For example, Article 29 of Arizona’s Uniform Trust Code (UTC) regulates how the parties to a trust may modify it’s terms. While the trustor may modify any part of the terms, if one party to the trust is unhappy with a proposed change, the courts will always err on the side of stability by refusing to enforce an invalid amendment. For this reason, grantors should work with their estate planning attorney to draft and implement amendments that comply with state law.
Revocation of a trust offers greater challenges to estate planners. Revocation terminates the trustee’s authority over the grantor’s assets, meaning the grantor assumes personal responsibility for their security. This also means that once the trust is revoked, estate planning strategies that included the trust are no longer in effect, potentially exposing the grantor to estate tax, creditor and probate problems.
Some trusts are "living trusts" that are drafted as revocable trusts. Living trusts are not final and may be changed at any time. Thus, revocable living trusts are somewhat like a bank accounts that may be "re-deposited" at any time. While revocable, the grantor may change or revoke all of the terms of the living trust without consequence, and the terms remain valid for as long as the grantor is acting as trustee. However, once the grantor dies, revocable living trusts become irrevocable, meaning the terms may no longer be modified.
Moving pieces and rapid changes associated with estate planning can be a challenge for laypeople without experience in the field. Before consent is given to amendments, revocations or any other modifications to the trust, the parties involved should review them with their estate planning attorneys to determine if they are valid, and could expose the parties to any risks.
Taxes and Arizona Living Trusts
When creating a living trust in Arizona, there are tax considerations that should be kept in mind both when setting up the trust and when it comes to the trustor’s responsibilities. A couple of things that living trust creators should know include the following:
Many people incorrectly assume that by creating a revocable living trust, they will no longer have to file tax returns. This is not true. A revocable living trust is merely an alternative to a will and is merely a tool to distribute assets. There are no tax advantages of a revocable living trust and neither the trustor nor the beneficiaries may avoid filing income taxes on any property that is held in the trust.
Neither the trustor nor the trustee of a revocable living trust may deduct any of the expenses associated with the trust. This can become problematic once the trustor becomes incapacitated and the successor trustee has to take over. If the trustor must hire a different accountant, then the full fee for the preparation of the income tax return should still be paid from the beneficiary but not from the trust itself. Additionally, the trust may need to pay expenses such as attorney’s fees, accountants and tax advisors; however unless otherwise stated in the trust, any fees that might be paid in the future should come from the trust and not from the beneficiary’s share of the trust.
Final Thoughts and Professional Consult
The preparation and administration of a living trust is detailed and complex. It is imperative that an individual not attempt to create a living trust without the advice and counsel of a qualified attorney. Likewise, should a dispute arise regarding the validity or administration of a trust, it is important that one act quickly to obtain legal assistance to protect one’s interest. An immediate cause of action may exist whether the trust is being administered or contested.
The State Bar of Arizona has an excellent publication regarding the selection of an attorney that explains how to select an attorney when faced with any kind of legal situation; not just an estate or trust issue. Living Trusts are complicated enough without trying to navigate your way through the rules of evidence and civil procedure in Arizona. Additionally , one should check to see if the attorney has experience preparing these type of documents. A brief interview or meeting with the attorney may also prove helpful in identifying future legal needs that may require assistance. It is extremely important to interview the attorney you plan to use in the future because you may be able to resolve the matter before it goes to court. A few questions that are good to ask may include:
• Have you prepared or administered many living trusts?
• Would any of the assets of the trust be subject to tax?
• Are there any potential issues with this trust that I should be aware of?
• Should I fund a trust after I create it?
• Do you need to administer the trust or can I do it myself?
• Do you know how to make changes to the trust?
• If I die, will my family need to pay to have the trust reviewed, revised or administered? What are the fees? Is there an hourly rate or a flat fee per project?
• Do you have any other legal experience that may benefit me?
• If I have a legal question outside of the trust, would you help me with that as well?
After asking these questions, it is important to listen to the attorney’s responses and observations.