I. What’s Included in Your Estate:
Basically all of your assets you own at your death. This includes bank accounts, money market and brokerage accounts, certificates of deposit, your house and any other real property, cars (if you do not lease them) and recreational vehicles, IRAs, retirement plans and life insurance death benefits (unless the policy is owned by someone other than you or your spouse, or it is in an Irrevocable Insurance Trust.).
II. Why should you have a Will?
- Ensure that your assets are distributed to whomever you would like to receive them at your death; otherwise, the state of Arizona will distribute your assets according to Arizona law.
- Name the person or family you would like to raise your minor children.
- Appoint the person you would like to serve as the Personal Representative to administer your estate.
What doesn’t the Will do?
- It does not prevent probate which is a lengthy and expensive court process.
- It is not a private procedure. All documents, records and hearings are a matter of public record.
- Most Wills, unless it contains a testamentary trust, does not provide for the assets to be distributed out over time. This means that your children will receive their distribution at the age of majority (18).
- It does not provide asset protection to the beneficiaries.
III. Why should you have a Revocable Trust?
- Minimize or eliminate estate taxes.
- Asset protection for the ultimate beneficiaries.
- Is a relatively seamless transfer of assets
- Avoids Probate:
1. Only assets properly titled in the name of your trust will avoid probate at your death. If you forget to title an asset in the trust name, there is a probate first and then it is transferred to the trust and is passed out in accordance with the trust terms. If you own real property in other states that is not titled in your trust, there must be a separate probate in each state.
2. Generally, you should not name your revocable trust as the beneficiary of your IRA or any retirement account, since you will lose the ability for each non-spouse beneficiary to use their own life expectancy for distributions and all income tax is due within five years of the death of the trustor. However, specific provisions may be included in your trust to allow for individuals to inherit an IRA via your trust and allow for it to be “stretched out”. This is helpful for families with minor beneficiaries.
- Control Asset Distribution to Children/Grandchildren: A trust allows you to be creative regarding the terms of the distribution of your assets. This means you can be as strict or lenient as you want to be with the distributions. Distributions can occur over time, or they can be 100% outright immediately upon your death. You may also make the distributions contingent on a child maintaining a certain grade point average in school or distributions based on certain milestones in the beneficiary’s life.While a beneficiary’s share is held in trust, it is always creditor protected. This means that a creditor cannot make a claim to the beneficiary’s future distributions. A trust must have a spendthrift provision in it to provide this type of protection from creditors.
- Allow a step-up in cost basis: Your cost basis is what you paid for the asset. If your heirs (spouse, children) inherit an asset rather than receive it as a gift during your lifetime, they will get a “step-up” in cost basis to the fair market value of the asset as of the date of death. This means that heirs can sell the property after your death for its fair market value and pay no capital gains tax. This is potentially a large income tax savings.Property held in joint tenancy may avoid probate, but the surviving owner loses the step-up in basis for his or her half of the asset. Property owned by a husband and wife as community property with right of survivorship will receive a step-up in cost basis for the entire asset.
IV. Estate Tax:
Is owed only if the value of your assets exceeds the applicable federal estate tax exemption in the year you die. If it is a possibility that your assets are over the estate tax exemption, an appraisal will be done for your assets on the date of death to establish if the total asset value is over the estate tax exemption. Exception: exactly 6 months later, if the total asset values are less, you can use the lower value for estate tax purposes (also known as the alternate valuation date).
- Federal Estate Tax Exemption:
This the amount you can pass on to non-spouse beneficiaries, estate tax free. In 2015, the exemption is $5,430,000, but this amount changes frequently and may not remain this high.
- Unlimited Marital Deduction:
A married couple does not pay any estate tax until the second spouse’s death, no matter how much the assets are worth (assuming the surviving spouse receives all of the deceased person’s community property and separate property). Only one estate tax exemption gets used in the year of the surviving spouse’s death, unless you create a trust that splits into sub-trusts upon the first spouse’s death, utilizing both estate tax exemptions.
V. A-B Trust:
The “A” trust is the survivor’s trust and the “B” Trust is the decedent’s trust. This trust is a mandatory split trust. At the first person’s death, the “A” trust receives the surviving spouse’s one-half of the community property and all of his or her separate property. The “B” trust (aka, Decedent’s Trust) is funded with the deceased spouse’s one-half of the community property and all of his or her separate property. This trust is used for several reasons:
- There are children from previous relationships
- If there are creditor issues or potential creditor issues
- Both exemptions are needed due to the size of a couple’s estate
- Separate property of one or both spouses
VI. A-Disclaimer Trust:
This is used when a couple does not know if they will need both exemptions and they trust the other to have full power to change the beneficiaries of the trust.
At the death of the first spouse, if the surviving spouse thinks there might be estate tax at her death (assuming the wife is the surviving spouse), she can disclaim a part of the estate to the Decedent’s Trust, which she can receive income and principal, if needed, but it will go to the children or the ultimate beneficiaries named in the trust at the second spouse’s death and get the benefit of using up all or part of the two estate tax exemptions. This trust provides maximum flexibility to the Trustors, since you don’t know the answer to three very important questions: 1. What will be your date of death? 2. What will the federal estate tax exemption be on that day? 3. How much will your estate be worth at your death?
A disclaimer is when the spouse steps aside from inheriting all or a portion of the deceased Trustor’s estate. It must be done within nine (9) months of the date of death of the first spouse. It’s as though the surviving spouse died first and never inherited the disclaimed piece. The next named beneficiaries in line step up to first place for the outright distribution, but because the surviving spouse might live a long time and need to live off of those assets, the disclaimed funds are placed in the Decedent’s Trust so the survivor may access the money, if needed, but they are generally used after the Survivor’s Trust has been exhausted. Because the Decedent’s Trust is an irrevocable trust, those assets become creditor protected and are not a part of the survivor’s estate, nor accessible by creditors of the survivor.
VII. Single Trustor Trust:
A single person can pass on one exemption worth of assets to heirs. Amounts in the estate exceeding the federal estate tax exemption are subject to estate tax within nine months from the date of death.
VIII. Health Care Power of Attorney:
A health care power of attorney is a document that designates an agent to make health care decisions on your behalf, in the event you are incapacitated and unable to make decisions for yourself. This could be a result of an illness or possibly an accident and the doctors or hospital needs someone to consent to a treatment or procedure. When time is of the essence, you don’t want family members disputing over who has authority and what should be done.
A health care power of attorney can limit your agent’s powers, or can provide full authority to make decisions on your behalf, as well as disclose medical records.
This can be particularly important if you are unmarried, but have a significant other that you would want to make medical decisions for you, rather than your immediate family members.
IX. Living Will:
A living will sets forth your desire to receive or refuse end of life treatment which may only prolong the inevitable, in the case of a terminal illness. Most people would choose to not be left to live on a feeding tube in a hospital bed for months or years on end with no hope of recovery due to a terminal illness, coma or persistent vegetative state. Most individuals will choose quality of life over quantity of life. A living will sets forth your personal desires, in the event you are ever incapacitated and unable to communicate your personal wishes.
X. Financial Power of Attorney:
A Financial Power of Attorney will appoint an individual or company to act on your behalf to conduct everyday business, manage bank and brokerage accounts, individual retirement accounts and any additional authority granted to the Agent on the Principal’s behalf. This can be used in the event of an accident including physical or mental incapacity, but can also be granted to an Agent with full power to act at any time, regardless of the capacity or incapacity of the principal.
The above information is provided for general information only. If you need specific legal advice, please consult an attorney.