Articles Posted in Trusts

What is a Trust?

A Trust, like a will, is a written document that governs what happens to certain property when a person passes away. Unlike a will though, Trusts can also be used for providing for a person’s needs while they are still alive.  There are many different types of Trusts, trusts can be simple or complex, they can be used to shield beneficiaries from creditors, they can be  used for charitable purposes, trusts can even be set up to care for your pets.  However, for the purposes of this article, we will be discussing a basic Revocable Living Trust.  This type of trust allows a person to retain control over all of the assets in the trust and to make changes to the trust at any time.  The requirements for creating a trust are governed by Arizona Revised Statute §14-10402.  Generally, in order to create a trust, a person must have the capacity to create a trust, the intent to create a trust, the trust must have a beneficiary, the trustee must have duties and the same person cannot be the sole trustee and the sole beneficiary.

Does a Trust affect all my assets?

What is a will?

A will is a written document that governs what happens to certain property when a person passes away. A will is the most basic estate planning instrument one can utilize. In Arizona wills are governed by statute.  Arizona Revised Statute §14-2501 governs who can create a will.  Generally, any person over the age of 18 who is of sound mind and body can create a will.  Arizona Revised Statute §14-2502 sets forth the general requirements of a valid will.  The basics require that a will must be in writing, signed, and witnessed by at least two other people.  A will usually also appoints one or more people to serve as personal representative of the decedent’s estate.  A personal representative is the individual who will be responsible for distributing the estate according to the terms of the will. A personal representative has certain powers and obligations to the estate and the beneficiaries.  These duties are also governed by statute beginning with Arizona Revised Statute §14-3701.

Does a will affect all assets?

Estate planning documents are designed to help and provide for families at a critical time, usually upon the death or incapacity of a family member. The typical estate plan focuses on financial needs. But religious needs and the communication of religious values are also important to many of us. Your estate planning documents can be an effective means to communicate your religious and cultural values to those close to you.   This can be done in any number of ways. A few of these might be:

  1. Giving instructions to a trustee that money be provided for religious education, religious travel or a program of charitable giving.
  2. Giving instructions to a trustee to adhere to religious principals in investing estate funds.

The Arizona Trust Code at A.R.S. §14-11010(A) states that “Except as otherwise provided in the contract, a trustee is not personally liable on a contract properly entered into in the trustee’s fiduciary capacity in the course of administering the trust if the trustee in the contract disclosed the fiduciary capacity.” This provision indicates that so long as the trustee has disclosed his representative capacity that the trustee is not personally liable UNLESS the trustee expressly makes himself or herself personally liable to a contract (i.e. by giving a personal guaranty). This provision is meant to protect trustees, properly acting on behalf of a trust, when entering into contracts with third parties for the benefit of the trust.

In a recent case, the protection of the trust from liability to a third party were challenged where the trustee was thought not to have clearly enough indicated she was operating solely in her representative capacity. In the case of Focus Point/Kantor v. Johnson/Oak Acres, 235 Ariz. 170, 330 P.3d 360 (App. 2014), the Court concluded on the specific facts of the case that the trustee was not personally liable for a breach of contract by the trust, where specific provisions of the listing agreement and the manner in which the listing agreement was signed made it clear enough that the trustee was acting in her representative capacity.

In Focus Point, the Trustee hired a realtor to assist selling a piece of commercial property titled in the name of the Trust. After the initial listing agreement was signed, the realtor requested a second listing agreement for a longer period of time. The second listing agreement was prepared by the realtor, and was not reviewed by the Trustee. The Trustee proceeded to sign her name without further specifying in her own handwriting that she was signing in her representative capacity. The opposing party initially obtained a jury trial judgment against the trustee personally. However, on appeal, the court set aside the personal judgment against the trustee for several reasons.

A Living Will is different from a normal Will.   A Will is a common estate planning document that controls the distribution of a person’s property after he or she dies. It is not effective until death. A living will, however, is effective during a person’s lifetime and serves a wholly different purpose.   Also known as an “advance directive” a living will allows a person, in advance, to give written instructions for medical treatment should he or she become terminally ill and be unable to communicate with a physician or family member. Most states have laws authorizing living wills/advance directives. Arizona’s statutes are found at A.R.S. §36-3201, et.seq. A sample Living Will can be found in A.R.S. §36-3262.

Medical care has become so good that life can be extended artificially for long periods. Physicians often opt to extend life where possible, but this may not be what a patient wants. Few of us want our lives to be artificially extended where we are terminally ill with no chance of recovery. Most want to be allowed to die with some dignity.   This is where a living will comes in.

A Living Will provides a means to control the medical procedures provided to you at a time when you cannot speak for yourself.   In most cases, this amounts to a description of what services are not wanted in the event of a terminal illness. Often, people opt for “comfort care” with instructions that they are to be medicated to be free from pain but other life extending procedures such as feeding tubes, blood transfusions, cardio-pulmonary resuscitation and similar services are rejected. In other cases, patients may wish to preserve life as long as possible using current technology. A Living Will can also be drafted with this goal in mind.

When trying to figure out whether an Arizona probate estate is required, the Phoenix probate attorneys at Platt & Westby, P.C. suggest that it is often helpful to look at the decedent’s assets (especially how they are titled) and the decedent’s debts.

The manner in which decedent held title to his/her various assets makes a big difference. Real estate can be held in a variety of ways including solely and separately, joint tenancy, community property, and as tenants in common. Often the joint tenancy and community property titling is coupled with “right of survivorship” language. This additional language means that when a property is held by two or more persons, the surviving persons receive the deceased person’s share of the property automatically at the time the deceased person passes. This happens without the need for probate. On the other hand, property held solely and separately, or as tenants in common usually require a probate in order to transfer title or to sell the property. Similar to the manner in which title is held, it also depends what name the property is titled in. In the event that the decedent titled his/her real estate into a trust, a probate will be unnecessary. Instead, the trustee or successor trustee as the case may be, can usually proceed to administer the trust without court proceedings.

Bank accounts can be a little tricky because you have to distinguish whether a person associated with the account is an owner, a signer, or a beneficiary. Jointly owned accounts will normally pass to the surviving person automatically without the need for a probate. When the account is owned only by the decedent, and there is a surviving person who is only a signer on the account (or acting as an agent under a power of attorney on the account), then the signer/agent will not have access to the funds upon the owner’s death. Instead, it will have to be determined whether the account has another surviving owner or had a beneficiary designation on it. If there is a surviving joint owner, that person will likely own the funds remaining in the account and will have continuing access to them without anything further. If there is no surviving joint owner, then the next step is to determine if there is a beneficiary to the account. These beneficiary designations are often referred to as TOD (transfer on death) or POD (payable on death) designations. Essentially, these POD/TOD designations work just like a beneficiary designation on a life insurance policy. In order to obtain the funds in the decedent’s account where a valid POD/TOD exists, the person entitled to the funds applies to the bank institution for the funds, proving who they are and providing information about the decedent’s passing. In most cases, these kinds of designations will permit distribution of the funds without opening a probate proceeding. An example where such a designation would not work is when the beneficiary passed away before the owner of the account dies and the owner did not update the POD/TOD designations. In that case, a probate would need to be opened up to collect the funds, to determine who gets the funds, and to distribute them to the person(s) entitled to them.

One of the more difficult decisions you will make is to file for bankruptcy protection. Well, now that you have made that decision and you are making the tough choices to put your economic life back in order, you suddenly find out that your long-lost relative died and left you a sum of money. What do you do now? Do you get to keep the money? Must you turn it over to the bankruptcy trustee? The answer to these questions depends on several things.

First, the date you became entitled to the inheritance is important. For bankruptcy purposes, you become entitled to the inheritance on the date the decedent passes away. Second, you get different treatment depending on which chapter of the bankruptcy code you filed under.

Chapter 7 – If you filed under chapter 7, the basic rule is that any inheritance you become entitled to in the first 180 days after you file your bankruptcy petition with the court becomes part of the bankruptcy estate. This is true for most assets passing to you via a Will, intestate probate proceedings, or assets passing via a Payable on Death (POD) or Transfer on Death (TOD) designation. As a result, the inheritance, minus any exempt portions, would have to be turned over to the bankruptcy trustee to administer on behalf of the creditors you are seeking to discharge. If you become entitled to an inheritance after the 180 day mark, you will get to retain the proceeds.

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On February 1, 2012, new rules will go into effect under the Arizona Rules of Probate Procedure which govern issues within the purview of the probate court. Most of these changes are directed at the rules governing guardianships and conservatorships, although trusts and decedent’s estates are implicated as well. A sampling of some of the rule changes include the following:

Rule 10.1 requires fiduciaries to exercise prudent management of costs including protecting against incurring costs that exceed probable benefits to the ward, protected person, estate or trust. Also requires fiduciaries, their counsel, the ward/protected person’s counsel or court-appointed counsel to timely disclose to the Court their belief that projected costs of complying with a court order may exceed probable benefits.

Rule 18 permits a party to file Notice that another party has made a repetitive filing for the same or similar relief within last twelve (12) months. Filing such a Notice stays the deadline for response or objection to the alleged repetitive filing until further order by court, but must be filed prior to the deadline for filing a response or objection to the alleged repetitive filing.

There is an old commercial for an oil filter which says you can pay the mechanic now to change the filter, or you can pay him a whole lot more later. The implication, of course, is that paying for something now may be less expensive in the long run. This axiom may also apply to your estate planning.

A Will is a basic and more traditional estate plan, and is adequate for many, but not all, people. This type of estate plan may necessitate the filing of a judicial action to transfer property (especially real estate) upon a death. That judicial action is called a probate. The disadvantage of a probate is the attorney’s fees and court costs involved and the time necessary to transfer the property

In many cases, the least expensive estate plan, in the long run, is a Living Trust. The advantage of a Living Trust includes, among other things, the ease of transferring property upon a death without the need of a judicial action(which is called a probate), and with a minimal amount of attorney’s fees and costs. Larger estates can minimize or eliminate estate taxes. A living trust will also provide for contingencies in the event that you become incapacitated. This has a higher initial cost than for preparation of a Will, but it will save money in the long run because you will likely avoid spending money on attorney’s fees to probate a Will.

A Personal Representative of an estate, a Trustee of a trust, and a Conservator for a protected person (also referred to as a Ward)are all fiduciaries who owe duties to the people whose assets are being managed by them. These fiduciary obligations require that the fiduciary act diligently, fairly, and keep detailed records. It is a high standard of care that all too often is not lived up to.

So, what can you do if a Personal Representative, Trustee or Conservator is not doing his/her job?

First and foremost, communicate with them and keep records of your communication. If you have a fiduciary who is not responding, you need to document that lack of communication (and all other facts about the estate/trust). Among litigators, if it often said that “if it can’t be read, it wasn’t said” – an adage which aptly points to the reliability of written documentation versus relying strictly on memory – not to mention the propensity for the opposing party to conveniently forget or alter important details. Make sure you document everything in writing.