FREQUENTLY ASKED QUESTIONS

Think of a Living Trust as a refrigerator. The “Trustor” is the person who creates the Trust and originally stocks the “refrigerator” by transferring ownership of property to the Trust. The Trust owns the property.

The “Trustee” manages the Trust. Think of this as “refrigerator privileges” because depending on the terms of the Trust, the Trustee can put items into the fridge, take them out of the fridge, or give them to people named in the Trust. Often, the Trustor and the Trustee are the same person.

A Trust has one or more “beneficiaries.” In the refrigerator scenario, the beneficiary may have the right to receive some or all of the stuff (“assets”) in the fridge. The Trust document states when the beneficiary can receive the assets. It may be when the Trustor dies, when the beneficiary turns a certain age, or when the beneficiary has specific needs.

Why would a person want a Trust? The most common reason is to avoid probate and estate taxes. Assets held by a Trust generally do not go through probate. Under the current laws, you will pay no Federal estate tax on the first $11.4 million of your estate (this amounts changes annually) and up to a 40% maximum tax after that. Currently, Arizona does not have an estate tax.

Since most of us don’t have $1 million in assets, why would we form a Trust? Many people create a Trust to allow for ease of management if they are incapacitated. A few other reasons people create a Trust are to provide for a family member who has special needs, to allow a family member (who has debt problems) to become the beneficiary, but not allow creditors to take the assets, to hold assets for minors, or to accomplish more complex wishes without probate.

A Trust can be quite complex, but that does not mean that it needs to be lengthy. A top New York estate planning attorney wrote a complex Trust that dealt with assets of greater than $5 million dollars, but the document was only 24 pages long. Longer is not necessarily better, and an excessively lengthy or poorly written document can make Trust administration an expensive nightmare.

Does a Trust take the place of a Will? No. It can perform many of the same functions, but a Trust is usually combined with a “pour-over” Will. Going back to the refrigerator example, if you bought groceries on the way home and died before you put them in the fridge, the Will takes the groceries (property) and puts them in the fridge (Trust). This makes sure that anything that may have been forgotten, or purchased after the Trust was formed, is transferred to the Trust.

A beneficiary deed is a way to transfer the title of real property upon the death of the current owner without probate. In plain English, real property refers to real estate – your home and land. Probate is a court proceeding to administer an estate after death. Probate can be a costly, time consuming hassle.

The beneficiary deed keeps title in the name of the current owner(s), but states who will own the property upon the death of the current owner(s). The person(s) receiving the property is the beneficiary.The beneficiary deed must be signed before a notary and recorded with the county recorder’s office.

When the current owner passes away, the death certificate is recorded at the county recorder’s office and title to the property transfers. Sweet and simple.

Death is inevitable, probate is not. The beneficiary deed provides a simple, inexpensive real property transfer without probate.

This article is for informational purposes and not intended as legal advice. If you need legal advice, you should contact an attorney.

Recently, I was asked if there is a difference between a Living Will and a Living Trust. Yes, there is a difference.

“Living will” is the common name for “Advanced Healthcare Directives.” This document allows you to specify what types of medical treatment you desire in the event that you are terminally ill, comatose, or in a vegetative state and have no reasonable hope for recovery.

Perhaps the most memorable court battle, which might have been avoided by having a living will, is the case of Terri Schiavo. Terri Schiavo suffered a massive heart attack in 1990 that left her comatose for several months. Terri’s condition was then raised to “persistent vegetative state.”

After 8 years of therapy to restore her to some level of awareness, Terri’s husband petitioned the court in 1998 to remove her feeding tube. A battle erupted between Terri’s husband and her parents, who did not want the feeding tube removed. Since Terri had no living will, a trial was held in January 2000 to determine Terri’s wishes regarding life prolonging care. The court determined that Terri would not have wanted the feeding tube and ordered its removal.

Then, Terri’s parents challenged the order to remove the feeding tube. The resulting conflict played out in Florida and Federal courts until March 18, 2005, when the judge issued the final order to remove the feeding tube. Terri passed away on March 31, 2005.

No matter whether one agrees with Terri’s husband or parents, one can see the benefit of a living will.

If you want to express your desires regarding life prolonging care, the Arizona Attorney General has forms available at http://www.azag.gov/life_care/#materials. This website also provides a Durable Healthcare Power of Attorney form which will allow the person you choose to make medical decisions for you in the event you become incapacitated.

Your living will can be registered with the Arizona Secretary of State, who will provide a wallet card notifying emergency responders that you have a living will. Information on registration is available at https://www.azsos.gov/adv_dir/.

A simple definition of a Living Trust is an estate planning tool that is often used to avoid probate and reduce estate taxes. However, the full explanation will have to wait for the next edition.

When you hear “POD account,” does a storehouse for seed pods come to mind? Actually, a POD account has nothing to do with seeds or pods. POD stands for Pay On Death. A POD account is a financial account that will transfer upon death to another person, or beneficiary.

The owner of the account remains the owner during his or her lifetime. When the owner passes away, ownership transfers to the beneficiary. The financial institution will usually transfer the account to the beneficiary as soon as they receive a certified copy of the death certificate.

To establish a POD account, simply inform your financial institution (i.e. bank, credit union, brokerage) that you would like your account to be a pay on death account. Your financial institution will provide you with the necessary paperwork to name a beneficiary, or beneficiaries.

One benefit of a POD account is that it usually avoids an expensive probate provided the beneficiary survives the account owner. A second benefit of the POD account is that unlike a joint account, the beneficiary does not have access to the funds in the account during the lifetime of the owner.

In most cases, yes. In Arizona for example, Allen and Betty own a home as joint tenants with rights of survivorship. Allen passes away. Betty records the death certificate in the county in which the property is located and ownership transfers to Betty, as the sole surviving owner.

But, what happens if Allen and Betty pass away in a car accident within a few hours of each other? There is no survivor, so probate, or in certain cases an Affidavit of Transfer, may be required to transfer the property to the heirs.

In fact, this situation may require a “double” probate, in which a probate must be opened for both Allen and Betty, at twice the expense. If you face a situation like this, you may need attorney advice to determine the best course of action for your circumstances.

Benjamin Franklin said, “In this world nothing can be said to be certain, except death and taxes.” Despite the certainty of death, we often avoid taking steps to make things easier for those left behind. It’s as if we believe the preparation for the inevitable may shorten our life span, and preparation also unpleasantly forces us to acknowledge our own mortality.

Recently a younger person asked why someone who is young might need a Will since he or she doesn’t have much “stuff” to pass on. A Will can be used to name a guardian and conservator for minor children in the event that both parents pass away. A guardian is the person who takes care of the child. A conservator manages any property owned by the child. You may name one or more persons to perform these functions.

By discussing this with the proposed guardian/conservator and naming that person in the Will, a parent gives their child security if the parent tragically dies. A guardian/conservator named in a Will is the court’s first choice. Parents can avoid family conflicts over who will care for their children by naming a guardian/conservator in their Wills. Naming the guardian/conservator in the Will does not avoid the court proceeding to establish a guardian, but it gives the court direction on whom to appoint.

A Will is most commonly used to give specific gifts of property to individuals. For example, it can be used to give great grandmother’s china to Susie. It can also be used to establish a Trust for minor children, although depending upon circumstances another method might be preferred. It can even give heartfelt expressions of love to those left behind. It can give property held in Trust to another if the Trust grants this authority (called “Powers of Appointment”).

If real estate or financial accounts are given by Will, an Arizona probate will be required to transfer these types of property. If you want to avoid probate, a Will is not the way to transfer these types of property.

A Will is a document that is done for an individual. A married couple may have the same wishes; however, each person must have a separate Will. You must choose someone to carry out your wishes as stated in the Will. Some states call this person the “Executor.” In Arizona, we call this person the “Personal Representative.”

To help your loved ones in the event you pass away, you might consider keeping a list of financial accounts and other important information (Will, deeds, powers of attorney, health insurance, life insurance) in one location and tell them where to find it. In the midst of grief, it is much more difficult when kinfolk cannot find the information they need. Death is certain, but preparation now can ease the difficulty for those left behind.

When your taxes are prepared, your tax professional may suggest that you can save on income taxes by forming a corporation or LLC, which stands for limited liability company. While the two types of businesses have some similarities, there are also some marked differences.

A corporation issues shares to shareholders, and is required to file an annual report with the corporation commission, pay an annual fee, and pay a penalty fee if the annual report is filed late. In many circumstances, corporations are more difficult to administer and more costly to form.

There are generally two Internal Revenue Code classes of corporations: c-corporations and s-corporations. A c-corporation is what might be considered a traditional corporation, whose shares are traded on the stock exchange, or it can be a small corporation with one shareholder. Its profits are taxed once as a corporation, then, any dividends (aka profits) paid to shareholders are taxed as income to the shareholder. So in effect, the profits are taxed twice.

An s-corporation is not taxed separately on its profits. The profits are taxed on the shareholder’s income tax return. Although an s-corporation must file an income tax return, the return is for informational purposes. This results in the profits being taxed once.

An LLC has one or more members which own a percentage of the company. It has no annual corporation commission filing requirements, which eliminates the potential for late filing penalties. An LLC may choose to be taxed as a partnership, c-corporation, s-corporation, or in some instances as a sole proprietorship.

If your tax professional is advising you to set up a corporation, and you do not want the extra burden and expense of filing annual reports, ask your tax professional if can achieve the same goal by forming an LLC and electing s-corporation status.

Ask your tax professional the exact purpose for forming the business. If the intention is to save on self-employment taxes, then be prepared to pay yourself wages as an employee. Once you begin paying yourself wages, your business will need to be registered with the state to pay unemployment and income taxes. You will also need to pay federal Medicare, Social Security, unemployment, and income taxes.

Wait a minute, wasn’t the idea to save on taxes? Yes, depending on your circumstances, forming a corporation or LLC may result in paying less total income tax. By determining your tax professional’s goal, you can decide whether a corporation or an LLC will best accomplish that goal.