The Right Title for Your Revocable Trust Assets

It’s a new year and it’s a good time to make sure that your assets are properly titled in your revocable trust. Properly titling assets is how a trust actually works to avoid the cost of probate or delays when needing to use assets during illness or after death.

The title or ownership should reflect that the Trustees own the property; for example: “John and Jane Doe, as Co-Trustees, of the Doe Revocable Trust dated [insert date of signature].” The date that the trust agreement is signed becomes part of the name of the Trust, even if the trust agreement is later amended.

Real property should be titled with a Warranty Deed. If a Quit-Claim Deed is used, then you may have limited the protection of your title insurance. Deeds may look simple but some large legal problems can occur when small items are left out; such as failing to include marital status, listing incorrect statutory references to affidavit exemption or the use of tax parcel numbers instead of full legal descriptions.

When refinancing property, lenders often prefer to have the property titled in the owner's name instead of the trust because it is easier to sell the mortgage on the secondary market (which lenders often do). Again, use of Warranty Deed instead of a Quit-Claim Deed is preferable to protect title insurance coverage. Also, it is important to remember to deed the property back to the trust after the refinancing is complete.

A qualified retirement account cannot be owned by the trust, but the designated beneficiary can be the trust. Similarly, the trust can be listed as the beneficiary of life insurance or an annuity. By naming the trust, you can avoid needing probate if a beneficiary is a minor, whether a child or grandchild of a deceased child. A court conservatorship and court imposed restrictions will apply for any distribution to a minor that exceeds $10,000 in a year.

To verify your assets are titled correctly and to assist your Successor Trustee, keep a copy of one monthly bank statements or stock account statements with your trust documents. Then, update the statement each year. This is better than keeping a list because there is no risk of transposing account number and the contact information of the financial institution is on the statement.

When is Living with a Revocable Trust Good?

One of the fundamentals of the estate planning documents is the Revocable Living Trust. As with any trust, there are three parties:

The Settlor is the creator of the trust who provides the assets. The Settlor is often also called a Trustor or Grantor. The terms can be used interchangeably, but the Arizona Trust Code, which took effect in 2009, prefers the use of "Settlor."

The Trustee is the owner of the assets of the trust who has a fiduciary duty of loyalty to care for the trust assets for the benefit of the beneficiaries.

The Beneficiaries of the trust are the recipients of the income and/or the principal.

The term “revocable” means that the trust terms are changeable. The term “living” means that the Settlors are living at the time that the trust comes into existence. This is distinguished from a testamentary trust which comes into existence in accordance with the terms of a Last Will and Testament, after the death of the person who wrote the will.
For most Revocable Living Trusts, the Settlor is also the Trustee and the initial beneficiary. A couple, whether married or not, can have one Revocable Living Trust and both be Settlors, Trustees and initial beneficiaries. The trust can hold community or jointly owned property as well as sole and separate property. The property can keep its character as community, jointly owned or sole and separate property.

Couples who are not married but share property can receive advantages with a Revocable Living Trust. If one of the couple becomes incapacitated, the other one can act as sole trustee for the trust assets. Also, they can jointly determine how their assets should be distributed upon their deaths.

With a married couple, a Revocable Living Trust can provide estate tax benefits by creating subtrusts when one of the couple dies. The deceased spouse’s portion of the trust assets, up to the Applicable Tax Exclusion, can be held in an irrevocable, unchangeable trust. The surviving spouse can receive income and even principal from the irrevocable trust and the assets do not become part of the surviving spouse’s assets. As a result, twice the amount of the Applicable Tax Exclusion (one for each spouse) can be passed to the couple’s children or other beneficiaries; free of estate tax.

If the assets of the married couple do not exceed the Applicable Tax Exclusion, then the Revocable Living Trust can remain completely revocable until the surviving spouse dies. As a result, the surviving spouse has more flexibility. Thus, trusts should include language allowing the most flexibility for the tax changes.

Other than taxes, there are two major benefits of the Revocable Living Trust: avoiding probate and facilitating access to assets if the Settlor becomes incapacitated. Probate is avoided because if all of the Settlor’s assets are titled in the name of the trust, then when the Settlor dies, the trust continues on. The probate court does not need to get involved with the distribution of assets because the successor Trustee will handle the distribution.

If a person's assets are in a trust and the person becomes incapacitated, then the successor Trustee can step in and handle the assets without any need for a conservatorship proceeding and court involvement.

There are certain assets which cannot be placed in trust, such as retirement accounts. Thus, a durable power of attorney is also needed along with the trust documents.

To determine if a Revocable Living Trust would be useful, several factors are considered, such as:

1. If the Settlor owns more than one parcel of real property or owns real estate outside of Arizona or wants to leave Arizona real estate to more than three adults. In such cases, a Revocable Living Trust eases the administration of the property and avoids probate.
2. If the Settlor owns many stocks, bonds or other investments which are not held in accounts that have "transfer on death" designation. If there is no "transfer on death" designation, then a trust is necessary to avoid probate.
3. If the Settlor want to leave assets to minors. Court involvement is required if a minor receives more than $10,000 in a year, unless the funds are held in a trust.
4. An adult beneficiary needs oversight over finances.

There are other factors but these are some of the most determinative

What to do with the Children? How about a Trust?

One of the favored uses for a Revocable Living Trust is the proper distribution of assets to children. Any money left to a minor child needed be left in trust to avoid unwanted consequences.

In Arizona, if a minor is left more than $10,000 in a year, a Conservatorship has to be opened. Life insurance benefits and retirement benefits will not be paid to that minor unless a court-appointed Conservator is involved. This court process can only be avoided with a Trust.

Courts have a very different view on how to use funds for a minor than most people. Because of the statutes, the Courts will release all the assets to the child upon the age of eighteen.

The terms of a trust can guide also allows the Trustee to use the funds throughout the beneficiary's childhood. For a child who is having problems with substance abuse, blood testing can be required. For a child who is responsible and trying to start a new business, the Trustee can use trust funds to help with the new business.

Not so with Conservatorships, where the Courts may focus on saving the money for college or impose restrictions that you do not have. I have seen Courts deny tuition payments for private high schools in order to protect the funds for college. I have seen a Commissioner cite his own 1993 car in refusing to allow the Conservator to purchase a new car for a seventeen year old who was driving in a rural area a 1994 truck with 120,000 miles.

Some people list their sibling or another adult as a beneficiary for life insurance or retirement benefits. The hope is that that adult will take care of the children. However, there is no guarantee that will happen.

Even if one's children are grown and independent, there is no guarantee that any child will outlive you. Therefore, if funds are to be left to that child's children (your grandchildren) who are minors, then the Trust is necessary.

New Trust Updates Needed for the New Arizona Trust Code

The Arizona Trust Code becomes effective on January 1, 2009. There are some exciting new laws that give our judicial officers guidelines for determining trust disputes. However, trust agreements need to be amended so that the new guidelines do not create unintended problems for old trusts.

For example, the new laws require the Trustee to disclose considerable information to beneficiaries of irrevocable trusts. Even if one of the creators of the trust, or Settlor, is still alive, children and/or grandchildren may be able to find out the value of irrevocable trust assets and how trust monies are spent. Trust agreements can be amended to give the Trustee discretion on how much information to disclose. However, without the amendment, the Trustee will be required to give information that previously younger generations could not obtain.

Trust agreements can now require alternative dispute resolution, or ADR, for disputes about trust administration. Thus, an argumentative beneficiary cannot cause expensive litigation, if the trust agreement provides for ADR. Since courts have had the discretion to disregard "no contest" clauses, ADR provisions enhance the ability to limit costly disputes.

Courts are now authorized to allow for the termination or modification of a trust if all the beneficiaries agree. However, the court needs to look at the Settlor's intent. Therefore, a trust agreement needs to set out the Settlor's intent and goals in order to limit unwanted changes to a trust.

A trustee can terminate an irrevocable trust that has value of less than $100,000 or is otherwise uneconomic to administer. If such a termination is undesirable, then the trust agreement must prohibit it.

The new laws also extend creditor protection to life insurance paid to a trust, just as if it were paid directly to a beneficiary. Thus, this is a good time to make sure that the beneficiary of your life insurance is your trust; particularly if you have beneficiaries who are minors.

These are just a highlight of some of the more profound changes under the Arizona Trust Code. This is a good time to review trust agreements to make sure they conform with the new laws as well as updating them for other changes. For example, if one or more of your successor trustees are no longer living or no longer close to you. If a beneficiary is having trouble with drugs, or needs motivation to work or obtain an education, trust provisions can be added to address this.

Also, there has been and will be further changes in the amount that can be passed estate tax free. Provisions can be added to allow flexibility with the changes in tax laws.

Anyone who owns a business should make sure that the business is owned by the trust. If the shares of a corporation or membership interest of an LLC are held in the name of the trust, then court involvement will not be needed if you become incapacitated or upon your death. There is no time like the present to consider these and other needs for updating your trust agreement.

Trust and Estate Administration-What to Do at Death

We are happy to assist with the administration of an estate, whether there is a trust or not. The administration of an estate or a trust requires collecting the assets, making sure bills are paid, taxes are paid and the distributions are made properly. As soon as a person dies, his or her Social Security number can no longer be used for accounts.

The estate or the trust needs to have its own tax identification number so income can be properly tracked and properly paid. Even in the most simple estates, it is very important to get the proper notices to creditors, so that the statutory deadline for claims applies. Otherwise, a creditor can come back to the personal representative or trustee to collect the debt- even years later.

All distributions to beneficiaries should be made in conjunction with releases of claims. Otherwise, a beneficiary can take his or her money and have a "war chest" to cause problems and bring claims against the personal representative and trustee.

Our staff is experienced in dealing with financial institutions, hospitals and the government to work through the paper work and obtain the records and finances due to the estate and decedent. The collection of assets is often more an "art than a science" and can be very frustrating for beneficiaries. We are happy to help and alleviate the pressure and strain.

Living Up to Your Living Trust

With the changes in the value of our investment, more now than ever it is important to have the most cost-effective method of having the right person handle your assets if you become ill or if you die. Revocable Living Trusts are very useful for assuring access to assets due to illness or death. However, for a Trust to be useful and effective, assets must be retitled in the name of the Trust.

The title or ownership should reflect that the Trustees own the property; for example: "John and Jane Doe, as Co-Trustees, of the Doe Revocable Trust dated [insert date of signature]." The date that the trust agreement is signed becomes part of the name of the Trust, even if the trust agreement is later amended.

A qualified retirement account cannot be owned by the Trust, but the designated beneficiary can be the Trust. Similarly, the trust can be listed as the beneficiary of life insurance or an annuity.

If the benefits are going to a minor child, then having the Trust as the beneficiary avoids the need for court intervention. A minor child cannot receive more than $10,000 in any year without a trust or court created Conservatorship.

Many married couples have trusts that automatically split in two when one dies. Normally, this helps to avoid or limit estate taxes. However, if the married couple's assets do not exceed the amount that can be passed estate tax free, then the automatic split is not needed and is more bothersome than helpful. A trust amendment to make the split optional instead of automatic should be considered.

Further, the new Arizona Trust Code provides helpful language for trust administration. However, if your trust is not amended to address these provisions, the new law could be more trouble than good. In order to live up to your Trust, it is important to have trust titling and the trust agreement reviewed from time to time.

If you really do not want a Trust but you want to avoid probate, you can utilize pay one death designations for your accounts and a Beneficiary Deed for your property. A Beneficiary Deed in essence is a "pay on death designation" for real property.

The Beneficiary Deed is a great tool for people who have all other assets in accounts that have a "pay on death" designation or designated beneficiary. The Beneficiary Deed is not a good tool if you want to leave your real property to more than three people, to minors or to adults with special needs receiving government assistance.

Under A.R.S. Section 33-405, the owner or owners of property can designate "grantees" or recipients of real property which is effective only on the death of the owners.

The Beneficiary Deed is fully revocable until the last owner dies by recording a Revocation of Beneficiary Deed. Therefore, co-owners need to realize that when one dies, the surviving owner could revoke the Beneficiary Deed.

Unlike other deeds, the Beneficiary Deed or the Revocation of Beneficiary Deed will only be effective once it is recorded. The owner retains control. The owner does not need to consult the beneficiaries or be concerned about their creditors (unlike joint tenants).

Wills and Trusts generally will not govern the distribution of your IRA's or 401k's. The designated beneficiary form directs who will get your qualified retirement plan after you die. Qualified retirement plans include IRA's and any plan created by ERISA, such as a 401k or a 403b retirement account.

If your "Estate" is listed as the designated beneficiary or if there is no designated beneficiary, then your heirs will have to open a probate in order for your retirement account to be distributed. Also, if you list your "Estate," then your retirement account benefits may need to be paid out in a lump sum, instead of over time to your desired beneficiaries. Therefore, it is preferable to list the specific designated beneficiaries, either the people or your living Trust.

The benefits of a qualified retirement plan can be distributed through a revocable Trust, over time, as long as certain precautions are taken. First, the named designated beneficiary must be the Trustee of your revocable Trust. Then, the revocable Trust must be valid under state law and become irrevocable upon the death of the participant. Also, the beneficiaries have to be identifiable from the trust agreement and a copy of the trust agreement needs to be provided to the administrator before the distributions are made.

Listing the trust as a designated beneficiary is very important if you plan to leave any of your qualified retirement account to a minor. A minor, under the age of 18, cannot receive more than $10,000 unless the court appoints a conservator. A conservatorship is a court case and is more expensive and troublesome than a probate.

If you are married, then normally your spouse must be the initial beneficiary and your Trust, or others, can be the contingent beneficiary. Federal law requires spousal consent if you want someone other than your spouse to be the beneficiary of your 401K or other ERISA qualified retirement account.

With regard to your IRAs, federal law does not require a spouse to consent to the distribution of the IRA to someone other than the spouse. However, since Arizona is a community property state, a spouse does have a community property claim to one-half of any contributions that came from earnings of the participant spouse.

Therefore, if you desire to distribute your IRAs to someone other than your spouse, you need to get a spousal waiver. Your children or your trust cannot receive the entire IRA or the 401k, if your spouse does not consent -- even if the IRA or 401k existed prior to your marriage.

IRA's and 401K's are great for charitable giving as part of an estate plan, because qualified charities do not pay income tax. There are lots of opportunities for qualified retirement accounts and some pitfalls. Thus, be sure your designated beneficiaries are correctly listed.