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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.