Estate Planning Essentials 2020
In Arizona, there are five (5) main estate planning documents that comprise an estate plan. The documents are: (1) Last Will & Testament, (2) Revocable Trust, (3) Durable General Power of Attorney, (4) Healthcare Power of Attorney and (5) Living Will. A proper estate plan will result in paying the least amount of estate and gift taxes, avoiding probate, and implementing powers of attorney to address worst case scenarios where you are unable to make your own financial and health decisions. A well written estate plan helps bring peace of mind.
This post is meant to provide a general picture of estate planning in Arizona. It is important to note that no two estate plans are identical. It is in your best interest to meet with an attorney to help formulate a plan specific to your unique circumstances.
Estate Planning Facts
The federal estate tax exemption is currently $11.58 million per person; a husband and wife each get their own exemption, resulting in a $23.16 million exemption per couple. In 2019, the exemption was $11.40 million per person. In 2018, the exemption was $11.18 million per person. And, in 2017, the exemption was $5.49 million per person.
The federal estate tax rate is 40% of the amount over $11.58 million.
The annual gift exclusion amount is $15,000.
Arizona does not currently have an estate tax. Arizona last had an estate tax collection prior to January 1, 2005. It was referred to as a “pick up tax.”
Arizona has adopted major portions of the Uniform Probate Code; the Code governs wills, intestate succession, and the administration of decedent’s estates, and these rules can be found in Arizona Revised Statutes, sections 14-1101 et seq.
A will is a written document that directs the distribution of a person’s property after his or her death. A will does not avoid probate. A will allows for an individual to name the following:
Personal Representative (Executor) – This person is appointed by the testator (person creating the will) to carry out the terms and wishes of the testator. This person has a fiduciary duty to the individual named in the will. It is important to also name a successor personal representative to prepare for the possibility that the original personal representative is unable to serve.
Beneficiaries – People for whose benefit the will was created; the individuals who will receive the property.
Guardian of a Minor – Naming the guardian of a minor helps ensure that the needs of a person’s minor children are taken care of in the event of your death or incapacity. A guardian can be your spouse, a family member, or a trusted friend. The goal is to make sure children have the care and oversight they need.
Separate List (A.R.S. §14-2513) – Arizona allows for testators to create a separate writing to dispose of items of tangible personal property (i.e., coin collection, sports collectibles, stamps, jewelry, etc.)
Even if a person decides to create a trust, a pour-over will is still recommended as part of a comprehensive estate plan. In short, a pour-over will makes sure all of your assets, including assets that could have been overlooked, are placed into your trust.
A trust is a fiduciary relationship in which a trustee holds legal title to specific property under a fiduciary duty to manage, invest, safeguard, and administer the trust assets and income for the benefit of designated beneficiaries, who hold equitable title. One of the main aspects of a trust is that it does not have to go through probate. There are many different types of trusts, including revocable living trusts, testamentary trusts, irrevocable life insurance trust, special needs trust and charitable trusts, just to name a few. In Arizona, a trust may be created for any purpose that is not deemed illegal, contrary to public policy, or impossible to achieve (A.R.S. §14-10404). A trust will fail if it was created to defraud the settlor’s creditors or was based on illegal consideration.
The basic components of a trust are as follows:
Grantor (Trustor, Testator, Settlor) – This is the person who creates the trust and distribution scheme.
Trustee – The trustee acts as the legal owner of trust assets, and is responsible for managing the assets, administration of the estate and tax filings for the trust, and making distributions according to the terms of your trust. The trustee has a fiduciary duty to look out for the best interests of the beneficiaries.
Beneficiary – Any person or entity (charity) that receives assets or profits from the trust.
The most common purposes for trusts are (1) to avoid probate, privacy (2) avoid estate taxes, (3) caring for blended families, with family structures changed as a result of divorce, remarriage and adoption, and (4) to protect individuals from supplemental government assistance, like Medicare or Medicaid.
It is important to note that once a trust has been created, it is imperative that the trust remain funded. In order to properly fund the trust, it is important to title assets into the name of the trust (property deeds, cash accounts, non-retirement investments and brokerage accounts, non-qualified annuities, stocks and bonds held in certificate form, and tangible person property.
Trusts are very complex estate planning vehicles that can be modified to conform to the needs of the grantor. It is important to meet with an attorney to make sure that the nuances of the trust are understandable and in accord with the wishes and desires of the grantor.
Understanding Durable General Powers of Attorney
As per A.R.S. §14-5501, a durable power of attorney is a written instrument by which a principal designates another person as the principal’s agent. The principal may designate the agent to make financial decisions on the principal’s behalf. The importance of this document is that it saves considerable time and money in managing the principal’s financial affairs during a time of disability or incapacity. It is durable because the power of attorney remains in effect even if the principal becomes incapacitated. In Arizona, both the principal and agent must be over the age of eighteen (18).
People often overlook the importance of this document and consider it unnecessary. However, powers of attorney play a fundamental role in any comprehensive estate planning. Even though this is a worst case scenario document, it is a document that, if properly drafted, can make life much easier for the principal’s family in the event of incapacity. For example, if you are married, one spouse will have some authority over property owned jointly (e.g., bills from a joint account). However, without a power of attorney, a spouse will have limited to no power over property owned by the incapacitated spouse. Without an effective power of attorney, it is possible that a spouse will be forced to go to court to request a guardianship or conservatorship to gain control over the incapacitated spouse’s assets.
Understanding Health Care Powers of Attorney and Living Wills
Under A.R.S. §36-3221, a written document can be created that allows for a person who is an adult to designate another adult individual or adult individuals to make health care decisions on that person’s behalf or to provide funeral and disposition arrangements in the event of the person’s death. A health care power of attorney is authorizes an agent to make health care decisions for the principal when the principal cannot make or communicate their own health care decisions due to mental or physical illness, injury, disability, or incapacity. A health care power of attorney is durable because it survives the principal’s disability or incompetency. For example, an agent will have the authority to give or refuse consent to all medical, surgical, hospital and any other related health care.
A living will (A.R.S. §36-3261) is not the same as a last will and testament, but it is a legally binding document that allows for the principal to declare how he or she would like to be treated in the event of a medical emergency. A living will controls decisions for the principal in situations where the principal has a terminal condition. For example, it allows for the principal to decide how long and what measures are to be used in prolonging life. A living will may be used as part of or instead of a health care power of attorney. If a living will is created in addition to a health care power of attorney, it should be attached to the power of attorney.
Probate simply refers to the legal procedure for the administration of a decedent’s estate. Probate includes proving the validity of the decedent’s will, identifying and inventorying the decedent’s property, paying debts and taxes, and distributing the remaining property in accord with the terms of the decedent’s will. Depending on the size of a decedent’s estate, probate can be a very long and expensive process. Arizona allows has three ways to probate an estate: (1) informal, (2) formal, and (3) supervised probate. Probate is typically initiated when the person who wants to be appointed as the personal representative files the will, if there is one, and a petition with the probate court. If there is no will, the court will default to Arizona’s intestacy laws to determine priority of appointment.
Informal Probate – This is used when there is a valid will that has not been contested. The personal representative appointed by the court administers the estate with very little court supervision.
Formal Probate – This is used to resolve an estate’s legal issue. For example, when the will is contested, ambiguous language in the will, or when there is a dispute over who should be appointed the personal representative for the estate.
Supervised Probate – This is where the estate requires supervision by the court, and the personal representative must ask for approval before taking any action. Often times a supervised probate is initiated when it is necessary to protect creditors, inheritors or any other interested party.
Arizona allows for a way to avoid probate by claiming property with a small estate affidavit (A.R.S. §14-3971). In order to take advantage of this process, the value of all of the personal property (cash, bank accounts, stocks and bonds, jewelry, etc.) in the estate of the deceased, wherever that property is located, less liens and encumbrances, does not exceed $75,000.00, and at least 30 days have passed since the death, and/or the assessed value of the real property (land and permanent structures on the land) in the deceased’s estate located in Arizona, less liens and encumbrances as of the date of the deceased’s death, does not exceed $100,000.00, and at least six (6) months have passed since the death.
The following avoid probate:
Payable-On-Death (POD) Accounts (bank accounts, retirement accounts)
Transfer-On-Death (TOD) Accounts
Property with Survivorship Designations (joint tenancy, community property with right of survivorship, etc.)
If you have any estate planning questions or would like to set up an appointment, please contact our office at (480) 947-1403.
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