One of the primary client questions we face as estate planners is: “Do I need a Trust?”. While there is no hard and fast answer as each client’s circumstances are different, we are looking at a few data points to determine the appropriate structure, such as:
What is the value of the client’s assets?;
Are the value of the client’s assets above statutory limits to allow for the use of small estate affidavits?;
How concentrated is the client’s wealth in certain assets?;
Are there reasons that a Will will not suffice (i.e., does client have children with special needs, children with drug/alcohol issue, children with spending issues, blended family (i.e., Brady Bunch family) situation)?;
Is there any reason to make a spouse or child’s inheritance protected from creditors/divorcing spouses?.
(Before reading below, please review this article for a complete explanation of types of property titling relevant to estate planning.)
Below, we will delve into a description of the different estate settlement structures that may be used, from least effective (intestate succession) to most effective (revocable trust).
Intestate Succession
Intestate succession is how estates are settled if there is no will or other dispositive plans (such as a Will or a Revocable Trust). Intestate (i.e., without a will) succession is governed by state law, which in Arizona is found in Arizona Revised Statutes §§ 14-2101 through 14-2114. In Arizona, if you do not have a Will, your estate will be either (i) given 100% to your surviving spouse if your children are also the spouse’s children, (ii) if you have children from a prior relationship, the estate will be divided in half, with 50% going to the surviving spouse, and 50% divided among the deceased person’s descendants “by representation”, or (iii) if no spouse is then living or if the deceased person was not married, then to the deceased person’s descendants “by representation”, or if none, to the deceased person’s parents, or if none, generally in order according to the “table of consanguinity”.
Accordingly, if a client does not want their estate to be disposed of as described above, they will, at the minimum, need a Will to change the disposition of their estate.
Will
Conversely, a Will allows a client to “opt-out” from the intestate succession regime so their disposition may be different than what state law provides. This does not necessarily mean that the disposition will be substantially different than what intestate succession provides, but it does allow a client to define their intentions specifically. It should also be noted that even if a Revocable Trust is used, a client will still have a Will (specifically, a “pour over” will that states that any probate assets owned by the deceased person will be distributed to the Revocable Trust in order to ensure that the Trust is the vehicle defining how the estate is to be distributed). It should also be noted that a Will is the primary document where a person with young children designates their desired guardians in the case of a tragedy affecting the spouses.
When choosing a Will only, it is essential to know that a Will only deals with “probate” assets (i.e. does not deal with assets that are (i) jointly owned (i.e. joint bank accounts, joint tenancy property, community property), (ii) beneficiary designated assets (i.e., life insurance, retirement accounts (401k, IRA, etc.), or (iii) Trust owned assets). Therefore, when using a Will alone, a client will need to be heavily focused on how those other assets are titled or beneficiary designated, because in reality, those documents will often deal with significantly more substantial sums of money than a Will will cover (namely because retirement assets are a significant portion of an average client’s net worth).
Additionally, a Will is only valid after it has been filed with the probate court located where the deceased person primarily resided. This will require a nominated “personal representative” (i.e., the “executor”) to file a probate petition to open probate of the deceased person’s estate. After “letters testamentary” are granted to the personal representative, the personal representative will have the authority to act on the deceased person’s behalf to (i) collect all probate assets, (ii) pay the deceased person’s debts, (iii) pay any taxes due, and (iv) distribute any remaining assets to the deceased person’s named beneficiaries.
As part of this process, the personal representative is required to provide notice to all of the deceased person’s creditors (both known and unknown) of such person's death. This process in Arizona takes at minimum four (4) months to complete and often takes longer. Additionally, a personal representative is required to provide notice to the beneficiaries of the will to notify them of their interest in the estate.
These requirements described above, and others, often require the assistance of an attorney, and can frequently be expensive and time-consuming, which is the primary reason why most planners suggest the use of a Revocable Trust.
Revocable Trust
A Revocable Trust is effectively a contractual document among three distinct parties; a Trustor (the person establishing and funding the Trust by transferring assets to it), a Trustee (a person or corporation that receives the funded property, and administers it according to the terms of the Trust), and beneficiaries (the persons who receive the benefit of the Trust property). During the Trustor(s) life, a Revocable Trust is solely for the benefit of the Trustor(s) and may be amended or revoked at any time. Accordingly, for all legal purposes, assets owned by a Revocable Trust will be treated no differently than if you held them in your own individual name (so, no creditor protection or tax benefit).
Unlike a Will, it is the intention of the estate planner to have substantially all of the client’s assets owned by the Trust in order to have only one place to look to determine where assets should be distributed post-death (unlike the situation described above where beneficiary designations and jointly owned property can be substantially different than the beneficiaries of a Will).
In addition to the centralization aspects of a Trust, a Trust also is substantially easier to administer since the legal requirements for notice are generally lower than those dealing with a Will. However, effective Trust planning requires the client to proactively and consciously fund their Trust to avoid disparate results.
Conclusion
Choosing the appropriate plan requires analysis of your individual circumstances and wishes with experienced counsel. If you would like to discuss your situation, please do not hesitate to call (480) 930-5859 to speak with an attorney.