Planning Notes

Real estate can be the source of substantial liabilities. Under certain circumstances, however, many of those liabilities can be eliminated by properly structuring ownership of real estate in a limited liability entity like a limited liability company (LLC).

Contract Liability

The significant cost of acquiring real estate often requires owners to borrow money purchase real estate. Because of the significant fluctuations in real estate values over the past decade, especially here in Arizona, many property owners now owe more money on loans associated with their real estate than the real estate is worth.

Although Arizona law generally prohibits lenders from suing homeowners to collect deficiencies associated with the disposition of primary residences, lenders can obtain deficiency judgments against real estate owners in other circumstances. However, if the real estate is owned by an LLC as opposed to a person, and the owner of the LLC (called an LLC member) has not personally guaranteed the loan or acted wrongfully, the lender cannot seek recourse against the LLC member for a deficiency, only the LLC itself.

Tort Liability

In the United States, people are required to act reasonably (non-negligently) relative to their age and capacity. If a person does not act reasonably, he/she can be liable for damages associated with his/her breach of that duty. However, a person who owns real estate can, in certain situations, protect his/her personal assets from negligence claims arising from the ownership of the real estate. This is done by titling ownership of real estate in the name of an LLC or other limited liability entity.

For example, if a tenant of rental property slips and falls in a pool of standing water at the rental property because a sprinkler was not properly installed, that owner of the rental property might be liable for those injuries. If the property is owned by a person, then the tenant can pursue the personal assets of the owner. If an LLC owns the property, however, only the LLC will be liable for damages (unless an LLC member personally created the danger through an act of negligence like incorrectly installing the sprinkler head that caused the pool standing of water), but the tenant would not be able to pursue the LLC member's assets to satisfy a judgment entered against the LLC.

Limited Liability Company (LLC)

During the past 30 years, the LLC has risen from realtive obscurity in Wyoming to wide-spread acceptance and usage in every state as an entity of choice for many businesses and for many asset protection plans. This is in large part because of the flexibility and lack of formational and operational formalities required by LLC statutes as compared to corporation statutes. There is, however, another possibly more important reason: charging order protection for LLC members.

Charging Orders

In contrast to corporations, which generally permit judgment creditors of a shareholder, except in Nevada, to foreclose upon a judgment debtor's property interest in a corporation, which is represented by shares, and exercise the rights associated with those shares, creditors of LLCs in many states, e.g. Arizona, are expressly prohibited from seeking foreclose of an LLC member's property interest in the LLC and are not permitted to exercise management or control over the LLC. Courts in some states, however, have permitted a foreclosure-like remedy, i.e. Florida (Olmstead) & Colorado, by disregarding single-member LLCs and imposing personal liability upon an LLC member in situations where the member was utilizing the LLC for unlawful purposes. However, Florida's legislature recently enacted a statute that only allows creditors to pursue charging orders against multiple-member LLC interests.

This brief overview of some important considerations associated with real estate LLCs and asset protection is by no means comprehensive. Always seek the advice of a competent professional when making important financial and/or legal decisions.

Arizona living wills and health care powers of attorney are legal documents that allow people to articulate their wishes. Although these two directives may seem mutually exclusive, they can actually work in tandem.

Health Care Power of Attorney

An Arizona health care power of attorney can be the broadest health care directive permitted under Arizona law. It can allow an adult to absolutely designate one or more other adult individuals to independently make health care decisions on that adult's behalf or to provide funeral and disposition arrangements in the event of the person's death or it can give specific instructions. Moreover, this includes not only treatment decisions, but decisions about the medical personnel and medical facilities at which a person should be treated.

Arizona law requires that a health care power of attorney be: 1) written, 2) dated, 3) signed, and 4) notarized or witnessed by at least one adult who affirms that the notary or witness was present when the person dated and signed or marked the health care power of attorney and that the person appeared to be of sound mind and free from duress at the time of execution of the health care power of attorney. ARS § 36-3221.

The notary or witness shall not be any of the following: 1) A person designated to make medical decisions on the principal's behalf, 2) A person directly involved with the provision of health care to the principal at the time the health care power of attorney is executed. If a health care power of attorney is witnessed by only one person, that person may not be related to the principal by blood, marriage or adoption and may not be entitled to any part of the principal's estate by will or by operation of law at the time that the power of attorney is executed. ARS § 36-3221.

Living Will

An Arizona living will can either exist by itself or as part of a health care power of attorney. It specifies those end-of-life actions a person would and would not like taken on his/her behalf. The situations and actions listed in a living will may range from very general to very specific.

If a living will is part of a health care power of attorney, it need only be in writing and need not comply with additional execution formalities. If it is not part of a health care power of attorney, however, its execution must satisfy the same execution requirements as a health care power of attorney. ARS § 36-3261.

The Arizona statutes are somewhat unclear as to whether a health care provider can act independently under a living will that only exists as part of a health care power of attorney, or whether the attorney-in-fact must issue the directives set forth therein. Therefore, to avoid this possible limitation, we suggest that a living will be executed as a separate document, even if its terms are contained in a health care power of attorney.

Out of State Validity

A health care directive prepared before September 30, 1992, or prepared in another state, district or territory of the United States is valid in Ariozna if it was valid in the place where and at the time when it was adopted and only to the extent that it does not conflict with the criminal laws of Arizona. ARS § 36-3208.

Controlling Directive

If there are conflicts among the provisions of valid health care directives, the most recent directive is deemed to represent the wishes of the patient. ARS § 36-3209.

This brief overview of some important considerations associated with living wills and healthcare powers of attorney is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.

An Arizona living trust is an arrangement in which a person, called a settlor, transfers his/her assets to a revocable trust for the benefit of others upon the settlor's death. Living trusts are commonly used as an alternative to wills in order to direct the distribution of a person's assets after his/her death and to avoid probate. In contrast, an Arizona testamentary trust is created by a decedent's will upon his/her death. Unlike living trusts, testamentary trusts are not created to avoid probate.

Asset protection is the process of structuring ownership of a person's assets to preserve maximum value for the owner and family, etc. in the event of creditor problems.

Although neither Arizona living trusts nor Arizona testamentary trusts provide asset protection for trust settlors (the people who create trusts), in many states that have enacted a variant of the Uniform Trust Code (including Arizona), both living trusts & testamentary trusts can provide asset protection for trust beneficiaries, even if the beneficiaries are also trustees, if such trusts include "spendthrift" provisions.

Trust Interests

Often, a beneficiary who is also a trustee possesses two different interests in a trust: 1) interest in income and 2) interest in principle. Although neither the Uniform Trust Code (a model from which many states derive their trust laws) nor the Arizona Trust Code (Arizona's actual trust laws) make such a distinction, the Internal Revenue Code does, and this distinction can result in substantial federal tax consequences.

1) Interest in Income

Both the Uniform Trust Code and Arizona Trust Code provide that interests in income are protected from the trustee/beneficiary's creditors as long distributions of income are limited to ascertainable standards, e.g. health, educations, maintenance, & support, and the trustee/beneficiary is not also the trust settlor.

The relevant portion of the Uniform Trust Code provides:

If the trustee’s or cotrustee’s discretion to make distributions for the trustee’s or cotrustee’s own benefit is limited by an ascertainable standard, a creditor may not reach or compel distribution of the beneficial interest except to the extent the interest would be subject to the creditor’s claim were the beneficiary not acting as trustee or cotrustee.

In addition, the Arizona Trust Code also provides that creditors are not permitted to compel distributions even if "the trustee's discretion to make distributions for the trustee's own benefit is purely discretionary." A.R.S. § 14-10504(E).

As mentioned previously, however, in situations where the trust aims to qualify for the unlimited marital deduction under Internal Revenue Code § 2056, a trust will not provide asset protection because § 2056 requires that the beneficiary, surviving spouse must receive all the income from the trust as a mandatory distribution.

2) Interest in Principle

The relevant provisions of both the Uniform Trust Code and the Arizona Trust Code regarding trust principle are the same as those regarding trust income. As such, distributions of principle that are limited to an ascertainable standard are protected from creditors to the same extent as distributions of income under the Uniform Trust Code & Arizona Trust Code.

Unlike distributions of income, however, Internal Revenue Code § 2056 does not require trust beneficiaries to receive trust principle in mandatory distributions to qualify for the unlimited marital deduction. Because of this, distributions of principle from the marital trust that are not limited by an ascertainable standard, i.e. purely discretionary, are also protected from creditors under the Arizona Trust Code.

This brief overview of some important considerations associated with Arizona asset protection through Arizona living trusts and Arizona testamentary trusts is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.

The following infographic is a brief, non-comprehensive illustrated overview of asset protection.

This brief overview of some important considerations associated with the asset protection is by no means comprehensive. Always seek the advice of a competent professional when making important legal decisions.

USE THIS IMAGE ON YOUR SITE

An Arizona living trust is a means of structuring the transfer of a decedent's assets upon his/her death in a manner that aims to avoid probate completely or minimize the size and complexity of a particular probate. This post is part of our continuing series addressing basic areas of the law.

Probate

Arizona probate is a judicial proceeding through which a decedent's will is validated, the decedent's creditors are paid, and the decedent's separate property assets are distributed to those specified in the decedent's will.

People often believe that probate is problematic and should be avoided because of high-profile cases in which litigation associated with probate was drawn-out and expensive. In many of those cases, however, had there been living trusts as opposed to wills, the litigation would not likely have been substantially less drawn-out or less expensive. Rather, the issues were often with the particular parties involved, as opposed to the probate process.

Although probate can be often be relatively simple, depending upon a person's particular circumstances, a living trust may be a better alternative.

Asset Ownership

In order to avoid probate, a person must transfer legal ownership of his/her assets to another legal entity. In the case a living trust, or more technically a revocable inter-vivos trust, the assets are said to be "held in trust" by a trustee for the benefit of a trust beneficiary or trust beneficiaries.

Settlor

The person who makes or settles a trust is called a trust settlor. Depending upon how the trust is structured, the settlor may reserve varying degrees of control over trust assets ranging from complete control and the right to revoke the trust (common in living trusts) to no ongoing control of the trust. Although some types of trusts can provide asset protection for trustees and/or beneficiaries, very few revocable living trusts (none in Arizona) provide asset protection for trust settlors.

Trustee

The person who holds legal title to assets owned by a trust is called the trustee. A trustee is a fiduciary and is held to the highest standard of care and good faith and is not permitted to use trust assets for his/her benefit and/or gain to the detriment of the trust beneficiary or beneficiaries.

Successor Trustee

In addition to appointing a trustee, who is often the trust settlor in cases of living trusts, a successor trustee is appointed to become the new trustee upon the death of the trustee. This helps to speed the distribution of trust assets if the settlor and trustee are the same person.

Beneficiary

The person or people for whose benefit trust assets are held by the trustee is/are called the trust beneficiary or beneficiaries and is/are often the heirs-at-law of the trust settlor. Depending upon the trust, the beneficiary or beneficiaries may be granted control over the trust ranging from near-complete control (if the beneficiary is also the trustee) to very little control (if the trust incorporates spendthrift provisions and trust beneficiaries cannot compel distributions of either trust income or principle).

Pour-Over Will

A pour-over will is often used to transfer the remainder of a person's estate to his/her trust after his/her death if not all assets are owned by the decedent's trust. Although pour-over wills are not exempt from probate, if the assets are less than values set by statute, an personal property affidavit may be used.

This brief overview of some important considerations associated with Arizona living trusts is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.

A Miller trust can allow those that otherwise have too much income to become eligible for Medicaid.

What is Medicaid?

Medicaid is a federally-funded, but state-administered, program that pays the eligible health care expenses of low-income individuals and families who fit into an eligibility group that is recognized by federal and state law. In Arizona, Medicaid is administered by the Arizona Health Care Cost Containment System (AHCCCS). 

Medicaid Income Cap

Because Medicaid is administered by the various states, some eligibility rules vary from state to state. In particular, some states (including Arizona) set a maximum amount of monthly income that a person is permitted to receive and still be eligible for Medicaid benefits.

How Does a Miller Trust Work?

Medicaid places strict restrictions on the transfer of income or assets by the applicant/member for less than fair market value. If a member/applicant violates these restrictions, he/she will not be eligible for Medicaid for a period of time that varies from state to state (60 months in Arizona). However, Medicaid does permit an applicant/member to assign either all of his/her income to a Miller trust or the amount of his/her income that exceeds his/her state's Medicaid income cap.

If the member/applicant chooses to assign all of his/her income to the Miller trust, the trustee will distribute the associated Personal Needs Allowance to the member in addition to paying for the member's Share of Cost, if any, and other expenses.

If the member/applicant chooses to assign only the income that is in excess of his/her state's Medicaid income cap, the member/applicant will be responsible to pay his/her expenses, including share of cost, from the the funds not assigned to his/her Miller trust.

In either case, when the trust terminates, either because the member dies or the member no longer needs Medicaid benefits, the trustee must distribute to the state an amount equal to the total medical assistance paid on behalf of the member. After the state is reimbursed, any remaining funds will either be distributed to the member, if still alive, or the member's estate.

What About Assets?

Medicaid also imposes a limit on the value of non-countable resources that an applicant is permitted to own, $2,000 in 2011. However, Miller trusts are specifically forbidden from owning assets, so the applicant/member must reduce his/her assets in a manner that will not violate the transfer rules and cause ineligibility, e.g. annuities. This usually means spending down those assets before becoming eligible for Medicaid.

This brief overview of some important considerations associated with Miller trusts & qualified income trusts is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.

To form an LLC in Arizona, two actions are required by The Arizona LLC Act: 1) file articles of organization with the Arizona Corporation Commission and 2) publish notice of the filing of the articles of organization. Filing of an affidavit of publication of the articles of organization with the Arizona Corporation Commission is optional.

However, those two (or three) steps are a bare minimum to form an LLC in Arizona; in order to provide for the internal governance of the LLC, an LLC operating agreement can be very useful.

1) File Articles of Organization

The Arizona LLC Act requires the Articles of Organization to contain: A) the name of the limited liability company, B) the name, street address in Arizona and signature of the agent for service of process, C) the address of the company's known place of business in Arizona, if different from the street address of the company's statutory agent, D) whether the LLC is member-managed or manger-managed, and E) the names of the managers, if member-managed, or the names of the members, if member managed. (ARS § 29-632) 

2) Publish Notice of Filing

The Arizona LLC Act requires: "Within sixty days after the commission approves the filing, there shall be published in a newspaper of general circulation in the county of the known place of business, for three consecutive publications, a notice of the filing of such articles of organization..." (ARS § 29-635)

3) File An Affidavit of Publication

Once the publication requirement has been fulfilled, "[a]n affidavit evidencing publication may be filed with the commission." (ARS § 29-635). This step is optional but encouraged in order to prove that the formation requirements were satisfied.

This brief overview of some important considerations associated with how to form an LLC in Arizona is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.

Arizona beneficiary deeds and trusts are versatile and flexible methods of creating interests in property, however, the following discussion is limited to creating life estates in real property.

On occasion, a decedent may desire to permit another to use real property after the death of the decedent but only for as long as the other person is alive, thereby restricting the other person (life tenant) from directing the transfer of the property at the life tenant's death. Although there are a number of different methods to create a lifetime interest in real property at a person's death, two of the simplest and most flexible methods are beneficiary deeds and trusts.

Beneficiary Deed

A deed is the legal means of transferring real property from one owner to another. A deed generally becomes effective when it is executed, however, Arizona law provides for a special type of deed, called a beneficiary deed, that that will not become effective until the death of the grantor. Moreover, a beneficiary deed may convey either a fee simple absolute, i.e. an interest not subject to divestment, or a fee simple defeasible, i.e. an interest that is subject to divestment.

In order to create a life interest in real property at death via a beneficiary deed, the owner of real property executes the beneficiary deed currently, but it will not become effective until his/her death. If the grantor wishes to create a life estate, the deed specifies that a life tenant will posses a life estate in the property and that the property will be transferred to successor beneficiary upon the life tenant's death. After the death of the life tenant, the property will be conveyed to the second successor beneficiary. Because a beneficiary deed does not become effective until the grantor's death, it can be either directly revoked during the life of the grantor.

Trust

A trust is an centruries-old legal concept whereby a third party (trustee) holds property for the benefit of another (beneficiary) at the request of the property owner (grantor, settlor, or trustor). Specifically, a grantor transfers ownership of his/her property to the trustee for the benefit of the beneficiary or beneficiaries. The trustee is required to act as a fiduciary, i.e. cannot use the property for him/herself to the detriment of the beneficiary or beneficiaries, and is liable if he/she does not so act.

In order to create a life interest in real property at death via trust, the owner of real property transfers the property to a trust for which he/she would be both the trustee and beneficiary, the life tenant would be the successor trustee and contingent beneficiary, and a second successor trustee and second contingent beneficiary would also be specified. Such a trust may be either revocable (the grantor can revoke the trust prior to death) or irrevocable.

This brief overview of some important considerations associated with life interests in real property, revocable trusts, and beneficiary deeds is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.

On 14 April 2011, President Obama signed The Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011, which repealed substantially broader Internal Revenue Service (IRS) Form 1099 reporting requirements scheduled to become effective beginning in 2012 because of The Patient Protection and Affordable Care Act (PPACA) and scheduled to become effective beginning in 2011 because ofThe Small Business Jobs Act of 2011.

What is Form 1099-MISC?

Some payments totaling $600 or more for goods and services that are made in the course of a taxpayer's trade or business are required to be reported to the IRS using Form 1099-MISC. Payments not made in the course of a trade or business need not be reported.

The Patient Protection and Affordable Care Act (PPACA)

Prior the PPACA, it was necessary to issue Form 1099-MISC to independent contractors, e.g. sole proprietorships & partnerships, for goods and services they provide. Beginning in 2012, the PPACA required that Form 1099-MISC be issued to all vendors and service providers, including corporations, to whom payments totaling $600 or more were paid during a tax year.

The Small Business Jobs Act of 2010

Beginning in 2011, The Small Business Jobs Act of 2010 required owners of real estate used as rental property to also report payments totaling $600 or more for expenses associated with their rental properties.

What's Changed, Err, Not Changed?

The legislation enacted on 14 April 2011 returns the Form1099-MISC requirements to their pre-PPACA and pre-Small Business Jobs Act of 2010 states as if the neither law had been enacted.

This brief overview of some important considerations associated with IRS Form 1099 reporting requirements is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.