People often believe that estate planning is only for those who have substantial assets, but estate plans can benefit everybody. In general, estate plans allow people to:
- Direct medical care & other affairs during possible incapacitation;
- Direct the distribution and/or management of his/her assets after his/her death;
- Protect assets from potential creditors during life & after death; and
- Minimize Federal Estate Tax liability.
In particular, estate planning allows people to specify how the assets they leave behind will be distributed, to specify steps they would like taken to prolong their lives, to designate another to act on their behalf for non-healthcare-related matters if they become incapacitated, and to provide for loved ones after their deaths in a supervised manner that is consistent with their desires.
Direct Medical Care & Other Affairs During Incapacitation
While there are many different types of powers of attorney, two of particular importance in the context of estate planning along with another document that expresses a person's end-of-life preferences:
- Durable general power of attorney;
- Health care power of attorney; and
- Living will.
Durable General Power of Attorney
In the event that a person becomes incapacitated, a durable general power of attorney will permit another, called an attorney-in-fact, to act in that person's stead in regard to most types of matters, with the exception of health care matters.
For example, if a person has a stroke and is unable to communicate and unable to make decisions on his/her behalf, an attorney-in-fact pursuant to a durable general power of attorney would be able to "step into" the stroke victim's shoes and act on his/her behalf. However, if the stoke victim did not have a valid durable general power of attorney prior to the stroke, only those persons who were already authorized as signers on the stroke victim’s accounts or otherwise having interests in the stroke victim’s property would be able to act on behalf of the stroke victim in such matters.
Arizona law requires that a durable general power of attorney be: 1) written, 2) contain language that clearly indicates that the principal intends to create a power of attorney and clearly identifies the agent, 3) signed or marked by the principal or signed in the principal's name by some other individual in the principal's conscious presence and at the principal's direction, 4) witnessed by a person other than the agent, the agent's spouse, the agent's children or the notary public, and 5) executed and attested by its acknowledgment by the principal and by an affidavit of the witness before a notary public and evidenced by the notary public's certificate, under official seal. A.R.S. § 14-5501.
Health Care Power of Attorney
Unlike a durable general power of attorney, a health care power of attorney is limited to health care and health care-related matters.
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.
For example, if a person becomes incapacitated because of a degenerative neurological condition, an attorney in fact pursuant to a health care power of attorney can, in accordance with the terms of the health care power of attorney, direct the medical care of the patient so as to effectuate the patient’s treatment desires.
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.
A living will is a directive that allows a person to communicate the types of life-saving and life-sustaining efforts that the person would like taken on his/her behalf. Often, a person empowered under a health care power of attorney is required to respect the preferences set forth in a 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.
For example, if a person becomes incapacitated in a coma, a living will can specify the particular life-saving measures the patient would like taken to prolong his/her life, such as surgical procedures, among other treatments.
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.
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.
Direct Assets at Death
There are various legal methods through which a person can plan how his/her assets will be handled after his/her death, including but not limited to:
- Revocable living trust;
- Joint tenancy;
- Beneficiary deed; and
- Beneficiary designation.
Perhaps the most basic form of estate planning in Arizona, a will allows a person to specify how his/her assets will be distributed upon his/her death. A will must be admitted to probate in either an informal, formal, or supervised proceeding. Probate is the process by which a will is validated, creditors of the decedent are paid, and distributions are made according to the terms of the will.
For example, a person can specify in a will those people and/or organizations, which the person would like to be beneficiaries of the person’s estate.
In Arizona, a person can also nominate guardians for his/her children via a will. Although, courts are not required to respect such nominations, they often do.
Arizona law provides for three types of wills: (1) attested wills, (2) self-proved wills, and (3) holographic wills. In any case, however, the person making the will — called a testator — must be at least eighteen (18) years of age and be of sound mind. The requirements for all three types of wills are set forth in A.R.S. § 14-2501, et seq.
Revocable "Living" Trust
In order to avoid the probate process, some people choose to transfer ownership of their assets to revocable living trusts. Unlike probate, no court appoint is necessary for the person named as a successor trustee to oversee the distribution and/or management of trust assets.
For example, a person can specify in a will those people and/or organizations, which the person would like to be beneficiaries of the person’s estate.
If, however, all of a person's assets, which would otherwise be subject to probate are not transferred to the trust and exceed the any exemptions for small estates, probate may be necessary. This is especially common among so-called "snowbirds" who are residents of another state during the spring, summer, and fall, but live in Arizona during the winter and do not title their Arizona residences to their revocable living trusts.
Various types of property —for example, real property and bank accounts — are owned in joint tenancy, also known as joint tenancy with right of survivorship. Under Arizona law, when one joint tenant dies, the decedent tenant’s interest in the property is automatically transferred to any other joint tenants on a pro-rata basis by operation of law. This automatic transfer cannot be stopped or avoided by the provisions of a will or revocable "living" trust.
For example, if a married couple owns a house as joint tenants, or as community property with right of survivorship, the death of the first spouse will extinguish that deceased spouse’s interest in the house, making the living spouse sole owner.
Another way to avoid probate is via a type of deed that automatically becomes effective upon a person's death, i.e. a beneficiary deed. In Arizona, beneficiary deeds are expressly made possible via statute, specifically A.R.S. § 33-405.
For example, if a person owns a house as his/her separate property and does not have a will, living trust, a recorded beneficiary can convey the house to another person, called a beneficiary, by operation of law, without requiring probate, upon the beneficiary deed maker’s death.
Assets such a life insurance and federally-governed retirement plans such as a 401(k), IRA, or profit sharing plan are not subject to probate, unless payable to the decedent’s estate; rather, such assets include a beneficiary designation, which sets forth the particular beneficiary or beneficiaries of the assets.
Protect Assets From Potential Creditors During Life & After Death
There are many different strategies that can be used to prospectively protect assets from creditors. While some of these strategies permit significant flexibility and control, others do not.
- Irrevocable Trusts; and
- Limited Liability Entities.
Limited Liability Entities
Although there are many types of limited liability entities, the first that springs to mind are corporations, some types of limited liability entities are much better suited for asset protection purpose than other, specifically limited liability companies (LLC) and limited partnerships (LP).
A limited liability company is a separate legal entity from its owners, called members. As such, the members are note personally responsible for the creditors' claims against a validly formed LLC and for which the members have not offered personal guarantees. In most states, including Arizona, LLCs require the observance and compliance with very few formalities and, as such, are common elements of asset protection plans.
In Arizona, and many other states, a creditor of an LLC is only permitted to obtain a charging order against the LLC. A charging order is a court-ordered right to receive distributions made to a judgment debtor. It does not entitle the creditor to any say in the management of the LLC or to compel distributions from the LLC.
Family Limited Partnership
Unlike a general partnership, in which all partners are liable for all debts of the partnership, a limited partner in a limited partnership is only responsible for his/her contributions to the partnership. However, all limited partnerships require at least one general partner who will be liable for all the debts of the partnership. In addition, a limited partner may not be actively involved in the management of the limited partnership.
Although it will not absolve the general partner(s) from liability associated with the assets owned by the partnership, unsless the general partner elects limited liability, a family limited partnership can protect the assets of the limited partners from the creditors of the partnership in addition to protecting the limited partnership from claims of the limited partners' creditors.
For example, a husband and wife create a limited partnership in which the husband and wife are general partners and each own 1% of the partnership interest. Thereafter they convey ownership of their investments to the limited partnership. The remaining 98% of the interest is owned by their children. This arrangement gives them control over the limited partnership while the investments owned by the partnership cannot be used to satisfy the debts of, or judgments against, the parents.
Trusts can be very flexible and effective means of asset protection. They are flexible, in that they can be used to accomplish many different objectives, and they are effective, in that they can remove assets from a person's legal ownership while still providing benefit to that person.
Domestic Asset Protection Trust
A domestic asset protection trust is a trust created under the laws of the United States in which legal title to the trust, and effectively its assets, is in the name of the trustee and, in which, distributions are made to beneficiaries on a discretionary basis.
A trust that includes "spendthrift" provisions can prohibit creditors of trust beneficiaries from reaching trust assets, thereby limiting such creditors to distributions made by the trust. The trust can also be structured so as to limit distributions to the discretion of the trustee in such cases.
Family Savings Trust
A family savings trust is simply an umbrella term for an irrevocable trust that serves to benefit a family by, inter alia, protecting a family's assets. For example, a mother and father transfer their business to a trust that includes spendthrift provisions, in which they are the trustees and their children are the beneficiaries. Claims against the children cannot be satisfied using the assets of the trust.
Life Insurance Trust
A life insurance trust that is the beneficiary of one or more life insurance plans and which includes spendthrift provisions can be a very effective way for a person to provide for their beneficiaries in a manner that is according to their desires in the event of a tragic event, all the while protecting the trust's assets from the creditors of trust beneficiaries.
Qualified Personal Residence Trust
A trust that meets specific requirements and is created to own a person's or family's home is called a qualified personal residence trust. This type of trust is used to both minimize estate taxes and to provide asset protection.
Offshore Asset Protection Trust
Once the province of very high net worth individuals or families, offshore trusts have become more accepted ways of providing asset protection by providing greater flexibility and privacy than domestic trusts. However, these trusts are not without their limitations and risks, e.g. the stability of the international government in which the trust exists.
Revocable Living Trust
Although revocable living trusts are very popular because they can avoid probate, they provide very little, if any, asset protection.
Minimize Federal Estate Tax Liability
Although the Federal Estate Tax applied to a much larger portion of society in the past, because the Federal Estate Tax exemption is much higher — $5,430,000 per individual or $10,860,000 per married couple — than it has ever been, the Federal Estate Tax applies to less than 1% of Americans. That said, the strategies used to reduce Federal Estate Tax liability are largely the same as those strategies used for asset protection purposes. In essence, because these strategies reduce the amount of control that the owners have over their assets, which allows them to discount the values of their ownership interests in the assets.
Estate Planning Glossary
Probate – Court-monitored proceeding during which a decedent’s will is validated (if any), the decedent’s assets are gathered, the decedent’s creditors are paid, and the decedent’s remaining assets are distributed – either pursuant to the terms of the will or the intestacy statute – to the decedent’s heirs or beneficiaries, as the case may be.
Testator – In Arizona, the person who makes a will is called a testator. Further, after making a will a person is said to be “testate”.
Estate or Probate Estate – When a person dies, a fictional thing called an “estate” automatically comes into being. A decedent’s estate, owns all of the decedent’s property that isn’t titled in joint tenancy, as community property with right of survivorship, or otherwise not titled in the decedent’s name.
Personal Representative – In Arizona, the term “personal representative” is to describe the person who is appointed by the probate court to administer a decedent’s estate, as opposed to the term “executor”, which is used in many jurisdictions.
Heir – Person(s) who inherit from a decedent who does not have a valid will at the time of death pursuant to a state’s intestacy statute.
Beneficiary – Person(s) who have interests in a decedent’s estate pursuant to a valid will or person(s) who are otherwise benefit from a revocable “living” trust, pursuant to a beneficiary designation, or similar transfer that is outside of probate.
Intestacy – When a person dies without a valid will that person is said to be “intestate” and the distribution of that person’s probate estate is governed to a particular state’s intestacy statute.
This brief overview of some important considerations associated with estate planning in Arizona is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.
Mesa, AZ Office
Our Mesa, Arizona office is in the heart of downtown Mesa. It is located one block north of Main and Center Streets on Pepper Place, at 40 N. Center St. #110, Mesa, AZ 85201.
Steve Cook is a Mesa, Arizona probate attorney at Cook & Cook. Although his office is located in Mesa, Arizona, he represents clients throughout the Phoenix, Arizona Metropolitan area including the following east valley cities: Scottsdale, Paradise Valley, Tempe, Chandler, & Gilbert.