Arizona Living Trust Basics

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.

A trust is a very old concept whereby one person holds legal title to property for the benefit of another. The person who holds legal title is a fiduciary and cannot put his/her personal interests in front of those a trust beneficiary. A living trust is simply a type of trust.

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.

Typically people transfer ownership of their real property (home, land, other real estate), bank accounts, investment accounts, business interests (LLC membership interests, corporation shares), and other property that is not titled (jewelry, art) to the trust in order to fund it and reduced the size of their probate estate.

There are , however, some types of assets that are not well-suited for transfer to a living trust, such as tax-deferred retirements accounts (IRA's) because the distributions will be calculated and based upon the life expectancy of the other living beneficiary, meaning less potential for tax-deferred growth. Whether to make a living trust the beneficiary of a person's life insurance policy depends, in part, on the value of the person's estate for federal estate tax purposes. For example, if the value of a person's estate is significantly less than the current federal estate tax exemption — $5.43 million for an unmarried person and $10.86 million for a married couple (as of 2015) — it may be wise to have a living trust as the beneficiary of the person's life insurance policy. However, if the value of the estate is even somewhat close to the current federal estate tax exemption, it may be wise to have an irrevocable life insurance trust as the beneficiary.

Trust Administration

The administration of a living trust after the deaths of all the original trust settlors can either be quite simple — the terms of the trust may specify that all trust assets are to be distributed to the trust beneficiaries outright after which the trust will terminate — or they can be more complex — the terms may require that some or all of the trust principal will be held in trust until specific criteria are met or even in perpetuity.

Which option trust settlors choose often depends upon how much control they want to maintain after their deaths and how worried they are the trust beneficiaries will either waste trust funds or have creditor troubles.

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, a personal property affidavit or real 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.

Arizona Trust AttorneyDouglas K Cook is an Arizona trust attorney with over 40 years of experience as a practicing attorney. Although Douglas K Cook's 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.

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