I am constantly asked “What is the difference between living trusts and wills?” A Last Will and Testament is usually sufficient for many people. Always consult with an experienced Arizona estate planning lawyer to educate you about the various options.
A revocable living trust is sometimes overkill.
Many people request a revocable living trust because “they heard” it avoids a messy court case. Not true. A simple will is sufficient for most estates. Furthermore, with a revocable living trust, you must retitle all of your assets in the name of the trust. And you have to remember to title new assets in the name of the revocable living trust.
A revocable living trust may be appropriate if you have young children. It is also useful when you have real estate/assets in other states. Furthermore, you can use a trust to “control beyond the grave” how certain assets are utilized. For example, a trust may require your kids to use their inheritance for college first. You can also use a living trust to protect your beneficiaries from their own creditors. A trust is also useful to ensure that your spouse does not disinherit your children from a previous marriage.
A revocable living trust is usually not necessary to avoid estate planning taxes.
Some people have heard that a revocable living trust will “avoid taxes”, yet most don’t even know what that means. A revocable living trust may avoid some federal estate taxes. However, most people will never be subject to any federal estate taxes because their estate isn’t big enough. This is true for both living trusts and wills. The current federal estate tax exemption for 2023 is $12.92 million per person ($25.84 million per married couple). If your assets’ aggregate value is below such an amount, there will be no federal estate taxes. And Arizona does not have a state estate tax! These large exemptions are set to expire in 2025. However, they will likely remain high enough (at least over $5 million) to avoid estate taxes for most people. This is true whether inheriting property by living trust or will.
A revocable living trust usually cannot avoid capital gains taxes.
As a side note, estate taxes are different than capital gains taxes. Most people pay capital gains taxes on any “profit” made from selling assets. However, capital gains taxes may be lower when selling inherited property. This is true with living trusts and wills. The cost-basis for some assets is “stepped up” to the asset’s value at the time of inheritance. For example, the cost basis for selling real estate is what the property was worth at the time of death. It is not based on how much the decedent paid for the property. The point is that tax savings are not usually an issue with living trusts and wills. Most estates are not large enough to have an estate tax.
A revocable living trust does not protect assets from your creditors.
I hear this myth a lot. People falsely believe that putting assets in a revocable living trust will protect them against creditors. In fact, putting your assets in a trust or some other entity could cause your assets to be more attachable. For example, if you put your vehicle or bank account in the name of a revocable trust or an LLC, the Arizona exemptions that protect such property from your creditors may not apply. This is because exemption laws apply to individuals, not assets owned by an entity.
Some very wealthy individuals create an “irrevocable” trust to help protect against creditors. Still, those are very specialized trusts, incredibly expensive, somewhat untested, and usually overkill for most people. Furthermore, you may lose control of your assets if you put them in an irrevocable trust.
As a side note, a regular revocable living trust may protect your assets from your beneficiaries‘ creditors. A well-drafted revocable living trust usually contains spendthrift provisions. These provisions give the trustee discretion to hold back distributions when beneficiaries have creditor troubles. The spendthrift provision in a trust is also effective when a beneficiary has substance abuse problems, or may be divorcing.
Most probates in Arizona are not a big or expensive deal.
People call me and say: “I want a revocable living trust to avoid probate”. Yet, most people don’t even know what probate is. Most probates in Arizona are done as an “informal” probate. An informal probate is a simple court action to appoint someone as executor of your estate (called a “Personal Representative”). Once the court appoints a Personal Representative, that person can can transfer assets to the beneficiaries named in a will. This Personal Representative also is in charge of paying the decedent’s creditors.
Arizona lawyers usually charge hourly or flat fees for an informal probate, ranging from $4,000 to $6,000. Some states like California and Iowa allow lawyers to take a hefty percentage of your estate. In addition, the court proceedings in these states are more complicated. That is not the case for an informal probate in Arizona. Arizona prides itself on its informal probate processes. In Arizona, you can file an informal probate action at the court counter without seeing a judge. The appointment of the Personal Representative happens within a couple of days after you file the informal probate case. A competent Arizona lawyer can handle the process quickly and efficiently.
A revocable living trust does not prevent anyone from challenging your wishes.
Anyone can always challenge the document in court, whether you have a will or trust. Most of these lawsuits will be unsuccessful if you have a good Arizona estate planning lawyer drafting your documents. Sometimes a “No Contest” clause in your will or trust will deter beneficiaries from challenging your estate plan. However, many of these clauses are unenforceable. Having a trust instead of a will does not necessarily prevent anyone from challenging your wishes in court.
Do not put anyone else’s name on your assets.
Do not put someone else’s name on your real estate title or financial accounts. I cannot stress this enough. For example, if you put someone’s name on your home or bank account and the person gets sued, the asset is a risk of being lost to collection. Furthermore, the person may have higher capital gains taxes when they eventually sell or cash out the asset. And if you ever get into a dispute with that person, you can’t easily take them off title if they refuse to cooperate. Even if they consent, taking a person off title could trigger fraudulent transfer laws, which will put your asset and your loved one in the crosshairs of creditors and bankruptcy trustees.
There are many other ways to ensure your assets go to someone when you die without giving them a present ownership interest. For example, an estate planning attorney can draft and record an Arizona beneficiary deed so your real estate can transfer to your beneficiaries automatically when you pass away and your beneficiaries record your death certificate. Banks and other financial institutions usually allow you to name a “payable-on-death” beneficiary on most financial account. But before you do any of that, please consult a good Arizona estate planning attorney. Naming someone as a beneficiary on an asset may trump and supersede whatever your wishes are in a last will and testament or revocable living trust.
Everyone should have a basic will.
I don’t care how small you think your estate is; everyone should have a basic last will and testament. This is especially true if you are married or have young children. For example, you need a last will and testament to name a guardian for your minor children. And if you are married, your surviving spouse may not inherit everything automatically without a will if you have children from a previous marriage. The “default rules” that apply under Arizona law when you die without a will (called “intestacy statutes”) may cause your assets to go to individuals you did not expect.
Please hire an experienced Arizona estate planning attorney.
I encourage you to hire a good Arizona estate planning attorney to draft your estate planning documents. So many people have tried to save money by using online websites, software, and stationary forms. This almost always causes substantial problems and unnecessary confusion for their heirs and beneficiaries. Estate planning is very specific to Arizona law. Forms and other online companies simply cannot be relied upon. Each person’s situation is different. Furthermore, Arizona is one of only 11 states that enforce community property laws for married couples. As such, a last will and testament and a revocable living trust for a couple must be written in a manner that does not conflict with those laws.
Remember that you are not paying a lawyer only to draft documents. You are paying the lawyer primarily for the advice, consultation, and education you desperately need on various issues that you haven’t thought about.