Purpose of Estate Planning

Some of the more important reasons to undertake estate planning are:

Avoiding probate and the administrative costs associated with probate, providing for the administration and control of your assets in the event of your disability, and minimizing estate taxes.

Living Trusts

A popular tool of estate planners is the Living Trust, also referred to as revocable or inter vivos trusts.  The living trust is a legal arrangement that is formed to hold the assets of the creators.  The trust is operated according to the terms and instructions contained in the trust agreement which are based upon the creators’ individualized desires.  Generally, the living trust may be amended or revoked by the creator during the creator’s lifetime.  

The trust agreement gives instructions regarding the continued control or distribution of assets after the death of the creator, which eliminates the need for probating assets which are held by the trust.

The creator may and generally does act as trustee for the trust.  A trust may also be created jointly by a husband and wife.   In the event the creators become incapacitated or disabled, the trust agreement provides for the appointment of a successor trustee.  This ensures the continued administration of the trust assets to meet the needs of the creators without the expense and administrative inconvenience of appointing a conservator through the probate court.

The use of living trusts also provides for a greater degree of privacy concerning the management of trust assets upon the disability or impairment of the creator and the transfer of assets upon the death of the creator.  Only parties with an interest in the trust are entitled to notification regarding trust administration.   Probate and conservatorship proceedings generally require the disclosure of substantially more information in the form of court filings that are open to public inspection.  

It should be noted that the use and purpose of living trusts are wide-ranging and the above are simply descriptions of the most common uses of living trusts. 

Testamentary Trusts

Unlike a living trust, a testamentary trust does not become effective until the death of the creator, generally as a result of the language contained in a will instructing the retention of assets by a trustee with specific instructions regarding the administration and eventual distribution of the assets.  In most cases, the will must be admitted to probate in order to transfer the assets to the trustee, so the use of a testamentary trust is not designed to avoid probate.  Likewise, the testamentary trust is not useful in avoiding a conservatorship in the event of incapacity or disability of the owner of the assets.   

The testamentary trust is used to ensure the owner’s wishes are complied with regarding the use of the property after the owner’s death.  

Wills

Wills are used to express the maker’s instructions for the disposition of the maker’s assets after his or her death and also can be used to nominate guardians and conservators for minor children.  Instructions regarding the maker’s wishes regarding burial can also be included in a will.   The will is also the instrument that contains the controlling language for the creation of testamentary trusts. “Testate” is the term used to refer to the estate of an individual who dies with a valid will.  Individuals who die without a valid will are referred to as “intestate.”   To the extent the will gives instructions for disposition of property owned by the decedent, such assets are distributed according to the instructions contained in the will.  If there is no will, or if there are assets not addressed in the will, then the assets may be distributed according to the intestate succession statutes contained in Title 14, Chapter 2, Article 1, Arizona Revised Statutes.    

Power of Attorney & Living Will

Powers of Attorney can be used in planning for an individual’s incapacity.   Without proper advanced planning, it may be necessary to obtain the court appointment of a conservator and/or guardian.  Court appointment is a costly and time-consuming process.  

Powers of Attorneys generally address two distinct areas.   Financial Powers of Attorney apply to the control and administration of assets belonging to the principal.   Healthcare Powers of Attorney deals with making medical decisions on behalf of the principal.

Financial Powers of Attorney can be durable, which means they continue to be effective after the incapacity of the principal. In addition, the Power of Attorney can become effective only upon the incapacity of the principal, generally referred to as a springing power.  Financial Powers of Attorney can be general, giving the agent broad powers to handle all financial matters on behalf of the principal, or the Financial Power of Attorney can limit the agent’s powers to very specific matters.

Healthcare Powers of Attorney are used to designate an agent to make medical decisions for the principal in the event the principal is unable to make such decisions.  Like the Financial Powers of Attorney, the Medical Power of Attorneys can be very general and broad in describing the decisions the agent is empowered to make or may be limited to very specific decisions.   

Living Wills are commonly prepared in conjunction with the Healthcare Powers of Attorney, although it is not required, and a Living Will can be prepared without having a Healthcare Power of Attorney.   Living Wills are advanced directives regarding the principal’s desire not to be kept alive with the use of life support equipment and artificial administration of food and fluids if the principal is in an irreversible or incurable coma, a persistent vegetative state, or a terminal condition.

Non-Probate Transfers

Titling of assets can have a significant impact in transferring assets at death.   For small estates, it may be possible for the owner of assets to satisfactorily designate the intended recipients of the decedent’s assets without preparing a will and without any probate proceedings.   Generally, a will does not control the transfer of non-probate assets.

Assets such as deferred compensation plans and life insurance policies provide for the designation of beneficiaries.   Distributions are made to the designated beneficiary without any probate proceedings.

Financial institutions and brokerage firms allow for the designation of Pay On Death (POD) or Transfer On Death (TOD) accounts.   On the death of the account holder, the accounts transfer to the designated payee.

In 2001, Arizona adopted A.R.S. §33-405, which provides for beneficiary deeds for real property.  Beneficiary deeds designate the parties to succeed as owners of the property following the death of the original owner.  

Titling assets in the form of joint tenancy with the right of survivorship also serves to transfer ownership of the property to the co-owner upon the death of one of the co-owners.

The titling of assets has a significant legal impact and should be carefully considered.     

Guardianship

People are entitled to make their own decisions as long as they can make and communicate responsible personal decisions.  When they lose that capacity, the appointment of a guardian may be necessary.  A guardian is someone appointed by the court to make personal, medical, and placement decisions for someone else.  A guardian could be a family member or it could be a private fiduciary (an individual or company licensed by the state).  A guardian has the responsibility for the incapacitated person similar to that of a parent to a child.  The guardian has a duty to act for the benefit of the incapacitated person (the “ward”).  The guardian cannot benefit from the ward’s assets unless the court approves the benefit.  The guardian must make an annual report to the court disclosing the status of the ward and the continued need for a guardian. If the ward regains capacity, or if the ward dies, the guardian must be discharged by the court.

Conservatorship

Conservators are different from guardians in that conservators make financial and legal decisions for those who cannot manage their own financial affairs.  Conservators are similar to guardians in that conservators are appointed by a court. The conservator pays the person’s debts and takes care of all other financial and legal matters on behalf of the protected person.   A Conservator must post a bond based on the amount of the protected person’s assets that will be under the control of the conservator.  The conservator is under a strict duty to use the protected person’s assets only for the benefit of that person, and a conservator cannot take any benefit from those assets without court approval.  The conservator must inventory the protected person’s assets and must also make an annual accounting to the court.  The annual account shows every transaction involving the assets.  The account is scrutinized by the court accountant, and a hearing is held to obtain the court’s approval.  If a conservatorship is no longer needed, the conservator must petition the court to be discharged.