Family Wealth Matters

Life Insurance for Singles: Do You Need It?

Tue, 07 Apr 2026 23:21:36 GMT

Maybe, maybe not. Depending on your situation, even if you who have no dependents, you might have many of the same insurance needs as people who have families.

Because so many of the purposes for having a will, trust, life insurance, etc., are to protect and convey assets to one’s spouse and children, many single persons – unmarrieds and never-marrieds – might place a relatively low priority on estate planning and related issues.

That would be a mistake, as end-of-life planning is important for every adult, regardless of marital status or family composition.

For a single person, having a well-conceived estate plan checks many important boxes, including:

managing their finances, assets, and healthcare if they become incapacitated;
naming heirs and beneficiaries to receive their assets;
ensuring the orderly transfer of assets;
avoiding guardianship, conservatorship, and probate; and
of growing importance for many people, married or single: caring for pets.

(See our planning options and rates at “ An Estate Plan Tailored to Your Needs .”)

Life Insurance. On a related topic, a recent Wall Street Journal article provides useful guidance regarding another planning issue: life insurance.

In “ Does a Single Person Need Life Insurance? ” (March 23, 2026 – subscription required), the writer notes that, depending on their situation, people who have no dependents may have many of the same insurance needs as people who have families. If you are single, and any of the following factors apply to you, consulting with a life insurance professional would be a prudent step.

Paying for your long-term care is a priority. A hybrid life insurance policy, the Journal article suggests, offers the “dual benefit of a life insurance payout or access to funds for expensive long-term care costs.”
You want to cover the cost of your burial or cremation.
You own a business, and a life insurance policy would help preserve the business’s value if a key employee were to die.
You are one of multiple owners of a business or real property, and life insurance would fund a buy-sell agreement triggered by the death of a co-owner. (See our article, “ Multiple Owners? A Buy-Sell Agreement Is a Must .”)
You have debts or other financial obligations that, upon your death, would require liquidating assets that you intend to go to friends, relatives, charities, or causes.
You don’t anticipate having such debts, but you want to provide, at your death, cash for friends or relatives, or you want to endow a charity or cause.
The value of your estate exceeds $15 million, making it subject to estate taxation.

Life insurance policies come in three main forms:

Term life insurance, which offers coverage for a specific period of time (e.g., 10, 20 or 30 years). The amount of insurance and the length of your coverage should align with your financial commitments (e.g., your mortgage).
Permanent life insurance, which typically continues for as long as you live, has a defined death benefit, and can be treated as an investment that grows in value.
Hybrid life insurance, mentioned above, that can pay for some combination of long-term care expenses and a death benefit.

Non-Insurance Alternatives. As we suggested earlier, your situation might not warrant the purchase of life insurance. The Journal article describes non-insurance alternatives, such as:

retirement accounts, such as IRAs and 401(k)s;
other investment accounts, such as index funds or ETFs (exchange-traded funds);
high-yield savings accounts;
a health savings account (HSA); and/or
annuities.

We Can Help – Indirectly. To be clear, we are estate planning attorneys, and when it comes to investment and insurance planning, we endeavor to stay in our lane.

However, we work closely with many excellent financial professionals throughout Arizona; feel free to contact us for a referral.

Spendthrift Trusts: Protecting Your Beneficiaries from Themselves, Others

Mon, 09 Mar 2026 00:41:25 GMT

A spendthrift trust allows you to establish a separate subtrust for each beneficiary and attach conditions that reflect their individual situations, limitations, and capacities.

In structuring a revocable living trust, how the trust’s assets will be distributed to your named beneficiaries, after your death, typically follows one of two options:

The trust is liquidated, with its assets distributed outright to the beneficiaries (often in cases of small inheritances or low creditor risk, or when administrative simplicity is a priority).
The trust becomes irrevocable upon your death and continues to hold all or some assets, which are managed by a successor trustee (a beneficiary or a non-beneficiary third party).

The second option, a “spendthrift” trust, is designed to protect a beneficiary’s inheritance from legal threats and/or the beneficiary’s own bad decision-making.

The differences between the two options can be profound, and this article will describe why many estate plans – especially in high net worth or creditor-sensitive situations – embrace the spendthrift option.

REQUIREMENTS. Before we get into the most common benefits, let’s cover some basic rules. To be effective, a spendthrift trust requires three things:

irrevocability , as mentioned above;
restricted distribution standards (e.g., health, education, maintenance, and support) for trusts that beneficiaries will control directly, or the even more protective purely discretionary standard for trusts managed by third-party trustees; and
a spendthrift clause prohibiting the beneficiary from selling or transferring their beneficial interest in the trust.

STRUCTURE. In creating your trust, you can establish “subtrusts,” or separate spendthrift trust shares for each beneficiary, and attach conditions that reflect their individual situations and capacities. For example, you can designate for each beneficiary the age at which they can take over as their own trustee, or you might attach other conditions (e.g., years of sobriety), conveying a tailored level of protection and control. (Caution and restraint are appropriate here; see our article, “ Estate Planning: Protecting from the Grave .”)

Not all estate planning attorneys offer this customization in their plans, and it’s a significant value-added feature for clients of Hoopes Adams & Scharber.

BENEFITS. Once the requirements are met and the appropriate structure is in place, your spendthrift trust is ready to deliver substantial benefits to you and your beneficiaries.

1. Asset Protection . With a spendthrift trust, its assets are not legally “owned” outright by the beneficiary. They remain in the trust, where each beneficiary’s share of the trust assets is protected from lawsuits, creditor claims, bankruptcy, divorce claims, and bankruptcy.

This protection is especially important if a beneficiary – by virtue of their occupation, business interests, marital situation, or history of reckless conduct – is unusually vulnerable to litigation or financial losses.

In contrast, any assets that are distributed outright to the beneficiary immediately become the beneficiary’s personal property and lose the above-described protection at the moment of distribution.

2. Business and Professional Liability Shield. In this context, a spendthrift trust can be especially valuable for beneficiaries who, by virtue of their profession or business ownership – e.g., physicians, attorneys, real estate developers, or business owners in high-exposure industries – are especially vulnerable to lawsuits.

A spendthrift structure can insulate them from claims stemming from malpractice or business liability and provide separation between personal risk and inherited wealth.

3. Divorce Protection. Specific to protection in a failed marriage, assets that continue to be held for the beneficiary in a spendthrift trust are typically treated as separate property – i.e., not property of the marital community.

There is little risk of commingling or forced liquidation, and any increase in asset value would also be immune to property claims in a divorce.

Meanwhile, as in the “Asset Protection” example above, outright distribution exposes all assets to spousal claims for 50/50 or other equitable division.

4. Remarriage Protection. Similarly, if a beneficiary remarries, a spendthrift trust can help ensure that assets intended for use by your beneficiary stay segregated from the assets owned by the new marital community; protect the beneficiary’s children from a prior marriage; and reduce the risk of the beneficiary’s inheritance being diverted.

Conversely, with outright distribution, assets may be commingled, used for joint purchases, vulnerable in divorce, and passed unintentionally to the new spouse and his or her children, effectively disinheriting your own children.

5. Income Tax Flexibility. A spendthrift trust that is controlled by a beneficiary can:

distribute income in ways that reduce current-year tax liability;
accumulate income strategically;
promote tax-efficient investment timing; and
be structured as a grantor trust .

Outright ownership of assets distributed from the trust offers less flexibility for income tax purposes.

6. Estate Tax Efficiency. In a properly drafted spendthrift trust:

assets remain outside the beneficiary’s taxable estate;
there is no estate tax inclusion at the beneficiary’s death;
the trust can continue for children and grandchildren;
the federal Generation-Skipping Transfer (GST) tax exemption is fully leveraged; and
estate tax is avoided at every generation.

On the other hand, assets that are distributed outright will be included in the beneficiary’s gross estate, subject to estate tax at their death (if the estate is taxable), and require new planning to avoid estate tax liability.

7. Creditor and Bankruptcy Planning. Consistent with the above scenarios, assets that are distributed outright to a beneficiary become that beneficiary’s personal property and are totally vulnerable to creditor claims.

However, for assets in a spendthrift trust, the “trust principal” – cash, stocks, other property that were originally transferred into the trust – is generally excluded from the bankruptcy estate.

Even if the financially distressed beneficiary is also the trustee, protection still exists if there is no unrestricted right to withdraw principal, there is no general power of appointment, and, as mentioned earlier, distributions from the trust are limited by an ascertainable standard.

8. Protection from Poor Decisions. Not everyone is qualified or competent to make wise use of inherited wealth or valuable assets. If a beneficiary lacks investment experience, has a track record of bad financial decisions, is vulnerable to fraud or overly emotional decision-making, or has a history of addiction or mental illness, a spendthrift trust can help protect them from themselves.

You can build into your trust structural guardrails that encourage discipline, provide professional investment guidance, might require co-management of assets, and promotes long-term asset preservation.

9. Long-Term Family Governance. In contrast to the fragmentation that is inherent in an outright distribution, a continuing trust can:

enhance preservation of family capital;
provide for professional investment oversight;
support dynasty-style planning; and
encourage intergenerational continuity.

IN A NUTSHELL. Properly drafted, a spendthrift trust can be managed by a third-party trustee or by a beneficiary, either of whom, as trustee, can control the trust’s investments, direct distributions within accepted standards, and manage the trust’s overall administration.

The spendthrift trust’s assets are not legally “owned” by the beneficiary, not exposed to creditor claims, and not included in the beneficiary’s estate.

If you have substantial assets and want to preserve them for the long-term benefit of your children or other beneficiaries, structuring your revocable living trust to convert to an irrevocable trust upon your death may offer you the best of both worlds.

Incapacity Planning for Business Owners: 14 Steps

Fri, 13 Feb 2026 18:53:33 GMT

If you weren’t available – even temporarily – to run your business, would it operate profitably in your absence?

Our November 2025 article, “ Multiple Owners? A Buy-Sell Agreement Is a Must ,” discussed how business co-owners can protect themselves and their company if one of them experiences a life-changing event (e.g., death or disability).

But what if it’s just you? What would happen to your company if, for a significant time, you weren’t there to run it? In this article we will take a look at some planning steps that can promote business continuity in your absence.

Importance. Let’s all acknowledge that this probably isn’t anyone’s favorite topic. Like discussions of life insurance and succession planning, incapacity planning involves confronting your mortality – death, major illness or injury, mental incapacity.

That’s probably a can that you would probably rather kick down the road. The problem is, you never know when you’re going to run out of road.

So, first, let’s talk about why this is really important and why you shouldn’t put it off.

Your business is probably your main source of income and your most valuable asset, and protecting it is in your best interest.
If you have employees, your business is probably their main source of income.
If you have kids, your business (or the proceeds of its sale) might become one of their most valuable assets.

In the absence of a well-conceived plan, your incapacity could:

threaten your company’s relationships with lenders, investors, major customers, and important suppliers;
cause operational and product/service fulfillment problems that undermine profitability and business value; and
cause key employees to leave the company.

Incapacity planning involves your figuring out:

who, if you’re not around, will make the major and day-to-day decisions in your business;
how they will be empowered to make those decisions; and
under what circumstances they will step in to (and out of) your shoes.

14 Steps. Let’s cover some basic steps in protecting your business against your incapacity:

If you don’t have an incapacity plan, resolve today that you are going to create one.
Pick your replacement. If you already have a key employee you put in charge when you go on vacation or are out of the office, he or she would seem to be the logical candidate. If you don’t, now is the time to hire or develop that person.
If you have multiple good candidates and don’t know which one to choose, considering asking your professional advisors. Your CPA or business attorney might see something in a candidate that you’ve overlooked. They might also have good suggestions on how to structure your management hand-off.
Evaluate their readiness to be in charge. If they lack skills or experience in any important area, invest in them personally and/or get them the appropriate training and continuing education.
If one of your adult children is your ultimate heir apparent but isn’t the best qualified right now, designate a non-family member to be your replacement in the short term.
Give your replacement everything they need to do their job – including passwords and other access to essential business data, documents, and key contact information.
Don’t leave your replacement on a ledge. Even with preparation, they should not be expected to step fully and immediately into your shoes. Look at your other key employees and make any needed investments in their skill levels.
Define all of your decision-making roles. Just because you know everything about your company doesn’t mean that your replacement has to. Look for opportunities to de-centralize your decision-making and, as we suggested above, elevate the management skills of all of your key people. This might involve designating more than one replacement, to handle separate aspects of the business.
View this process as a way to make your business nearly as effective and profitable in your absence as it is in your presence . That’s an attractive quality for prospective buyers; even if you are never forced to activate your incapacity plan, the planning process might increase your company’s market value. (Read any good books lately? Try The E-Myth Revisited by Michael Gerber.)
Ask your business attorney how to give your replacement the legal authority to, in your absence, run the business, execute contracts, etc. Powers of attorney – general, durable, financial, business-specific, etc. – are the most common legal instruments for granting the needed authority and can be specifically structured to support your objectives.
Your business attorney can also advise you on how to convey and withdraw the temporary legal authority. If you are conscious and have the mental capacity to hand over the keys, that makes things simple; but you also want to have conditions and procedures in place for authority to be conveyed if you’re unable to call the play.
And your business attorney can tell you whether and how your incapacity or “succession” plan should be incorporated into your company’s governing documents (operating agreement, bylaws, etc.).
Ask your insurance agent for guidance on whether life insurance or disability insurance has a place in your incapacity planning.
Finally, either your business attorney or estate planning attorney can advise you on the relative merits of transferring your business ownership into a revocable living trust that you control. Under such an arrangement, your successor trustee would seamlessly assume legal authority over your business (along with your other assets) and either operate it directly or designate a manager.

Succession and incapacity planning are common elements of our advisory services to clients who own a business. To start the discussion of how to ensure the smooth transition of your company’s leadership in the event of your incapacity, contact Ron Adams or Ryan Scharber .

Money Management for the Non-Financial Spouse

Fri, 16 Jan 2026 18:43:16 GMT

Good communication while both spouses are alive and well can spare the non-financial spouse a great deal of heartache when the financial spouse can no longer do the job.

Among married couples, it’s not uncommon for one spouse to manage all aspects of the family’s finances. While in the short term that makes life simple for the non-financial spouse – often the wife – her lack of familiarity with the couple’s money, investments, taxes, and perhaps business ownership only worsens the fear and sorrow that strike if her husband pre-deceases her.

That is one of the scenarios highlighted in a November 1, 2025, Wall Street Journal article, “ Her Husband Died Unexpectedly; She Spent a Year Untangling Their Finances .”

Although it can seem overwhelming, there are good ways for newly widowed spouses to gain their financial footing and move forward. Ideally (and you can make it happen), the process starts while both spouses are alive and in a good place mentally and emotionally.

Spousal Communication

It almost goes without saying that clear, open communication about the couple’s finances while both spouses are still alive is the best way to equip the non-financial spouse.

However, even couples with the best of intentions may find financial discussions hard to initiate and easy to put off “until later.” If you find yourself in that situation, you might ask your estate planning attorney, financial advisor, or accountant to lead you through that discussion, inventory your assets and liabilities, and make suggestions to ease the transition when the time comes.

It is often very eye-opening for both spouses to find out just how much or how little the other understands about their family’s finances or their responsibilities when the first passes away. Talking things out now can help avoid heartache and frustration later. (Some agenda items for “the spousal talk” are obvious; others, not so much. Another recent WSJ article, “ Five Financial Blind Spots That Burden Grieving Spouses ,” suggests a few discussion topics that you might not have considered.)

If you conclude that a spousal conversation about finances and legal matters simply isn’t going to happen, get creative. We recently learned of a husband (the financial spouse) who recorded a selfie video in which he went through all of the couple’s accounts, documents, and hiding places, and then he sent it to his wife.

Cross-Training

Perhaps once a year, you and your spouse should sit down and go through the financial spouse’s management habits and practices. The objective here is not necessarily to make the non-financial spouse fully proficient; rather, it is to give him or her peace of mind in knowing that the couple does have a system and, if pressed into service, the non-financial spouse will at least know where to start.

For example, if you use Quicken or other financial software, review how to log in, see what things look like, and explain how bills are paid and on what schedule.

A Single Sheet of Paper

In many cases, reducing the couple’s accounts to a single sheet of paper that is kept in a secure place can be extremely helpful. The content might include the essential account numbers, your password vault, log-in credentials, cell phone passcodes, safe combination, etc. This document should be updated on a regular, scheduled basis (e.g., quarterly) and, in the interim, when one of the contents changes (e.g., a new password).

Having a bare-essential summary can go a long way toward equipping the non-financial spouse to assume his or her management duties and, in the process, gaining some valuable peace of mind.

A Trusted Helper

If you and your spouse would find it helpful, identify a trusted, financially savvy third party – perhaps your personal representative or successor trustee, or your tax professional or family attorney – with whom you could share basic information and include in your orientation discussion.

Newly Widowed

If you are thrust into the role of financial manager due to the death or disability of your spouse, ask that trusted helper for assistance. At the same time, slow down, take a deep breath, and don’t make any rash, long-term decisions. In most cases, that’s the first advice most experts give to widows and widowers who find themselves with major responsibility and little know-how.

There are a few things that would need to be done within a month or so of the spouse’s death – e.g., paying the monthly bills, taking care of taxes that might be due, and collecting any life insurance policies the spouse owned. Once those responsibilities are addressed, one can usually ease into the nuts and bolts of day to day management of personal finances.

We Can Help

Through years of leading couples through the estate planning process, we are comfortable in helping spouses communicate to each other their priorities and concerns on the way to making good decisions.

That experience can be valuable in helping a financial spouse describe for their non-financial spouse how the couple’s finances are managed. If you would like for us to facilitate a discussion of your financial habits and practices, please contact Ron Adams or Ryan Scharber .

Inherited Retirement Accounts and the Beneficiary’s Tax Consequences

Fri, 12 Dec 2025 21:46:31 GMT

Whether a non-spouse beneficiary has to take annual distributions, in addition to withdrawing all the funds within 10 years, is very fact-specific with regard to the decedent’s death and the beneficiary’s situation.

When the owner of a retirement account – a 401(k) or a traditional or Roth IRA – passes away, the account’s transfer to the designated beneficiary raises tax issues for the beneficiary. The nature and extent of those tax issues depends largely on the beneficiary’s relationship to the deceased, i.e., whether they are:

a surviving spouse (and a few others, described below); or
a non-spouse beneficiary (including an adult child).

For a surviving spouse, the tax-planning impacts are relatively mild. They can generally roll their deceased spouse’s account proceeds into their own IRA; by rolling it over, they can treat the account as their own, deferring any “Required Minimum Distributions” (RMDs) until they reach the IRS-mandated age (currently 73, and increasing to 75 for those born in 1960 or later).

Conversely, non -spouse beneficiaries are subject to what is known as the “10-year rule” ( see details on the IRS website ), and understanding the applicable variables is essential to avoiding serious tax consequences.

Inheriting a Retirement Account – in General

The 10-year rule holds that non-spouse beneficiaries (with a few exceptions noted below) must generally withdraw all funds from the account within 10 years of the account holder’s death. However, whether annual RMDs are required during those 10 years depends entirely on whether the original account owner died before or after their “Required Beginning Date” (RBD).

(Note: If a retirement account is “non-designated” – i.e., is designated to go to an estate or an improperly drafted trust – and the account owner died before their RBD, then the 10-year rule can shrink to five years. The “5-year rule,” which applies when there is no designated beneficiary, makes it important to name a specific person as the beneficiary of the account.)

In handling the inherited account, a non-spouse beneficiary generally must:

open a new, separate account in their name to receive the inherited funds; and
decide whether to take a lump-sum withdrawal (which would be subject to income taxation for the year in which it’s taken) or manage the funds over the 10-year period.

The SECURE Act of 2019 created the 10-year rule. IRS regulations finalized in 2024 clarified that annual RMDs are required only if the original owner died on or after their RBD. The penalty for failing to take a required RMD is 25%, which can be reduced to 10% if corrected within two years.

The Fine Print

Whether a non-spouse beneficiary has to take annual distributions, in addition to withdrawing all the funds within 10 years, is very fact-specific with regard to the decedent’s date of death and the beneficiary’s situation.

Did the account owner die before they reached their RBD? If yes, the beneficiary:

will be subject to the 10-year rule; and
no annual RMDs are required during the 10-year period.

Did the account owner die after their RBD? Generally, their required beginning date was April 1 after the calendar year in which they reached age 73. If they passed away after reaching their required beginning date, the beneficiary:

will be subject to the 10-year rule, and
must take annual RMDs each year during that 10-year period.

For deaths in 2020-2023, the IRS delayed enforcement of missed annual RMD penalties due to regulatory uncertainty. For deaths in 2024 and later, the above rules apply fully.

Are you eligible for an exception? A non-spouse beneficiary may qualify for the same RMD treatment as the account holder’s spouse if that beneficiary meets the criteria for an “eligible designated beneficiary” (EDB) – mainly, a beneficiary who has disabilities, is chronically ill, is 10 or fewer years younger than the account owner, or is a minor child of the account owner.

A qualifying EDB may take distributions gradually each year, based on their life expectancy, and is not required to empty the account within 10 years unless they lose EDB status (e.g., a minor child reaching the age of majority).

Seek Professional Help

Even in this relatively simplified look at inherited retirement accounts, you can see how tax outcomes depend heavily on the decedent’s RBD status, the beneficiary’s classification, and whether the account is a traditional or Roth IRA.

To gain a clearer understanding of how inheriting a 401(k) or IRA could affect your planning and taxes in the years to come, ask your attorney or tax advisor to help you prepare an effective strategy.

Multiple Owners? A Buy-Sell Agreement Is a Must

Tue, 18 Nov 2025 17:45:07 GMT

A well-conceived buy-sell agreement can protect you and your company from the consequences of a co-owner’s misfortune.

For any type of entity that has multiple owners (LLC, partnership, or closely held corporation), a well-conceived buy-sell agreement can lessen – or avoid altogether – the financial and emotional pain in a variety of common scenarios, cumulatively known as the “killer D’s”: death, default, departure, disability, disagreement and divorce.

As Investopedia explains, a buy-sell agreement among co-owners is a “legally binding contract that stipulates how [an owner]'s share of a business may be reassigned if that [owner] dies or otherwise leaves the business.”

If there are no buy-sell provisions in your operating agreement, partnership agreement or corporate agreements, or if you have no agreements that address these issues, the business is exposed to particularly worrisome issues in the event of death or divorce – i.e., what is to keep a deceased member’s spouse or children, or a divorcing member’s ex-spouse, from taking a seat at the table?

With a buy-sell agreement, the owners can agree, in advance:

how an owner’s interest is to be held to avoid probate and other complications in ownership transfers;
under what “triggering events” an owner would be bought out;
how an ownership interest would be transitioned in case of death, divorce, retirement, default, etc.;
which party would be the buyer (i.e., the entity or one or more of its owners);
restrictions on selling or conveying an interest to an outside buyer;
how the interest of a departing owner would be valued;
how the entity would fund the buy-out of an owner’s interest;
what the process would be for removing an owner; and
how to preserve, in a variety of circumstances, continuity of business operations.

Benefits. A buy-sell agreement offers at least four major benefits, as described in this Wolters Kluwer article :

Business continuity: In the event of death, retirement, or incapacity, a buy-sell can promote the seamless continuation of the business.
Compensation: Any survivor or designated successor will be properly compensated for the deceased owner’s interest.
Assurance: Remaining owners can be sure that the deceased’s business share is not passed onto someone deemed unsuitable.
Asset protection: If a triggering event occurs, the agreement creates a source of funding and liquidity and mitigates the need to sell assets.

Forms of agreement. A buy-sell usually takes one of three forms:

A cross-purchase agreement allows the other owners to purchase the interest of an owner who dies, is disabled, or retires.
An entity-purchase or redemption agreement calls for the business entity itself – not the other owners personally – to purchase an owner’s interest.
A hybrid of the first two types gives the entity first right of refusal to purchase the departing owner’s interest before that opportunity is presented to the other individual owners.

A fourth option, a “shotgun clause,” is something of a nuclear option, in which owner #1 offers to buy out, at a specified price, the interest of owner #2, who can either accept the offer or buy out owner #1 at that price. This can be particularly useful when two or more owners just do not get along and can no longer effectively work together in the business.

Valuation . A few of the more common methods for arriving at a value include:

a mutually agreed upon value, either prospectively or at the time of purchase;
a pre-determined fixed price;
a formula based on earnings or book value; or
a third-party valuation performed by a credentialed business valuation professional.

Funding the purchase. After an owner’s interest is valued, the purchase of that interest can proceed. The buy-sell agreement should specify how the purchase is to be funded. Common funding methods, which may vary with the nature of the triggering event, include:

cash buyout, by the business or by the acquiring owner;
installment payments;
percentage-of-earnings payments; and
insurance (life or disability).

We can lead you through the process. Including buy-sell provisions is part of our checklist in drafting clients’ business agreements. While those provisions often contain certain “boilerplate” language, the process of drafting them allows you to tailor the buy-sell to your specific situations and objectives.

We can help you identify those opportunities, so that your buy-sell agreement delivers maximum benefit to you, your co-owners, and the entity itself.

We gratefully acknowledge the contributions of M&A advisor Jim Afinowich (IBG Fox & Fin) to this article.

Streamlining Your Trust: One Simple Step

Fri, 14 Nov 2025 23:45:21 GMT

For estates that will not be subject to estate tax, the removal of a generally unnecessary trust provision can make life much easier for the surviving spouse.

Over a decade ago, we wrote a practical article (“ Is It Time for an Estate Plan Review? You Be the Judge “) that lists several triggering events that might warrant updating your will or trust. The following article addresses an issue that was not included in that list and frequently applies to older trusts.

If (a) you are married, (b) the value of your estate is below the estate tax threshold, and (c) your estate plan hasn’t been reviewed recently, your trust might include a provision that unnecessarily complicates things and should probably be removed.

To address potential estate tax liability that, for most couples, no longer exists, many older trusts require, on the death of the first spouse, that the surviving spouse allocate the couple’s assets between two trusts: the survivor’s trust and a credit shelter trust .

If the value of your estate is below the taxable threshold (for 2026, a combined $30 million for a married couple), there is no reason for that provision; it needlessly causes the surviving spouse to deal with an irrevocable credit shelter trust along with their own revocable survivor’s trust.

Thanks to estate and gift tax “portability,” which went into effect more than a decade ago, a surviving spouse inherits any unused portion of their deceased spouse’s estate and gift tax exemption. If the first spouse to die did not use up their full exemption, the surviving spouse can effectively double their exemption amount when it comes to their estate tax liability. While a federal estate tax return, IRS Form 706, would need to be filed to take advantage of this portability, it would be needed only if the couple’s combined estate value exceeded an individual’s estate tax exemption amount, roughly $14 million in 2025 and $15 million in 2026.

As a result, unless you and your spouse have an estate worth more than roughly $27 million ² , there is no estate tax reason to bifurcate your assets between the survivor’s trust and the credit shelter trust.

The simple solution: Amend or restate your trust to remove the separation-of-assets requirement and make it entirely a survivor’s trust.

If we’re performing the review, we will first look for good reasons (tax or otherwise) to continue to divide assets on the death of the first spouse. Examples might include a blended family situation, where one or both spouses might wish to protect their share for children from a prior marriage.

If we do not identify a reason to maintain the status quo, we will recommend the necessary modifications to simplify your trust provisions.

To schedule a review of your trust, contact Ron Adams or Ryan Scharber at 480-345-8845.

Background. When splitting assets between a survivor’s trust and a credit shelter trust, the deceased spouse’s assets are divided into two trusts: one for the surviving spouse (the “survivor’s trust”) and one for other beneficiaries, which may also include the surviving spouse (the “credit shelter trust”).

In a credit shelter trust (also known as an “B” trust or “bypass” trust), assets are held for the surviving spouse’s benefit after the first spouse dies. The surviving spouse can receive mandatory or discretionary income and some access to the principal, and the assets are not included in the survivor’s taxable estate. When the surviving spouse dies, the remaining assets pass to the beneficiaries named in the trust without taxes due.

One of the disadvantages of a credit shelter trust is that it does not give the surviving spouse immediate access or full control over the principal of the trust’s assets. Instead, the spouse can generally receive income from the trust and may be allowed to use the trust principal to pay for health, education, and maintenance as needed.

A survivor’s trust (also known as an “A” trust) is a common estate planning tool for married couples. Its purpose is to ensure that the surviving spouse has access to a portion of the couple’s assets after the death of the first spouse. It includes the remaining assets of the deceased spouse after the credit shelter trust is funded, plus the surviving spouse’s assets. The surviving spouse has full control over the assets in this trust.

While this strategy can help save on estate taxes, as we discussed above it may be beneficial only in limited circumstances.

² If you and your spouse have an estate worth roughly $14 million or less, you would not even need to file a federal estate tax return to take advantage of porting to the surviving spouse the first-to-die spouse’s unused estate tax exemption.

For Simplicity’s Sake: View Your Estate Plan with the Future in Mind

Fri, 10 Oct 2025 20:58:09 GMT

Attention to five important issues now can ease your heirs’ emotional and legal burdens later.

After investing the time, money, and mental energy that go into creating an estate plan, for many people there’s a temptation to view their will or trust as a one-and-done proposition: “Okay, we have our estate plan; we can check that off our list and move on.”

That’s a mistake. The passage of time, changes in circumstances and priorities, and other factors can quickly erode an estate plan’s value. It’s a sign of wisdom to review your plan on a scheduled basis, with an eye toward (a) keeping things up to date and (b) considering how your plan will affect and be interpreted by your loved ones and other heirs.

Last year, the Wall Street Journal published a useful article, “ 5 Things to Do Now to Make Your Estate Simpler for Your Heirs ” (November 14, 2024), that you might consider making required annual reading. The article focuses on five smart tips:

keep documents updated;
address digital assets;
assign personal property in advance;
leave good notes; and
strive for conflict-avoidance.

Below we restate those tips, summarize the WSJ article’s comments, and provide links to our related articles from the Family Wealth Matters archives , to provide additional detail and, in some cases, Arizona-specific information.

1. Keep documents updated. “Having a will or living trust is essential – but it isn’t enough. … The proper documents need to be updated periodically, especially as life circumstances change.” These articles on our website go a little deeper:

“Many people also fail to update beneficiaries for life insurance, retirement accounts and bank or investment accounts. These assets pass according to the beneficiary designation, if there is one, regardless of what the will or living trust says.”

Beneficiary Designations Trump Wills and Trusts

2. Address digital assets. “Many people have digital assets, including email and online photos, that could be lost to heirs if proper provisions aren’t put in place.”

Digital Assets: Your Estate in the Cloud

“Cryptocurrency and nonfungible tokens can also easily be lost if their owners don’t provide heirs a way to access these assets.”

Cryptocurrency and Your Estate Plan

3. Assign personal property in advance. “Many people assume that heirs will figure out on their own how to divide personal property, but that can lead to fights. A personal-property list … can be handwritten and [kept] up-to-date, and should be kept with estate-plan documents. The document should also include where items can be found.”

Personal Property Memorandum: A Valuable Bit of Do-It-Yourself Estate Planning

4. Leave good notes. “[Set] aside a folder with important information for the heirs, such as names, numbers and locations of accounts, as well as names and contact information for attorneys, accountants and financial advisers. Also let heirs know where to find your estate-planning documents.”

5. Strive for conflict-avoidance. “Parents sometimes create conflict by choosing one child over another to serve as executor, trustee or both. … Sometimes it may be appropriate. [But consider) naming a relative or friend to avoid potential sibling-rivalry issues [or] hiring a trust company or a private professional fiduciary.”

“People who have specific reasons for dividing assets or roles unevenly should prepare a letter that explains their thought process. If you want to make things easy for your kids, if there’s anything that could be misinterpreted, explain it to them so they’re not fighting about it.”

Conclusion. If even a surface review of your estate plan reveals the possible need for an update , we can help you sort through your options and implement the changes that meet your needs and will make life easier for your heirs – at an emotionally charged time when “easier” will be especially valued.

“Go Set a Trustee”: Harper Lee and Privacy in Estate Planning

Mon, 15 Sep 2025 17:57:21 GMT

The life and death of one of the 20th century’s most celebrated American authors offer valuable reminders about the differing natures of wills and trusts.

By Ryan Scharber

This year is the 65th anniversary of the release of the classic American novel, To Kill a Mockingbird , written by Harper Lee and published in 1960.

I mention this because, first, an autographed copy resides on my bookshelf. Also, and more germane to this article, after Ms. Lee’s death in 2016, her estate was involved in controversies that raise at least two useful lessons in estate planning , especially in preserving privacy and making clear one’s wishes for the disposition of certain assets.

The Mockingbird Trust . In 2011, Harper Lee created a trust, appropriately titled “The Mockingbird Trust.” Among her personal assets that were transferred into the trust were her literary rights, including the rights to To Kill a Mockingbird and various other published and unpublished works, including the 1957 manuscript of an unpublished sequel, Go Set a Watchman .

(Of interest to fans of Ms. Lee, Watchman was written a few years before Mockingbird , but the story, set in the same locale with several common characters, takes place two decades after.)

For fifty years after Mockingbird was published, the reclusive Ms. Lee’s sister, Alice, served as her attorney, financial advisor, and protector of her privacy. Alice turned 100 in 2011, and one could speculate that her reaching that milestone might have been a factor in Harper Lee setting up a trust.

At about that time, Tonja Carter, a member of Alice Lee’s law firm, succeeded Alice as Harper Lee’s attorney and was a trustee of the Mockingbird Trust. In 2014, Ms. Carter discovered in Harper Lee’s safe-deposit box a manuscript of the unpublished Go Set a Watchman . She forwarded the manuscript to Ms. Lee’s literary agent, and in 2015 – a year before Harper Lee’s death at 89 – HarperCollins published the book.

Its release sparked a controversy over whether Ms. Lee had wanted Go Set a Watchman to be published at all. For most of the 55 years following Mockingbird ’s release, she insisted she would never write another book, not wanting to experience again the pains of publicity for herself and her small Alabama hometown.

Some of Ms. Lee’s friends strenuously criticized the book’s publication, citing her steadfast, long-standing refusal to publish again; claiming that, thus, publication was not consistent with her wishes; and arguing that, given her declining condition, she was not mentally competent to approve publication and that she may have been coerced or otherwise suffered elder abuse.

Her trustee, Ms. Carter, denied those claims (the State of Alabama’s Human Resources Department investigated and took no action) and stated that Ms. Lee was “happy as hell” with the publication. The widely reported controversy eventually subsided.

Lessons in Estate Planning . This is an interesting parable that carries two important lessons:

Privacy. First, after Harper Lee's death, her trust became a source of controversy due to (a) Ms. Carter's substantial control over the trust’s literary properties, and (b) the alleged “lack of transparency” surrounding the arrangements.

What that allegation overlooks is that “lack of transparency” – i.e., privacy protection – is one of a trust’s most valuable benefits. While it can be debated whether Ms. Lee approved of Watchman ’s publication, it is undeniable that her trust did its job – including keeping her wishes and instructions out of the public eye.

If her trust could stand up under the pressures of celebrity, so can yours under more normal conditions.

Specificity. Second, the two people - Alice Lee and Harper Lee - who could have extinguished the debate either could not (Alice died a year before the book was published ) and did not (true to her reclusive nature, Harper probably did not care to make public announcements about her private affairs). Had either expressed Harper Lee’s wishes concerning Watchman in a way that would have provided guidance to Harper’s trustee, the controversy could have been avoided.

In creating your trust, it is efficient – but not necessarily effective – to make blanket statements about how you want the trust’s assets to be managed and distributed.

If, like Harper Lee, you own property that warrants special treatment in order to support your specific desires concerning that property, ask your estate planning attorney for the best way to express your wishes to your trustee.

Epilogue . In addition to the Mockingbird Trust, Harper Lee also had a will – a simple pour-over will that she executed eight days before she died. Because its purpose was simply to ensure that, upon her death, any assets held outside of her trust would automatically convey to the trust, the will’s contents weren’t very exciting.

But the New York Times didn’t know that and didn’t care. Assuming that there was a story in a celebrity signing a “deathbed” will, in 2018, the Times sued Harper Lee’s estate, asking the court to make public the will’s contents. (At Ms. Carter’s request, an Alabama court had sealed the will in 2016).

Ms. Carter ultimately consented to unsealing the will and, in the process, offered a reminder of one of the consequences of probating an estate: wills become public record .

OBBBA: Tax Provisions for Individuals and Businesses

Mon, 11 Aug 2025 21:19:38 GMT

While beauty is in the eye of the beholder, there’s no denying that the One Big Beautiful Bill Act is big – and important. Aside from a few terminated deductions and credits, it delivers welcome news for many taxpayers.

If you are a long-time reader of our Family Wealth Matters articles, you might recall seeing several mentions that, “if Congress fails to act by 2025,” the tax issue being discussed might revert to a less favorable condition.

Henceforth, you will not see that phrase. When President Trump signed into law last month the One Big Beautiful Bill (OBBB) Act, he made “permanent” major 2017 business and individual tax provisions that were due to expire at the end of 2025. The Act also introduces some new provisions that will benefit many taxpayers, and this article provides a snapshot of the continuing and new elements.

We place permanent in quotation marks because it’s not literally correct, as Congress, in future sessions, could vote to revise or repeal. Instead, “permanent” here means that the OBBB removed the expiration or sunset date, and undoing a provision would require another act of Congress.

The Act wouldn’t include the word “big” if we could describe it all here. To learn more about some of the provisions mentioned below, or to explore additional provisions, see the July 2025 Journal of Accountancy article, “ Tax Provisions in the One Big Beautiful Bill Act .”

Here is a look at some of the more notable tax provisions, first for individuals, then for businesses.

INDIVIDUAL TAX PROVISIONS

Estate and Gift Taxation. For individuals who pass away after December 31, 2025, the federal estate and gift tax exemption will increase to $15 million ($30 million for a married couple) in 2026 and be indexed for inflation in subsequent years. The current exemption is $13.99 million per individual. If Congress had not acted this year, the exemption would have dropped to about $7 million in 2026.

Income Taxation. The OBBB makes “permanent” the individual income tax rates and wider tax brackets that were enacted in 2017 and would have expired at the end of this year. For 2026 and beyond, the top individual rate will stay at 37% (instead of reverting to 39.6%), and married couples filing jointly will typically not incur higher taxes compared to filing as singles.

Standard Deduction. The standard deduction has been increased and enhanced. For 2025, the standard deduction is $30,000 for joint filers, $22,500 for heads of household, and $15,000 for singles. For 2026 and beyond, those amounts increase to $31,500, $23,625, and $15,750.

Itemized Deductions. The Pease limitation, which reduces the value of itemized deductions for high-income taxpayers, is permanently repealed starting with 2026.

Mortgage Loan Interest. If your home mortgage exceeds $750,000, you can deduct only the interest paid on the first $750,000 of the loan.

Age 65+ Deduction. For tax years 2025-2028, individuals who are 65 or older (and their spouses, if filing jointly) can claim a new $6,000 per-person deduction. The deduction decreases for taxpayers whose adjusted gross incomes exceed $75,000 (single) or $150,000 (joint), and it applies equally to itemizers and non-itemizers.

Charitable Contributions. Beginning in 2026, taxpayers who do not itemize can claim a partial deduction of up to $1,000 (single) or $2,000 (joint) for charitable contributions.

Auto Loan Interest. For tax years 2025-2028, individuals can deduct up to $10,000 per year in interest paid on loans for new personal-use vehicles, even if they don’t itemize. The deduction phases out for single filers with modified AGI over $100,000 ($200,000 for joint filers). It applies to purchase-money loans, secured by a first lien, for new, U.S.-assembled vehicles (under 14,000 pounds).

Tax on Tips. Effective for 2025 through 2028, employees and self-employed individuals may deduct qualified tips received in occupations that the IRS has listed as “customarily and regularly receiving tips.”

Tax on Overtime. Also effective for 2025 through 2028, individuals who receive qualified overtime compensation may deduct the pay that exceeds their regular rate of pay. The deduction is limited to $12,500 for individuals and $25,000 for joint filers.

SALT Limitation. For 2025, the state and local tax deduction cap is temporarily increased to $40,000. It increases by 1% per year until 2029, then reverts to $10,000 in 2030.

Alternative Minimum Tax. The exemption amounts for the dreaded AMT are permanently increased for 2026 and beyond (that’s good news), but the phaseout rate for higher-income taxpayers doubles from 25% to 50%. Because AMT liability can occur unexpectedly, high-risk taxpayers should continue to seek guidance from their tax professional.

Child Tax Credit. The credit is increased to $2,200 per qualifying child and, after 2025, is adjusted for inflation.

Child and Dependent Care Credit. Starting in 2026, the maximum credit increases to 50% of eligible expenses, up to $3,000 for one qualifying child or $6,000 for two or more. The full credit applies to families with AGI up to $15,000 and phases down to 35% for AGI up to $75,000 ($150,000 for joint filers).

Adoption Credit. Starting in 2025, the adoption credit is enhanced to include a refundable portion of up to $5,000 per child (indexed for inflation) in the year in which the adoption is finalized. Eligible taxpayers can receive up to $5,000 as a refund even if they owe no tax.

Scholarship Contributions. For 2027 and after, taxpayers can claim a federal income tax credit of up to $1,700 per year for cash contributions to qualifying scholarship-granting organizations in participating states (including Arizona). The federal credit is reduced by the amount of any state tax credits claimed.

529 Plans – K-12. Owners of 529 savings plans can use tax-free distributions for a much broader range of K-12 education expenses – not just tuition, but also books, tutoring, standardized test fees, dual enrollment, and educational therapies for students with disabilities. In addition, starting in 2026, the annual limit for K-12 distributions doubles from $10,000 to $20,000 per beneficiary.

529 Plans – Beyond College. Plan distributions can be used tax-free not only for college costs but also for “qualified postsecondary credentialing expenses” – e.g., tuition, fees, books, supplies, and equipment – required for enrollment in recognized certificate, licensing, or apprenticeship programs, even if they are not traditional degree programs.

ABLE Accounts. “Achieving a Better Life Experience” (ABLE) accounts benefit employed individuals who have disabilities. The OBBBA adjusts the base limit amount by one year for inflation, and it permanently allows beneficiaries who make qualified contributions to their ABLE account to qualify for the Saver’s Credit, which will increase to a maximum of $2,100 starting in 2027.

Eliminated Tax Breaks. The OBBA terminates tax deductions and credits related to the following issues:

energy-efficient home improvements placed in service after 2025;
residential clean energy expenditures made after 2025;
clean vehicles (personal or commercial) acquired after September 30, 2025; and
electric vehicle charging stations placed in service after June 30, 2026.

BUSINESS TAX PROVISIONS

QBI Deduction. The Qualified Business Income deduction, which allows eligible business taxpayers to deduct up to 20% of their QBI, is made permanent. It also provides a $400 minimum deduction for “applicable taxpayers” and increases the phase-in amounts from $50,000 to $75,000 for single filers and $100,000 to $150,000 for joint filers.

Bonus Depreciation. The OBBBA makes permanent the additional first-year (bonus) depreciation for certain qualified property permanent at 100%, now with no phase-out for property acquired after January 19, 2025. There is also a new 100% bonus depreciation provision for “qualified production property” – non-residential real property used in the manufacturing, production or refining of certain tangible personal property – placed in service after July 4, 2025.

Section 179 Expensing. For property placed in service after 2024, the Code Sec. 179 expensing limits are increased, with inflation adjustments, to $2.5 million, and the phasedown threshold is increased to $4 million.

Form 1099. For payments made after 2025, the reporting thresholds for Forms 1099-NEC and -MISC are increased from $600 to $2,000.

Research Deduction. Section 174A allows a full deduction for domestic research or experimental (R&E) expenditures paid or incurred during the taxable year.

Qualified Small Business Stock. Taxation of gain on the “applicable percentage” is eliminated for QSBS acquired after July 4, 2025. Also, the gain exclusion threshold is increased from $10 million to $15 million, and the $50 million aggregate gross asset limit is increased to $75 million.

Corporate Charitable Contributions. The OBBBA imposes a new 1% floor (in addition to the 10% ceiling) on corporate charitable deductions for tax years after 2025.

Manufacturing Investment Credit. The advanced manufacturing investment credit (also known as the “semiconductor credit” or “CHIPS credit”) on qualified investments in an advanced manufacturing facility built before January 1, 2027, is increased to 35% (from 25%) for property placed in service after 2025.

Farm Sales. For sales or exchanges of qualified farm property occurring after July 4, 2025, sellers may elect to pay capital gains tax in four equal annual installments.

Eliminated Tax Breaks. The OBBA terminates tax deductions and credits related to the following issues:

energy-efficient commercial building property (construction beginning after June 30, 2026);
wind energy components produced and sold after December 31, 2027;
clean vehicles (commercial or personal) acquired after September 30, 2025; and
electric vehicle charging stations placed in service after June 30, 2026.

Just in Case. If you own a spaceport – i.e., a facility that is used to manufacture, assemble, launch, or repair spacecraft – your property will henceforth be treated like an airport under the exempt-facility bond rules.

IRS: Assets conveyed to an irrevocable grantor trust are not eligible for step-up in basis

Sat, 09 Aug 2025 15:29:25 GMT

The good news: Assets transferred to a revocable or “living” trust continue to receive the step-up.

Step-Up in Basis. Generally, assets that are part of a person’s gross estate for estate tax purposes receive a step-up in tax basis at the time of the owner’s death, pursuant to Internal Revenue Code Section 1014. The higher basis reduces the taxable gain on the asset when it is sold.

Example: In 1990, Michael bought a Babe Ruth baseball card for $100,000. By early 2020, its value had grown to $400,000. If he had sold it then, he would have owed taxes on the $300,000 gain in the card’s value.

However, he kept the card and left it to his son, Dennis, pursuant to Michael’s will or revocable trust. When Michael died in late 2020, Dennis inherited the card, and its tax basis was “stepped up” to its appraised value of $400,000.

Dennis sold the card later that year for $450,000 and was taxed only on the $50,000 by which the card appreciated after his dad’s death.

Revenue Ruling Impact. When the creator (or “grantor”) of an irrevocable grantor trust conveys a personal asset into the trust, that asset ceases to be part of the grantor's estate. (Reducing the taxable value of one’s estate is a common objective in creating an irrevocable trust.) By the time a trust asset reaches a beneficiary of the trust, two transfers have occurred: (1) from the grantor to the trust, and (2) from the trust to the beneficiary. Therefore, there is no direct transfer of ownership from the grantor to the beneficiary, as the trust served as an intermediate owner.

Beneficiaries who received assets from an irrevocable trust commonly try to claim a step-up in basis concurrent with the grantor’s death. The resulting reduction in the beneficiary’s tax burden, and the government’s loss of tax revenue, triggered the issuance of IRS Revenue Ruling 2023-2, which boils down to this: Assets held by an irrevocable grantor trust do not receive a step-up in basis at the death of the grantor. ¹

That is a big deal, which we can illustrate by applying it to the Babe Ruth card.

In this scenario, Michael created an irrevocable grantor trust, named Dennis as a beneficiary, and transferred the Babe Ruth card to the trust.

When Michael died, the trust transferred the card to Dennis, who, as in the previous example, eventually sold it for $450,000. So far, so good, except for one important consequence: Because the card was, for a time, the property of Michael’s irrevocable trust, there was no direct conveyance of the card from Michael to Dennis and, thanks to the revenue ruling, there is no step-up in tax basis.

Instead of paying tax only on the $50,000 increase in value that occurred during his ownership, Dennis was taxed on a whopping $350,000 (the difference between the $450,000 selling price and the $100,000 that his dad originally paid for the card).

Strategies. This ruling directly impacts a variety of irrevocable trusts, including grantor retained annuity trusts, qualified personal residence trusts, insurance trusts, and other grantor trusts.

Following are a few strategies that could benefit clients who have incorporated irrevocable trusts into their estate planning and want to retain the step-up in basis upon their death.

Many irrevocable grantor trusts have a provision that allows the grantor to substitute or exchange personal assets for assets of equal value owned by the trust. This provision, known as a “power of substitution,” would allow you (the grantor) to substitute an asset that you own for an asset that the trust owns and that is of equal value but has a lower basis. By doing so, the asset with the lower basis is now part of your estate at your death and receives a step-up to fair market value. The asset that the trust owns does not receive the step-up, but it already had a higher basis when it was transferred.
If the trust does not contain a power of substitution, you (still the grantor) could purchase low-basis assets from the trust in exchange for high-basis assets, such as cash for stock. For example, if the trust owns stock that is worth $1 million but has a basis of $500,000, you could pay the trust $1 million in cash and purchase the stock. The stock is part of your estate when you die, and it receives the step-up in basis. You have still moved $1 million out of your estate for estate tax purposes by paying that amount to the trust. This strategy ensures that low-basis assets continue to cycle back to you, enabling the estate to take full advantage of the step-up at your death.
The final alternative involves granting to a third party a testamentary “general power of appointment” over the irrevocable trust. Essentially, the power of appointment (a) gives the “power holder” the ability to direct who receives the trust’s assets and (b) causes those assets to be included in the power holder’s estate for estate tax purposes. As a result, the assets get a step-up in basis upon the power holder’s death. In this instance, you want to be sure that the power holder has enough estate tax exemption that including the trust’s assets in their estate does not result in an estate tax.

Uses of an Irrevocable Trust. Irrevocable trusts offer two main benefits: (1) creditor protection during the grantor’s life; and (2) estate tax planning.

Creditor Protection. Assuming your irrevocable trust was drafted properly such that your transfers into it are considered completed gifts, then if you get sued, the assets in the trust will not be available to your judgment creditors.

Estate Tax Planning. Completed gifts into an irrevocable trust are no longer considered part of your estate, and, if utilized strategically, they allow you to stretch your lifetime gift allowance much farther than if your beneficiaries simply inherit from you directly.

U.S. citizens who die in 2025 have $15 million of lifetime gift allowance to use. Furthermore, gifts from an individual to an irrevocable trust can be leveraged through an LLC to take advantage of discounts for lack of control and marketability. Depending on the assets being gifted, that discount can be 25% to 50% of the asset’s fair market value. However, such discounts are off the table after the grantor passes away.

Revenue Ruling 2023-2 essentially closed a loophole that many estate planners have been using. Grantors can create an irrevocable trust and make completed gifts into it so that all of the benefits described above are realized, while also electing “grantor trust” status so that the grantor continues to pay all of the income tax on the assets within the trust. That increases the value of the gift, because trust principal and income do not have to be expended paying taxes, and it created an argument for a step-up in tax basis upon the death of the grantor.

With Revenue Ruling 2023-2, the IRS basically stated that the grantor has to choose now:

If the grantor wants the step-up in basis, the asset has to be part of the grantor’s estate at death (and therefore subject to estate taxes).
If instead the grantor wants the creditor protection, discounts for lack of control and marketability, and the option of locking in politically unstable exemption dollars, then the grantor loses the step-up in tax basis.

The non-tax benefits of an irrevocable trust will continue to justify its use in many situations, but there is no denying that IRS Revenue Ruling 2023-2 complicates its inclusion in many planning scenarios.

If your estate plan includes any type of irrevocable trust, you should contact your trust attorney for an analysis of whether, and to what extent, a plan revision would benefit you and your beneficiaries.

¹ You may wonder why the beneficiary of an irrevocable grantor trust would try to claim a step-up in basis applies to the trust’s assets. The reason has to do with the term “grantor.” When an irrevocable trust is a grantor trust, it means that the creator of the trust – the grantor ̶ is still responsible for the income taxes generated by the trust’s assets, even though the grantor no longer owns those assets. For example, let’s say I transfer stocks worth $100,000 to an irrevocable grantor trust and name my children as the beneficiaries of that trust. Those stocks generate dividend income that is retained by the trust. Because the trust is a grantor trust for income tax purposes, I am responsible for paying the income tax due on those dividends, even though the trust retains the dividend income for my children’s benefit (which, by the way, also allows me to essentially make additional tax-free gifts to my children, since the trust value is not reduced by the payment of those taxes). The argument is that, since the stocks are still part of my estate for at least the purpose of paying income taxes, they should receive a step-up in basis at my death. The IRS argues that, since those stocks are not part of my estate for estate tax purposes, no step-up applies.

“Adequate Disclosure” of Gifts that Exceed the Yearly Limit

Fri, 08 Aug 2025 18:17:56 GMT

As gifting grows in popularity, so does the anticipation that the IRS will improperly pursue “strict compliance” with its disclosure requirements.

A common strategy for reducing one's taxable estate is to make gifts to children, grandchildren, charities, etc., within the $19,000 gift limit (for 2026) per donor, per recipient. (See our article, “ Gifting: As Simple as Writing a Check .”) If you restrict the value of each gift to the annual limit (or less), you should expect no problems from the IRS.

But what happens if you exceed the per donor, per recipient limit? That’s when you, with the help of your tax professional, will need to pay close attention to the rules.

Adequate Disclosure. If you make a gift of more than the limit that was in effect for the year in which the gift is made (e.g., $19,000 in 2026), you must file a gift tax return (Form 709) . The IRS then has a three-year window, from the filing date of the tax return, during which it can assess tax.

However, if you make a taxable gift but don’t file a Form 709, or you do file the form but don’t adequately describe the gift, the three-year window becomes an open-ended time period for the IRS to calculate and assess your tax liability.

To preserve your three-year window, you must provide to the IRS “adequate disclosure” of your gift. The IRS regulations state that a gift has been adequately disclosed if, on your Form 709, you:

accurately describe the gift and any consideration you received in return;
identify the recipient of the gift and your relationship to them;
in cases where the transfer is in trust, disclose the trust’s tax ID number and a brief description of the trust’s terms;
for gifts of assets other than cash, describe the valuation method or attach a qualified appraisal; and
provide a description of any position that is contrary to the regulations that were in effect at the time you made the gift.

In 2023, the U.S. Tax Court issued a taxpayer-friendly ruling, in Schlapper vs. Commissioner , that rejected the IRS’s tax assessment after finding that the taxpayer had “substantially complied” with the adequate disclosure requirements.

Nonetheless, many tax experts anticipate that, if major gifting grows in popularity to lower the taxable value of wealthy estates, the IRS will disregard the substantial compliance standard, instead pursue “strict” compliance, and resort to nit-picking of the five requirements listed above.

If you anticipate making gifts, in this or future years, that could be construed as exceeding the gift limit in effect at that time, be sure to check with your professional advisors to ensure that you achieve adequate disclosure and avoid the IRS’s stepped-up collection efforts.

Tips for Managing a Decedent’s Home and Personal Property

Tue, 15 Jul 2025 22:51:15 GMT

Immediately after a person dies, their personal representative or trustee should be alert for opportunities to safeguard the decedent’s assets.

“What do I do now?” If you have been named as the personal representative of an estate or the successor trustee of a trust, that might be among the first questions that come to mind when you learn of the death of the testator (will) or trustor (trust).

Several years ago, we sought to help answer that question with the publication of two popular Arizona-specific resources: Personal Representative Handbook and Successor Trustee Handbook .

While both handbooks offer fairly in-depth guidance, we want to share with you a recent article, “ Home Sweet Home – the Post-Death Edition ,” by a Boston law firm. It provides a little more detail on how you might fulfill your immediate duties regarding an unmarried decedent’s home and personal property.

Below we will highlight some of their key points and include a few excerpts from our handbooks.

PERSONAL PROPERTY

From our PR Handbook:

“ Gathering Assets. Initially, you (as the personal representative) must identify and collect the assets of the decedent’s estate and protect those assets from harm. … You must be able to account for all of the decedent’s assets as they existed on the date of the decedent’s death … and determine what the value of the decedent’s estate was as of that date.”

Article highlights:

To avoid theft, remove from the home easy-to-carry valuables, such as jewelry, small electronics, and cash. Other things to consider removing from the vacant home are:

paperwork with the decedent’s Social Security number or account numbers (since you do not know what might be needed in the future, securely store such paperwork rather than rush to shred everything);
prescription medications;
guns and ammunition; and
antiques and artwork.

Regarding antiques and artwork, a qualified appraiser can come to the house and advise you as to whether there are any items of significant value. Also, consider whether any items require special attention, such as storage in a climate-controlled area.

Regarding the decedent’s motor vehicles: Because of the potential for liability, you should usually try to transfer the decedent’s vehicles to the named beneficiary (if one was specifically designated in the will) or sell it as soon as practical. While they remain in the estate, make sure they continue to be insured.

DECEDENT’S RESIDENCE

From our PR Handbook:

“ Gathering Assets. … You may need to secure the decedent’s primary residence to protect it against vandalism or to prevent family members from removing items from the home.”

Article highlights:

Security. Day-to-day administration of the decedent’s home often begins with issues of security, including break-ins that occur after the death becomes known.

A security checklist might include the following:

lock all windows and exterior doors;
activate the security system, if there is one;
change the locks on the property and update any alarm passcodes; and
notify neighbors that the owner has passed away and ask them to advise you of any suspicious activity.

Vacancy. If the house is going to be empty for even a short period of time, try to make that less than obvious to the casual observer:

have interior and exterior lights, and maybe a TV or radio, on timers;
ask a neighbor to occasionally park in the home’s driveway;
arrange for mail pickup until you can set up a forwarding arrangement with the post office – even then, have someone check the mail every few days and remove flyers and leaflets;
cancel newspaper delivery;
remove indoor plants; and
maintain landscaping maintenance and watering.

For more suggestions, see the article authors’ Residence Maintenance Checklist .

Upkeep. Vacancy issues also include interior considerations:

remove all perishable food items or non-perishables that might attract insects;
retain basic utilities and services – electricity, gas, water, and trash collection – and cancel others (e.g., cable);
set the thermostat to an appropriate temperature; and
inform the homeowners insurance company that the property is unoccupied.

About insurance: If the insurance company does not cover vacant homes, or if the decedent’s death triggers a cancellation or other unfavorable change in coverage or expense, switch to a different company.

If you fail to take reasonable steps to update the homeowners insurance coverage, and an incident occurs that devalues the home, you could be personally liable for the loss of value .

Selling the Home. Selling residential real estate is often a part of estate administration. Be mindful that, in your fiduciary role, you are held to a high standard of conduct, and your decisions and actions must maximize the benefit to the decedent’s estate. Common questions include the following:

If the probate estate or a trust holds the home, does it have to be sold? No, the fiduciary is not required to sell the home unless the will or trust mandates a sale. If it does not, you can simply deed the real estate out to the beneficiaries, who (generally) would own the home in joint tenancy or as tenants in common. But often the beneficiaries don’t want the burden of organizing a sale and might ask you to do that on their behalf. If you take on that obligation, take care that any costs of the sale are allocated to the sale proceeds, i.e., not paid out of another beneficiary’s share.
Is the fiduciary required to receive the highest price possible for the home? A fiduciary has the duty to act in the best interest of the beneficiaries. The fiduciary also has the duty to act as a prudent investor would act in managing the estate or trust assets. Taken together, you must weigh many factors while establishing a sale price and accepting an offer, such as (i) the cost of carrying the home while it remains unsold, (ii) the real estate market, and (iii) the fair market value of the home as set by a qualified independent appraiser.
Do I need to get permission of the probate court to sell the home? Once the estate has been opened and you have been appointed as the Personal Representative, you generally do not need special permission to sell real estate. It can be liquidated like any other estate asset, though the more valuable the property, the more care you should take in having it properly appraised and marketed in order to maximize value of the heirs. If you as the trustee are selling the home, the trust (or state law if the trust is silent) should grant you the power to sell the home.
What information should I give to the beneficiaries? It is usually prudent to keep the beneficiaries reasonably apprised of estate administration matters, and most states impose this duty by law through its probate code or its trust code. Keeping the beneficiaries informed during the sale process will help ward off beneficiary complaints. Let them know how the realtor was selected and why one was chosen over another. Let them know the initial listing (sale) price and how it was determined. If the listing price is ultimately adjusted downward, let them know why.
Is it OK to sell to a beneficiary of the estate? Absent language in the estate plan prohibiting such a sale, it is OK for you to sell the home to a beneficiary, as long as the sale is done at “arm’s length,” i.e., treated as if it was a sale to an independent third-party buyer. The home should still be listed with a broker and the beneficiary can make an offer like anyone else in the housing market.
Is it OK for the fiduciary to buy the home? A fiduciary is prohibited from self-dealing, i.e., profiting from the fiduciary position. The will or trust should include language addressing this question.

In Arizona, real estate can be sold without going through probate under specific circumstances, primarily if the property is held in a way that bypasses probate, such as through a living trust or as joint tenancy with rights of survivorship, or if the estate qualifies for a small estate affidavit. Otherwise, probate is generally required to transfer property ownership after death.

For more suggestions on carrying out your duties as a fiduciary, visit the “ Probate and Trust Administration ” section of our articles index.

Cryptocurrency and Your Estate Plan

Wed, 18 Jun 2025 22:11:25 GMT

Due to its decentralized nature, unique storage requirements, and value volatility, crypto increases the importance and complexity of estate planning for its owner.

If you have invested in crypto since your estate plan went into effect, you should include that investment among the potential “ triggering events ” for an estate plan review or update. Also, your estate plan should include meticulous documentation, including identifying crypto holdings, their location (wallets, exchanges), and access keys, and perhaps designating a “crypto custodian.”

UNDERSTANDING CRYPTO

In contrast to more conventional investments, such as ownership of currency or registered securities, crypto is a purely digital asset with specific storage, access, and tax implications. Significant planning challenges can arise from any number of issues related to crypto, including:

documentation;
taxation and valuation;
ownership transfers;
probate (if the crypto is held outside of a trust); and
fiduciary selection and access.

No Paper Trail. Unlike conventional investments, cryptocurrency ownership is documented on the “blockchain,” which can complicate the process by which your beneficiaries establish ownership and gain access.

On a more conventional level, as with your registered securities and other financial accounts, you will need to create a detailed list of all of your crypto holdings, including the types, amounts, and wallet addresses, and the exchanges where they are stored.

Tax Liability. The IRS considers cryptocurrency as “property” (see the Digital Assets page on the IRS website), which subjects it to the same tax rules as your more conventional assets. This determination is very important in estate planning.

You might need to bring in a tax professional who understands the specific tax consequences of crypto, including how it is valued for estate or inheritance tax purposes, and, more common, how capital gains taxes might apply to ownership transfers. In either case, crypto’s erratic market fluctuations can make establishing a defensible value much more challenging than with other types of assets.

Will vs. Trust. One of the consequences of crypto’s decentralized nature is that you generally cannot designate beneficiaries with an account custodian, as you can for most other sorts of financial assets.

Thus, absent some special arrangement (see “Crypto Custodian” below), an individual (a) who owns even a modest amount of crypto, and (b) whose estate plan consists solely of a basic Will, will not avoid probate.

While the complexities of probate are, in many instances, exaggerated, such is not the case when crypto is added to the probate estate. If crypto issues are unfamiliar to your personal representative and heirs, you can assume that they will also be unfamiliar to the judge presiding over your probate.

In our opinion, if you have crypto holdings, a trust is a practical necessity. Your trust should own the crypto (i.e., the crypto should be retitled into the trust), and your successor trustee should have some familiarity with digital assets. If your successor trustee is not likely to have or obtain that familiarity, read on.

Crypto Custodian. There are some companies that offer crypto custodial services, which are like a limited trust/conservatorship just for digital assets. Signing up for such a service does allow you to name beneficiaries and perhaps avoid probate; however, you are limited to the contractual terms on offer, and there are always risks in relying on such third-party companies to manage large amounts of wealth for an extended period of time.

Access. You will need to create a detailed list of all of your crypto holdings, including the types, amounts, and wallet addresses, and the exchanges where they are stored.

Protecting your crypto assets requires proper storage and restrictions on access. It is crucial that your successor trustee can obtain the necessary login credentials, keys, passwords, etc., when necessary . Ensuring that your trustee knows where those credentials are stored (we recommend storing them separate from your estate plan binder) and can access them in an emergency, but not before then , is an elusive objective for crypto owners.

SEEK PROFESSIONAL ADVICE

In creating or updating your estate plan in the wake of crypto ownership, you should consult with an estate planning attorney who is familiar enough with cryptocurrency holdings to ensure that your plan is legally sound and addresses the foreseeable tax and asset transfer considerations.

Video Will? Don’t Do It

Tue, 27 May 2025 22:56:50 GMT

As long as Arizona requires a will to be signed, with the signer and witnesses physically together, video wills won’t work, and “electronic” wills are likely to be more trouble than they’re worth.

In 2022, a Montana man, Jesse Beck, sent a selfie video to his brother, Jason. In the video, Jesse stated, “If anything happens to me whatsoever, I give all my possessions – everything – to Jason Beck, my brother.”

Four days later, Jesse died in an auto accident. His daughter asked the court to appoint her as Jesse’s personal representative “in intestacy” – i.e., without a will. Jason objected and asked the court to probate the video as Jesse’s will.

The court denied Jason’s petition, ruling that Jesse’s video did not meet Montana’s statutory requirements for a valid will. Two years later, the Montana Supreme Court agreed, and the case was reported by The Wall Street Journal .

Reading the Journal article caused us to wonder how many cell phone users here in Arizona might have the same idea as Jesse and pursue a video selfie alternative to the traditional hard-copy will.

Our short advice: Don’t do it.

Why? Because Arizona laws governing the making of a will look a lot like Montana’s. And while a 2019 Arizona law allows people to execute an “electronic will” (see below), its provisions would not allow a video selfie will to survive a legal challenge, nor does it loosen the statutory requirement that the witnesses to the signing of a will must be physically present when the testator (the maker of the will) signs it.

A video recording or digital text or email message that is intended to serve as a will is certainly convenient and perhaps even persuasive (the Montana Supreme Court conceded that Jesse Beck’s video “undoubtedly [expressed] testamentary intent”). But as long as it exists in a purely video or electronic-only state, it can’t be read, signed, and witnessed, and without a witnessed signature, it will not stand up to a legal challenge.

Your Options. The statutorily safe way to express your wishes in a will is to put it in writing. A will that is typewritten, or drafted on a computer and printed, allows for easy signing and witnessing (but beware to strictly follow the witness requirements under Arizona law to create a valid Last Will and Testament).

You might also create a “holographic” will – i.e., a will written in the maker’s own hand. To be valid, it has to be handwritten entirely by the maker. A holographic will does not have to be witnessed or notarized so long as it is entirely in the maker’s own handwriting, but having at least one witness will help it stand up to challenge. Also, the maker should include a statement that they intend for the document to serve as their will.

If Jesse Beck had simply written on a cocktail napkin what he said in his brief video and signed it, Jason might have inherited Jesse’s estate. But Jesse decided to go digital, and his wishes were not honored.

Electronic Will. What the 2019 Arizona law does is allow for digital signatures by the maker of the will and the witnesses (think DocuSign and buying a house). But while that is very 21st Century, there are complications, such as:

all of the required signers are still required to be in the same place at the same time;
a digital file that is digitally signed has to be properly created and maintained as an electronic record and stored in the uninterrupted custody of a “qualified custodian” – i.e., not on your laptop; and
you might not want to move (or die) out of state; at the time of this writing, most states don’t permit the making of electronic wills, and a few expressly prohibit them.

Premarital Estate Planning: When Marriage Is a Merger

Tue, 15 Apr 2025 18:04:23 GMT

In contrast to a prenuptial agreement, which stakes out each spouse’s position in case of divorce, premarital estate planning blend the spouses’ separate property into a financial union.

By Ryan Scharber

When Michael and Jessica, a 40-something engaged couple, made an appointment for premarital estate planning, we assumed (OK, I assumed) that they would want to create a prenuptial agreement .

Wrong assumption. The couple made clear from the beginning of our meeting that they wanted nothing to do with a traditional prenuptial (or premarital) agreement, which they viewed as a divisive “what’s mine is mine” step in planning for a failed marriage and a divorce.

What they did want was for their marriage to be a union in all respects, including, to the greatest practicable extent, conveying into the marital community the ownership of all of their sole and separate assets. And they wanted a comprehensive estate plan that would go into effect immediately after their wedding.

“We’re getting married in three months, we’re in it for life, and we want to do things right,” Jessica explained. “We don’t want to have any secrets, separate property, or hidden assets. We want what we bring into the marriage to belong to both of us, with equal ownership, access, and control.”

Michael added this historical analogy: “When the Spanish explorer Cortés arrived in the New World, he burned his ships to eliminate any possibility of turning back. We want you to help us burn our ships.”

Having vividly stated their objectives, they moved on to a description of their assets and situations:

This would be the second marriage for both, and neither had children.
Each of them was a homeowner. They planned for Jessica to move into Michael’s home after their wedding and to turn Jessica’s home into a rental property.
Michael was a self-employed landscape architect, and his business was held in a single-member limited liability company (LLC).
Jessica was a salaried employee, but she was also the sole member of an LLC that owned one asset: the rights to several musical compositions for which she earned royalties.
Michael’s financial assets consisted of a personal checking account, business checking account, Simplified Employee Pension (SEP) IRA, and mutual fund shares held in a brokerage account.
Jessica also had personal and business checking accounts, plus a money market account and a 401(k).
Both had credit card balances that they would pay off shortly before the wedding, but Michael owed a substantial debt that he would not be able to pay off by that time.

Planning the Marital Merger

Opportunities to lead a couple through this type of planning do not come along every day, and helping them achieve their well-defined objectives was an enjoyable experience that encompassed many interesting aspects of estate planning.

We began by identifying steps that they could take on their own, either just before or immediately after the wedding. Their action items:

open a joint personal checking account, transfer to that account the balances from their individual checking accounts, and then close those accounts;
open an interest-bearing account to which Jessica would transfer her money market balance;
add the other as a signer on their business checking accounts;
designate the other as the beneficiary on Michael’s SEP-IRA and Jessica’s 401(k);
open a joint brokerage account to which Michael would transfer his investment portfolio; and
pay off their credit card balances, cancel the individual credit cards, and get new personal and business credit cards.

We then turned our attention to the structuring of their estate plan.

First, it was clear that the centerpiece of their plan would be a revocable living trust , which would (a) allow their estates to avoid probate after each of their deaths and (b) support Michael and Jessica’s objective of shared ownership and control of their assets.

In general, their trust would be the titled owner of:

their personal bank accounts,
their brokerage account,
their motor vehicles,
their existing LLCs (that was the original plan, but we ultimately took a detour described below) ,
Michael’s home, and
a new LLC that would own Jessica’s home, serve as the operating entity for its rental, and add a liability shield between the couple and their tenants.

Michael’s business and the renting of Jessica’s home combined to make asset protection a priority. To achieve an extra measure of protection, and because the couple would have multiple LLCs, in this case it made sense to create a holding company . Their holding company became the sole member of the three LLCs, and their trust was made the sole member of the holding company.

By that point we had checked all the boxes but one: insulating Jessica from liability for Michael’s financial debt. As that is somewhat hard to do in a community property state such as Arizona, they accepted one deviation from their “no prenup” mandate and executed an agreement stating that Michael’s debt was his sole and separate obligation for which Jessica had no liability. The existence of such an agreement does not make the non-debtor spouse bulletproof from collection efforts, but it does create a legal hurdle for creditors.

Executing the Plan. Because Michael and Jessica wanted their estate plan to go into effect on or right after their wedding day, we discussed two options for putting it in motion: (1) sign everything in advance, with instructions for all documents to go into effect on the wedding day, or (2) prepare the documents in advance and sign them immediately after the wedding day. They chose option 2, which they viewed as the simpler and less risky course.

Conclusion. For the purposes of this article, the clients are fictitious, and the details of their situations and objectives were adapted from multiple estate planning engagements.

However, the value of the strategies described above is very real, and the underlying issues are sufficiently common as to provide a planning template for many couples who are coming into a marriage with sophisticated asset scenarios.

New Arizona Laws: A Short List of Legal and Tax Issues Now in Effect

Tue, 11 Mar 2025 23:47:36 GMT

Whether the result of legislation or voter approval, a number of new state laws and more have recently become effective.

In Arizona, new state laws can be created in two ways: as the result of a bill that passes both houses of the legislature and is signed by the governor, or by voter approval of an initiative (initiated by the public via petition) or a referendum (referred to the voters by the legislature). While laws can be passed by the legislature or by voters, a state constitutional amendment can be approved only by public vote.

Following is a short list of statutes and one constitutional amendment that have become the law of the land in recent months.

Residential Sales Tax Eliminated. Under a statute that went into effect January 1, residential tenants no longer have to pay the municipal tax on their monthly rent payments, and residential landlords are barred from collecting it. (A January 2025 Kiplinger article provides helpful details .)

In prior years, the tax applied to residential properties that were leased for 30 or more consecutive days. Property owners are still required to register their property with the county assessor to comply with landlord-tenant laws.

Property Tax Refunds for Non-Enforcement of Laws. Proposition 312, approved by voters in November 2024, allows property owners to apply for a property tax refund if the city in which the property is located does not enforce laws meant to restrict, for example, illegal camping, loitering, obstructing public thoroughfares, panhandling, public urination/defecation, public consumption of alcoholic beverages, and possession or use of illegal substances.

Income Tax Withholding on Retirement Distributions. A 2024 law clarifies that elective withholdings on (a) payments from pensions or annuities and (b) distributions from retirement accounts are to be treated as if they were payments of wages by an employer to an employee for a payroll period – if a withholding request is in effect at the time of payment.

State Taxes Paid Via EFT. A taxpayer’s electronic payments will be deemed to have been made at the date and time when the taxpayer successfully authorized an electronic funds transfer, as evidenced by an electronic payment confirmation from their financial institution or the Arizona Department of Revenue.

Youth Businesses: License and Tax Exemptions. A business owner who is younger than 19 is not required to obtain a sales tax license or remit state or local sales taxes if their gross receipts are $10,000 or less for the calendar year.

Minimum Wage Increase. On January 1, Arizona’s minimum wage for private employees increased by $0.35 per hour, to $14.70.

Arizona Border and Immigration Laws. Another 2024 ballot issue, Proposition 314, makes it a misdemeanor for noncitizens to enter Arizona at any location that is not an official port of entry. As of March 2025, Arizona’s active ports of entry are at Fredonia, Page, St. George, Kingman, Topock, Sanders, Teec Nos Pos, Ehrenberg, Parker, San Luis, Yuma, Yuma Business 8, Nogales, Douglas State, Douglas International, and San Simon.

Prop. 314 also authorizes (a) local police to arrest persons who cross illegally and (b) Arizona judges to order deportations. In addition, it is now a class 6 felony for non-citizens to knowingly submit falsified documents when applying for government benefits, increases the penalties for knowingly submitting falsified information to an employer, and increases the penalties for selling fentanyl if the drug then causes a death.

Abortion Rights. In approving Proposition 139, Arizona voters amended the state constitution to establish the right to abort a pregnancy before the point of fetal viability, defined as the point during a pregnancy when there is a significant chance of the survival of the fetus outside of the uterus.

DUI Laws for Rideshare Drivers. For Arizona drivers that work for Uber, Lyft, or any other rideshare companies, the legal blood alcohol limit has been reduced to 0.04%, half of the limit (0.08%) applied to all other categories of drivers.

Life Sentence for Child Sex Traffickers. Proposition 313 requires that any person convicted of child sex trafficking will be sentenced to life in prison without the possibility of parole or release.

Reselling of Event Tickets. Ticket resellers are prohibited from selling multiple copies of one ticket, reselling tickets before they are available to the public, and not disclosing seat locations prior to the purchase. Additionally, computer bots are no longer able to purchase tickets in bulk using the same IP address or multiple emails to avoid security measures.

Some other interesting new laws vary in their gravity and impact:

Home cooking for sale. Cooks who register with the Arizona Department of Health Services and pass a food-preparation course can now sell home-made food products that contain meat, provided the products are packaged with a label and disclaimer.
Flagpole holders. A community association is authorized to limit a member to two exterior wall-mounted flagpole holders.
Backyard chickens. Cities and counties can no longer prohibit individuals from keeping small numbers of chickens or other fowl in their back yard. You can now raise on your property up to six chickens or other fowl, if your coop enclosures are at least 20 feet away from neighbors and you pick up their droppings (your chickens’, not your neighbors’) twice a week.
State planet: Pluto. In 1906, Percival Lowell, founder of the Lowell Observatory in Flagstaff, began the search for what would become the ninth planet in our solar system.

Other Arizona state symbols, previously designated, include the official state amphibian (Arizona tree frog), bird (cactus wren), butterfly (two-tailed swallowtail), dinosaur (Sonorasaurus), drink (lemonade), firearm (Colt single-action revolver), fish (Apache trout), flower (saguaro blossom), fossil (petrified wood), gem (turquoise), mammal (ringtail cat [not a cat]), metal (copper), mineral (wulfenite), neckware (bola tie), nickname (“The Grand Canyon State”), reptile (ridge-nosed rattlesnake), and tree (palo verde).

Funeral Planning: Important Considerations

Fri, 14 Feb 2025 14:34:45 GMT

Whether your funeral plan is part of, or separate from, your estate plan, specifying your wishes and perhaps pre-funding your funeral expenses can ease the burden on your loved ones.

One of the ironies of estate planning is that, after going to great lengths to create specific, thorough instructions regarding the disposition of their assets, many people provide little or no direction concerning the disposition of their remains.

That’s too bad. Just as a well-conceived estate plan can eliminate legal and financial stress in the months following your death, a simple statement of your funeral wishes can lighten your family’s emotional stress when the pain of losing you is at its peak.

A funeral plan can also:

help ensure that your beliefs and values are honored;
specify your wishes regarding the disposition of your remains and the type of memorial service you desire;
allow you to designate the person who should manage your funeral arrangements (it might not be your personal representative or trustee);
if you wish, provide for pre-funding your funeral and burial/cremation costs; and
be made available in advance to everyone who needs to know.

You should discuss your wishes with your family members and other people who are important to you. If you change your mind about any aspect of your plan, you can revisit it at any time.

PLANNING OPTIONS

Burial vs. Cremation. When choosing between the two most common methods of disposing of one’s remains, you might be guided by any number of factors, including:

religious beliefs: some denominations do not permit cremation, a few require it, and most are accepting of it;
family tradition: you might wish to be buried at the same cemetery where your family members’ remains are interred;
respect for your remains: some people view cremation as a form of desecration;
closure: an open casket can be a comfort to friends and family who were not present at the time of death;
cost: cremation is significantly less expensive than burial, which typically entails the costs of the casket, embalming, the burial itself, and cemetery plot, and, if there is to be an open-casket funeral, preparing the body for viewing; and
portability: cremation allows for remains to be stored in a small urn, which can be retained by a loved one or placed in a columbarium niche.

Type of Service. Your funeral or memorial service can be a reflection of your beliefs, values, and how you wish to be remembered. Common types of service include:

a traditional faith-based funeral, held at your church or a funeral home;
if you are to be buried, an open- or closed-casket viewing or funeral service;
if you are a military veteran or a member of a fraternal organization, a service that includes a related rite or ceremony; or
a less formal remembrance ceremony or celebration of life, which can be held nearly anywhere and with any degree of formality.

Arrangements. Depending on the type of service, your funeral planning can include a wide variety of arrangements, such as:

funeral home, mortician, or crematorium (you should spare your loved ones the ordeal of shopping for a mortuary at a difficult time);
who should write your obituary, and where it should appear;
public or private ceremony;
location;
alternatives to floral arrangements (e.g., memorial contributions to a church, charity, or cause);
who should be invited;
who should speak, and whether speakers should be limited to selected persons or anyone in attendance; and
if you are to be buried, how you are to be dressed, who will serve as pallbearers, and what should appear on your headstone or grave marker.

Financial Considerations. Depending on the type of memorial service and the disposition of your remains, the cost can be in the tens of thousands of dollars. How and when you intend to pay for your funeral is a major planning consideration.

Your options include:

pre-paying for your funeral, via a plan offered by your mortuary;
purchasing a life insurance policy with a death benefit that will cover the anticipated funeral costs;
creating an investment account earmarked for funeral expenses; and
having your personal representative or trustee pay for your funeral from your estate.

A 2024 Wall Street Journal article, “ Plan Your Own Funeral, Just Don’t Pay for It Now ” (subscription required), offers an in-depth look at funeral planning and some useful cautions about your payment options.

GOVERNMENT REGULATION

The Arizona Department of Health Services’ “ Consumer Guide to Arizona Funerals Information ” is a valuable resource.

Also, a recent Nolo.com article, “ Burial and Cremation Laws in Arizona ,” contains several helpful insights, including these:

A casket is not required for burial (but the cemetery may have certain rules).
Caskets are not required for cremation.
You do not have to buy a casket from the funeral home (if you prefer, you can buy one online, or you can build your own).
There are no Arizona laws that prohibit burial on private property (but local governments might have rules governing burials, and the location of the cemetery must be filed with the county recorder's office).
Arizona law is silent as to where you may keep or scatter ashes.
You should check both city and county regulations and zoning rules before scattering ashes on local public land, such as a city park.

As for federal rules and restrictions:

Officially, you should request permission before scattering ashes on federal land.
While many national parks allow scattering ashes, each park has its own rules, and some have affirmatively suspended permitting the scattering of human cremated remains.
The Clean Water Act requires that cremated remains be scattered at least three nautical miles from land.
If the container won't easily decompose, you must dispose of it separately.
The EPA doesn't permit scattering at beaches or in wading pools by the sea.
You must notify the EPA within 30 days of scattering ashes at sea.

Telling Your Adult Kids About Your Estate Plan

Wed, 08 Jan 2025 19:23:19 GMT

You don’t have to go into great detail; giving them the highlights can go a long way toward avoiding confusion and a family fight after your death.

Last summer, in “ Equipping Your Successor Trustee or Personal Representative ,” we outlined the benefits of notifying your estate administrator – perhaps one of your adult children – that you have named them to serve in that role and how to locate the documents they will need to carry out their duties.

While we stand by our suggestions, we also endorse a November 2024 Wall Street Journal article, “ Warren Buffett Talks to His Kids About His Will; You Should Too ” (subscription required), in which the Omaha billionaire:

raises the ante on intrafamily communication and transparency, and
shares his strategy for passing wealth to the next generation while minimizing family conflicts.

“Be sure each child understands both the logic for your decisions and the responsibilities they will encounter upon your death,” Mr. Buffett wrote in a letter to his shareholders. “You don’t want your children asking ‘Why?’ … when you are no longer able to respond.”

That’s good advice. In many of our estate controversy matters, the family disputes that gave rise to lawsuits could have been avoided if, prior to their deaths, the parents had delivered the same news to all of their kids at the same time.

TOPICS. You don’t have to go into great detail about what your assets are worth or how much the kids are likely to inherit. In many cases, an overview will suffice. For example:

a description of your estate plan – whether it’s a trust or a simple will;
a general description of what you own – cash, investments, business interests, retirement savings, life insurance, personal property, etc.;
how your assets will be disposed of and passed down – e.g., liquidation, with the proceeds shared equally by the heirs, or specific assets intended for specific heirs;
whom you have named to act as your fiduciary – i.e., successor trustee (for a trust) or personal representative (for a will) – and, if appropriate, your reasons for selecting them; and
the provisions you have made for end-of-life decisions (i.e., “advance directives”).

BENEFITS. Here are some of the benefits we have seen in parents talking to their adult kids about the parents’ estate plan:

Transparency. Laying your cards on the table while you’re still alive – and giving your kids the opportunity to ask questions – greatly reduces the risk of your kids suing each other over your estate.
Predictability. Upon your death, you don’t compound their grief with needless uncertainty or surprises.
Clarity (part 1). If all of your kids are clear as to how you want your assets to be managed and conveyed, you’ve taken another step toward avoiding estate litigation.
Clarity (part 2). If you haven’t already briefed your fiduciary on accessing your important documents and property, doing so in the presence of the other kids could be helpful.
Clarity (part 3). If you have made any tough provisions – e.g., disinheriting a child or not treating all of your kids equally or equitably – letting that be known now will make life much easier for your fiduciary.
No fighting over specific assets. The family meeting gives kids an opportunity to express their desire for this or that item of personal property, and it helps you prepare a personal property memorandum that reflects those desires.
Preparing for a windfall. If you decide to be specific as to the value of your estate, and if your kids might receive significantly more than they were expecting, this discussion could help prepare them to receive and deal with substantial wealth.
Better planning. If you know you are going to be discussing your estate plan with your kids, you might be just a little more thorough in your decision-making regarding your estate.

As the Wall Street Journal article acknowledges, “sharing and discussing the contents of a will can be emotionally difficult for parents and adult children. Many feel uncomfortable talking about money and death. And parents often fear disclosure could create conflict among their children.”

Those are understandable concerns. But, regarding the last one, if discussing your estate plan with your kids could cause problems among them now, consider how much those problems would be magnified in your absence. We recommend that you not kick that can down the road.

TIPS. In closing, consider a few other suggestions:

If, at any time after the meeting, you make any substantive changes to your estate plan, follow up with your kids to let them know about the changes.
In preparing for the meeting, if you see the need for reinforcements, ask your estate planning attorney to attend.
If having an in-person meeting is impractical (e.g., due to distance) or too scary, consider delivering the news in identical letters to all of your kids. It’s not a perfect substitute for a meeting, but it’s better than keeping them in the dark.

Dementia: Responding to the Signals of Potential Incapacity

Fri, 13 Sep 2024 20:02:12 GMT

A professional diagnosis, appropriate legal planning, and understanding the available financial resources are keys to meeting the needs of a loved one in decline.

It’s one of the handful of questions that we dread hearing from our clients: My spouse is showing signs of dementia. What do I do?

After taking a deep breath, expressing our sympathy for their concern, and acknowledging the potential seriousness of Alzheimer’s disease and other forms of dementia, we seek to help our clients examine their situation from three perspectives: medical, legal, and financial .

Medical Diagnosis. If your spouse, parent, or other loved one is still at the “showing signs” stage, a medical diagnosis, starting with their primary care physician, is a key first step in determining the nature and severity of their condition. For example, memory loss is often the first apparent symptom, but by itself it does not reveal whether the person is truly experiencing dementia or simply demonstrating, for the first time, some common signs of aging.

Signs of dementia are not limited to memory loss. According to a Mayo Clinic article, “ Diagnosing Alzheimer’s ,” other indicators include:

having a hard time concentrating, planning or problem-solving;
trouble finishing daily tasks at home or at work, such as writing or using eating utensils;
confusion with location or passage of time;
having visual or spatial issues, such as not understanding distance in driving, getting lost or misplacing items;
trouble with language, such as not being able to find the right word or having a reduced vocabulary in speech or writing;
using poor judgment in decisions;
withdrawal from work events or social engagements; [and]
changes in mood, such as depression or other behavior and personality changes.

If testing by a PCP or a neurologist confirms the onset of dementia, early detection can in some cases help slow the condition’s progress and extend the duration of the patient’s mental acuity.

Legal Planning. This is often the easiest step in the process. If we prepared the person’s or couple’s estate plan, the work that went into that plan probably addressed most of the issues that arise in cases of physical or mental impairment. Our wills, trusts, and related documents generally align with the Alzheimer’s Association’s suggested “ basics of legal planning ”:

taking inventory of existing legal documents and reviewing and making necessary updates;
making legal plans for finances and property;
putting plans in place for enacting your future health care and long-term care preferences; and
naming another person to make decisions on your behalf when you no longer can.

Our trust-based estate plans typically include, but are not limited to, a:

Revocable Living Trust, which contains your instructions for your own care and the care of your family if you become disabled, as well as for the distribution of your assets upon your death;
Last Will and Testament, which addresses the handling of any property that was not transferred to the Revocable Living Trust;
Durable Power of Attorney for property management, through which you appoint an agent to act for you if you become incapacitated;
Authorization for Release of Protected Health Information, which identifies persons who may obtain protected health information on your behalf, make informed decisions about your care, and pay your medical bills;
Healthcare Power of Attorney, which authorizes your agent to make medical decisions for you if you cannot express your wishes or make the decisions yourself; and
Living Will, which informs your doctors of your wishes regarding the extent of medical measures to be taken on your behalf.

Your legal planning might also include provisions for appointing a guardian or conservator to cover situations in which one or more Power of Attorney documents are inadequate, or if family members are in disagreement about how to handle your legal, financial or health care decisions.

Financial Planning. In-depth planning for elder care and other levels of service associated with dementia is a highly technical and situation-specific area of expertise, and the process of identifying one’s likely financial needs and creating strategies for meeting them is not within the scope of our legal services.

For an overview of financial planning for dementia patients, we direct you to the guidance contained in the “ Financial Planning ” page of the Alzheimer’s Association website. Following are some useful excerpts.

Care costs. Since Alzheimer's is a progressive disease, the type and level of care needed will intensify over time. Common care costs include:

ongoing medical treatment for Alzheimer's symptoms, diagnosis and follow-up visits
treatment or medical equipment for other medical conditions
safety-related expenses, such as home safety modifications or safety services
prescription drugs
personal care supplies
adult day services
in-home care services
full-time residential care services.

Resources. A number of financial resources may be available to help cover care costs, [including]:

Medicare, Medicare Part D and Medigap
insurance, including life and long-term care
employee or retirement benefits
personal assets such savings, investments and property
Veterans benefits
Medicaid
Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI), if you are younger than 65
community support services (see the Alzheimer’s Association’s Community Resource Finder ).

Conclusion. Addressing your concerns about a loved one’s mental capacity is a responsible and loving first step in helping them determine the extent of their condition and marshal the medical, legal, and financial resources that are necessary to meet their needs.

Within our scope of estate planning and document preparation, we stand ready to guide you through the initial steps of the process and help you identify the appropriate professional resources.

Best Lawyers® selects Ryan Scharber for 2025

Thu, 15 Aug 2024 21:02:05 GMT

Equipping Your Successor Trustee or Personal Representative

Fri, 12 Jul 2024 23:16:48 GMT

You can help your fiduciary administer your trust and non-trust assets by anticipating what information they will need and telling them – while you’re alive – where to find it.

It’s a common scenario: Our client’s estate plan has been finalized, they signed all of the pertinent documents (Trust, Will, powers of attorney, memorial instructions, etc.), and they have come to our office for a brief meeting to pick up their document binder and flash drive.

At some point during their visit, they are likely to raise a few frequently asked – and important – questions:

Should we tell our trustee (or personal representative) that we have named them to take care of our affairs
Should we give them a copy of our estate plan?
What should we tell them about our estate plan?
What other information should we give them?

These are very good questions, and this article will describe the responses we generally offer.

Informing Your Trustee or Personal Representative. First, let’s define two important terms. If you have a Trust, you named a “trustee” to administer the trust assets in the event of your incapacity or death. In your Will, you named a “personal representative” to administer your property assets after your death. In the interest of brevity, this article will use “fiduciary” as a catch-all term to describe both roles.

As to informing them of their appointment, you should definitely let them know that you have named them to serve as your fiduciary. (Ideally, you would discuss it with them, and receive their consent, before you start the estate planning process.)

Sharing Your Estate Planning Documents. In most cases, we recommend giving copies of your estate planning documents to the individual(s) you have appointed as your fiduciary.

However, you are by no means required to do that, and before you share with anyone copies of your documents, you should carefully consider the pros and cons. Here are a few:

PROS

Efficiency. When the time comes for your fiduciary to assume their duties, they will have the legal documents they will need to act on your behalf.
Clarity. If they have questions (and they will), they can ask you, and you or your estate planning attorney can respond.

CONS

Privacy. There might be information that you do not want your fiduciary to know while you are alive. Also, if your fiduciary is also a beneficiary or heir of your estate, you might not want them to know what they (and others) will receive after you die.
Second thoughts. Consenting to serve as your fiduciary might have been easy to do in the abstract, while you were alive and healthy, but seeing your actual estate planning documents might cause them to feel overwhelmed and inadequate to the task.
Obsolescence. If you amend your estate plan, you would need to either provide your fiduciary with a copy of the amendment, or at least, notify them that their existing copy of the estate plan is no longer up to date.

Telling Them About Your Estate Plan. Whether or not you give them a copy of your estate planning documents, it’s a good idea to tell them about the major provisions of your plan – e.g., whether it contains a Trust or only a Will; important instructions regarding major bequests, special needs provisions, etc.; your wishes regarding health care and end-of-life decisions; and your memorial instructions.

You should also tell them where to find your estate planning documents and other important papers and information, and be sure they understand that your Trust or Will provides for them to receive “ fair and reasonable compensation ” for serving as your fiduciary.

Sharing Other Important Information. The list of important documents can go well beyond the contents of your estate plan. For your fiduciary to fully administer your estate, their needs for information might include the following:

How to reach your professional advisors

Estate planning attorney
Other attorneys
Bank
Investment advisor
Tax professional
Life insurance agent
Home/auto insurance agent

Where to find your account credentials

Online banking
Banking software (e.g., Quicken or QuickBooks)
Credit cards
Mortgage account
Investment accounts
Retirement accounts
Social media

Where to find other important documents

Tax returns
Personal property memorandum
Life insurance policy
Vehicle titles
Funeral instructions

Other important information

Combination to your safe (if you have one)
Your social security number(s)
Resources that will help them carry out their duties (e.g., see our Successor Trustee Handbook and Personal Representative Handbook

For your fiduciary’s benefit, we recommend keeping a “cheat sheet” with your estate planning documents that summarizes all of this information. Because one of the most challenging aspects of their role is the detective work involved in tracking down assets, liabilities, and beneficiaries, ensuring that your fiduciary has the information they will need goes a long way toward ensuring an efficient administration of your trust or estate.

A 529 Plan Can Help Cover the Growing Costs of a Child or Grandchild’s Education

Fri, 14 Jun 2024 00:59:13 GMT

A useful tool from its inception, the 529 concept has improved as the scope of its permitted use has grown.

A 529 or “qualified tuition” plan is federally authorized savings plan that you can use for a child's or grandchild's college tuition and other educational expenses. In most states, contributions to the plan are tax deductible (state), and the earnings in a 529 account are not subject to federal income tax.

Here are the features of AZ529: Arizona’s Education Savings Plan :

offers parents, grandparents, and students an opportunity to save for “qualified education” expenses – tuition, books, and room and board – in a tax-deferred manner;
can be used to pay for college, vocational and workforce training, apprenticeships, and private K-12 education;
grows tax-free; withdrawals are taxed only if used for purposes outside the scope of the plan;
offers an Arizona income tax deduction for contributions of up to $4,000 for married couples filing jointly and up to $2,000 for individuals; and
can feature a variety of investment options, from FDIC-insured CDs to mutual funds.

You are not restricted to your state’s plan. If the plan of another state is a better fit for your situation, you are free to select it.

529 IMPROVEMENTS

In its original form, dating back to 1996, a 529 plan could be used only for college or other post-secondary-school costs.

Private K-12 Tuition. That continued to be the case until 2017, when the Tax Cuts and Jobs Act significantly expanded the scope of "qualified education expenses," allowing the withdrawal, in Arizona and most other states, of up to $10,000 per year, per beneficiary, for private K-12 tuition. (Other private K-12 education-related costs, such as books and computers, must be purchased with non-529 funds. Also, costs of homeschooling are not eligible for 529 plan proceeds.)

Student Loan Repayment. In the 2020 SECURE Act, the federal government recognized student loan repayment as a qualifying education expense. You can use up to $10,000 per beneficiary to repay student loans. A 2023 Forbes article describes various limitations and other details .

Roth IRA Rollovers. Starting this year, with implementation of the SECURE 2.0 Act , 529 account owners gained additional flexibility: If your 529 account has unused funds, you can roll them over to a Roth IRA.

This flexibility has a few limitations:

The Roth IRA must be owned by the beneficiary of the 529 account – i.e., the child or grandchild for whom the education saving was intended.
The 529 must have been open for more than 15 years before it can be rolled over to a Roth IRA.
The total amount of the rollover is limited to $35,000.
The Roth IRA rollovers are subject to the same annual contribution limits that apply to direct contributions – e.g., $7,000 per person for 2024 – minus any contributions that the beneficiary makes directly.
Rollover amounts are also affected by the beneficiary’s earned income: The amount of the rollover cannot exceed the beneficiary’s earned income for that year.

Special Needs Education. For children with a disability, the federal ABLE Act allows 529 plans to be re-purposed and rolled over to a state-specific ABLE account, which is a type of savings account for people with special needs. Money in an ABLE account can be used to pay for certain types of “qualified expenses,” e.g., education, housing, transportation, job training and support, assistive technology, health and wellness, financial management, and legal fees.

Before initiating a rollover from a 529 plan to an ABLE account, you should consider the potential benefits and risks, including these:

Funds in an ABLE account generally do not affect a beneficiary’s eligibility for Medicaid or other federal benefits (although accounts with more than $100,000 may affect a person’s eligibility for SSI).
Money saved in 529 plans is protected from Medicaid payback (i.e., the government is barred from seeking repayment of Medicaid costs from a 529 plan that benefits a person with special needs who passes away.) In contrast, in such situations, the government can seek payback from an ABLE account.
The ABLE rollover amount counts toward the account’s yearly contribution limit ($18,000 in 2024). Before making a rollover, you will want to confirm that it will not cause the account to exceed its limit for the year.

You can read about Arizona’s program, “AZ ABLE,” at az-able.com .

ESTATE TAX PLANNING

Owning a 529 account can be a useful tool, as the money it contains is exempt from federal estate tax.

Also, a 529 plan contribution is treated as a gift to the beneficiary. Because contributions of $18,000 or less in any year are excluded from gift tax, you can use your yearly contributions to max out the gift tax exclusion.

You can front-load a 529 by making a lump-sum contribution of up to $90,000 – $18,000 per year (2024 limit) for five years – without incurring a gift tax. If you are able to seize that opportunity, the value of the account after five years will likely be greater than if you space your contributions over five years.

The estate tax benefits of a 529 are not limited to the account owner. Because 529 plans are eligible for third-party contributions, you can contribute to a 529 plan that your adult child set up for your grandchild.

PLANNING CONSIDERATIONS

You can set up a 529 plan through your investment advisor; using an attorney, at least on the front end, should not be necessary. As a “qualified” account, a 529 is subject to the same transfer limitations as an IRA and cannot be moved into a trust.

Nonetheless, 529 plan ownership should be factored into your overall planning and periodic estate plan reviews, so that, when you pass away, the plan can be easily transferred outside of probate. You should designate a back-up owner to administer the account in case you die prematurely, and you should name a back-up beneficiary in case the primary beneficiary dies before the account is exhausted.

For parents and grandparents, a 529 plan offers significant benefits, without any apparent drawbacks. To explore your plan options and strategies, contact your investment advisor.

A Spousal Lifetime Access Trust (SLAT) Offers Many Benefits, Few Drawbacks

Thu, 16 May 2024 23:23:18 GMT

A SLAT provides a trifecta of asset protection, estate tax avoidance, and continued access to personal assets.

Achieving Estate Tax Savings and Asset Protection Through a QPRT

Fri, 19 Apr 2024 20:06:40 GMT

For owners of valuable residential real estate, a QPRT offers an attractive way to transfer it to their beneficiaries while continuing to occupy the home.

For many couples and individuals, their homes (primary or second) make up a substantial portion of the value of their estate. In larger estates, the existence of residential property poses estate tax considerations and, in the event of a lawsuit or creditor claim, exposes the property to seizure by third parties.

Protecting valuable residential real estate can be achieved through the use of a “qualified personal residence trust” (QPRT) — a type of irrevocable trust that allows the creator of the trust (or “grantor”) to transfer their primary or second home out of their personal estate. Such a transfer offers to the grantors (and, ultimately, their beneficiaries) at least two important benefits: estate tax savings and asset protection.

CREATING A QPRT

Here are the basic steps: The owners of the home set up a QPRT, obtain an appraisal of the real property, and then convey into the QPRT the ownership of the home as a gift, for a specific, predetermined number of years, or the “term.”

The length of the term varies from case to case, based primarily on the grantors’ age and health. For example, a couple in their sixties and in good health might designate a 10- or 15-year term.

After the house has been gifted into the trust, the grantors can continue to live in the house, rent-free, for the duration of the term.

The value of the grantors’ rent-free use is known as their “retained interest.” What is the value of living in a $5 million house rent-free for 15 years? At a 6% annual return on investment, that value could easily exceed $4 million over the term of the QPRT.

(When the term expires, the grantors have two residential options: They can move to another residence, or, if they have made a paid rental arrangement with the beneficiaries, they can stay put.)

Discounted value. The projected value of the property at the end of the term is known as the “remainder interest,” an amount that, at the inception of the QPRT, is calculated based on:

the length of the term (the longer the better, within limits – see “Timing” below);
the amount of the grantors’ retained interest (the more the better); and
the property’s discounted fair market value (the lower the better).

The discounted value stems from two valuation factors recognized by the Internal Revenue Code (IRC):

restrictions on who, at the end of the term, can own the property (i.e., only the beneficiaries named in the QPRT); and
restrictions on when the property can change hands (in our example, 10 or 15 years into the future).

A key factor in determining the amount of the discount is the prevailing IRC Section 7520 interest rate (at the time of this article: 5.2%).

Timing. A key planning objective is for the term to expire before both grantors pass away. The longer the term, the steeper the discount on the property’s remainder value; however, if the grantors die before the end of the term, the entire value of the property gets pulled back into their estate. That is why, when establishing the term, it is important to consider the grantors’ ages and health conditions. It is also a reason that the QPRT strategy declines in potential value as the potential grantors approach end of life.

BENEFITS

Estate tax savings. Consider this example: John and Mary own a home that has a current appraised value of $5 million. They create a QPRT with a 12-year term and convey their home into it. Twelve years later, the property’s market value has increased, by an average of 5% per year, to nearly $9 million. Because the residence was held in an irrevocable trust, the $4 million gain that occurred during the QPRT’s term will be estate tax-free. The grantors’ gift tax liability will reflect only the gain that occurred before they gifted the home to the QPRT.

Asset protection. If the grantors are sued during the term of the QPRT, the home is creditor-protected. They no longer own the property; the trust does.

That is an important consideration for couples whose primary residence makes up a significant chunk of their total estate, as the primary residence is one of the hardest assets to protect from creditors.

RISKS

Whether your objective is estate tax avoidance, asset protection, or both, a qualified personal residence trust can be an effective planning strategy.

A QPRT is not without its risks, however:

It is an irrevocable trust, and once you have set it up and funded it, you cannot cancel it or change its terms.
The term of the QPRT is based on assumptions regarding the grantors’ life expectancy; if both grantors die before the expiration of the term, the transferred real estate returns to the grantors’ estate and increases the possibility of estate taxation.
Because the house becomes the property of the trust, the grantors cannot refinance it or use it as security for a loan.

Before you convey your residence to a QPRT, you should fully explore these and other factors with your estate planning attorney and weigh them against the benefits you intend to achieve.

We Have Lift-Off: A Mentoring Checklist for Parents of Adult Kids

Wed, 20 Mar 2024 17:21:15 GMT

Whether your kids’ launch will succeed or fail is ultimately up to them, but helping them anticipate and navigate life’s challenges is a valuable parental role.

The results of a recent online search included this eye-catching title: “ Has Google Replaced Mom and Dad? ”

In addition to being somewhat prophetic (it was written in 2012), the article’s insights could lead one to a sobering conclusion – that, in contrast to preceding generations, children of the Internet era are far less likely to view their parents as their primary source of information, knowledge, and wisdom.

One of the consequences of a child’s attention shift from parents to smartphones is that, increasingly, we hear parental laments that their kids have left the nest ill-equipped in the basic practices and disciplines that allow them to function as an independent, responsible adult.

Whether your kids’ launch will succeed or fail is ultimately up to them, but you can still help them anticipate and navigate life’s challenges. Following is a list of 10 fundamental conditions and mentoring topics that you might use and expand to help your adult child – single or married – get and keep their house in order.

Financial record-keeping – use an app such as Quicken and enter purchases and deposits daily.
Budget – create one that encompasses all sources and uses of cash and credit, is based on historical spending/income data (see item 1) or at least reality, and is actively monitored and managed.
Taxes – file federal and state returns and pay taxes, on time, and don’t minimize tax withholding just to maximize take-home pay.
Savings – put away 10% or more of income, for rainy days, emergencies, mortgage down payment, major purchases, investment/retirement (show them the compound interest calculator at www.investor.gov ); max participation in employer’s 401(k).
Debt management – strive for zero personal debt except for home mortgage, understand the real cost of the minimum monthly payment, and build debt retirement into the budget (see item 2).
Credit card use – it’s a convenience, not an income stream.
Everyday purchases – pay cash for everything (or use a credit card only to make purchases that can be paid in full each month), know the difference between a need and a want, avoid impulse buying.
Major purchases (including cars, large appliances, home improvements, and education) – anticipate them (make a list) far enough in advance that they can be purchased with saved funds, not installment debt (if they can’t afford the saving, they can’t afford the loan payment).
Estate plan – at the very least, a will (maybe a trust), financial power of attorney, and healthcare directives.
Insurance – health, life, auto (including UM/UIM coverage) and maybe an umbrella policy.

In a healthy relationship with an adult child, the parent is still a parent, but the child is no longer a child. Your relationship can become more peer-to-peer, and your role in their life can progress from disciplinary to advisory.

If your child is still a minor, instilling in them the values implied in the preceding list can help them enter adulthood on the right foot and a firm foundation.

If they have already left the nest but are showing signs of a malfunctioning launch, a list like this one can serve as a valuable mentoring tool that will help you share your knowledge and experiences and help them make wise decisions en route to a successful life.

Asset Protection: Should a Holding Company Own Your Business?

Mon, 12 Feb 2024 22:31:41 GMT

The use of a holding company offers an extra layer of legal separation between you and your business entities and assets.

Over the years, numerous strategies have been developed to help business owners, professionals, and owners of vulnerable assets protect their interests against litigation, creditor claims, and other future legal and financial threats.

In our asset protection practice , we utilize a variety of legal structures, special trusts, and other planning vehicles to help our clients achieve their legal and financial goals and achieve peace of mind.

That assortment of asset protection options includes a long-standing, battle-tested option: the holding company.

Simply stated, a holding company is a legal entity – typically an LLC or a corporation – that owns, in whole or in part, multiple “subsidiary” or “operating” entities.

Creating a holding company and subsidiaries achieves legal separation between the owner(s) and their downstream entities and assets and, as we discuss below, reduces owner liability if one of the entities encounters legal or financial problems that otherwise might expose the owner personally.

As its name suggests, a holding company’s primary purpose is to hold other companies and/or business assets. In its simplest or “pure” form, it does not manufacture a product, provide a service, conduct any normal business operations, or even closely manage its subsidiaries’ operations; it simply owns – hiring and overseeing the upper management (e.g., you) for each entity, making major policy decisions, and perhaps buying, selling, and dissolving its subsidiaries.

(Not all holding companies are so pure. A “mixed” holding company or “holding-operating” company wears two hats, conducting its own business operations while also owning subsidiaries. An “immediate” or “intermediate” holding company might be pure or mixed and is owned by another holding company that is higher on the food chain. And a “personal” holding company is an entity for which 50% of the ownership rests with five or fewer individuals and at least 60% of its income is passive.)

Small Businesses. Many business owners associate the holding company concept with very large corporations and conglomerates and mistakenly conclude that it is not for them.

In fact, a holding company can be a very effective tool for private companies and individual entrepreneurs. Consider two common scenarios:

You own a retail business. You might form two LLCs – an operating entity to own the store, and a holding entity to own the LLC that owns the store. If you open another store, you create another operating LLC that is owned by the holding LLC.
You own a sand-and-gravel operation that includes trucks used for deliveries. You might form three LLCs: one to own the sand-and-gravel operation, another to own the trucking operation, and a third (owned by you) to own both of the operating entities.

Liability Protection and More. There are many reasons why holding companies are used (you can see a comprehensive list in an article by Wolters Kluwer), but in the context of asset protection, the primary benefit is reduced liability – for you and for each entity.

The debts of each subsidiary belong to and are limited to that subsidiary. If a subsidiary goes bankrupt and is the subject of an adverse judgment, its creditors generally have no recourse against the holding company, its owners, or another subsidiary. The worst-case scenario is that the holding company suffers a capital loss and a hit to its net worth.

If a company has multiple types of assets, each major asset can be owned by a separate operating entity. To take our sand-and-gravel business a step farther, separate subsidiaries might exist for the basic business and its underlying real estate, front-end loaders, screening infrastructure, delivery trucks, and intellectual property (proprietary processes, logos, etc.).

Another structuring option is for the holding company to own the major assets used by each subsidiary and to lease them back. If a judgment is entered against a subsidiary, it would own few, if any, vulnerable assets that the plaintiff or creditor could pursue.

Also, as Investopedia points out , holding companies also make it easier to escape unfavorable changes in state tax policies. If your current state imposes higher business taxes, the holding company can relocate to a more business-friendly environment while continuing operations in the original jurisdiction.

Drawbacks. The asset protection benefits should be weighed against a variety of potential drawbacks. The Investopedia article points out multiple considerations, including these:

entity formation and ongoing compliance costs (we should also mention the burden of Corporate Transparency Act reporting requirements for each entity);
greater organizational complexity (the use of holding companies and subsidiaries adds a degree of difficulty not found in a single-entity structure); and
roadblocks to business growth (investors and lenders might find it more difficult to assess the financial health of the enterprise).

Conclusion. As is the case with most legal strategies, the holding company option should be evaluated in the context of your specific situation and business and legal objectives.

An experienced business or asset protection attorney can explain to you the major considerations and describe your options in creating a multi-entity ownership structure that will best preserve your major assets against a future legal threat.

Should your revocable trust own your LLC?

Wed, 15 Nov 2023 15:54:58 GMT

An LLC interest held outside of a trust is considered personal property and subject to probate upon the owner's death.

You can spare your successor trustee that pain, and spare your estate the cost of probate, by transferring your LLC interests to your trust. Doing so can help you achieve your major estate planning objectives and pave the way for a smooth and hassle-free transition of your LLC to your beneficiaries.

Here are common steps for conveying your LLC ownership to your trust:

Be sure that your LLC’s operating agreement allows you to transfer your interest to a trust. If it does not, you will need to amend it, though most operating agreements include exceptions that allow for the transfer of membership interests to revocable trusts for estate planning purposes.
If your operating agreement sets forth any specific requirements for transferring your interest, follow them.
If your LLC ownership predates the creation of your trust, your trust agreement should include an “assignment of interest” from you to the trust.
Conveying your LLC ownership to your trust might require you to amend your Articles of Organization and/or other records on file with the Arizona Corporation Commission or the appropriate governing agency in your state.
If you form the LLC or acquire an LLC interest after you set up your trust, your trust should be named as the owner of your membership interests ab initio ("from the beginning").

If your interest is in a multi-member LLC, your transfer may need to be approved by the other members, particularly if your operating agreement has any restrictions regarding transfers of ownership. Approval might be in the form of a signed resolution that acknowledges and accepts the transfer of your LLC interest to your trust.

While acknowledging the advantages (described above) to having a trust-owned LLC, it is important that you carefully evaluate the operating agreement and any buy-sell agreements and transfer restrictions to avoid unforeseen consequences. Working with a knowledgeable attorney can help you navigate this process and make informed decisions for your business.

Funding your trust: a crucial step in achieving the benefits of a sound estate plan

Wed, 18 Oct 2023 18:27:33 GMT

Creating a trust is of little benefit if your assets have not been properly transferred to it.

The situation we’re about to describe sounds like modern-day folklore, but it is painfully true and far more common than one might realize.

Consider the story of John and Jane. Because of some recent changes in their family and business situations , they wisely scheduled a meeting with an estate planning attorney for a review of their 10-year-old trust and related documents. The review revealed that, while their trust otherwise seemed to be in order, it was missing a key element: assets.

Imagine their dismay when they learned that the estate plan in which they had invested so much thought and legal fees a decade earlier was an empty shell:

If either John or Jane (or both) had passed away, most of their personal property, bank accounts, vehicles, collectibles, securities, business assets, and other investments would have been subject to probate, defeating their primary objective in creating their trust.
If either had become incapacitated, there would have been no assurance that John or Jane’s assets would be properly managed or deployed for their care.
The “spendthrift” provision that they had included to restrict their irresponsible adult child’s access to his inheritance would have been totally ineffective.

Fortunately, their story had a happy ending. As an unintended benefit of initiating their estate plan review, their new attorney inventoried their assets and retitled them as appropriate, ensuring that everything that belonged in their trust was actually conveyed to it.

Happy endings are not typical in these situations. The defects in do-it-yourself trusts, trusts prepared by a third party for a low fee, and other estate planning shortcuts are often exposed only when the trust is belatedly put to the test.

FUNDING YOUR TRUST

The following discussion covers various methods of conveying the types of assets most commonly owned by trustors (also known as "settlors").

Personal Property. Since tangible personal property, such as household furnishings, jewelry, etc., is without any recognized documentation of title, funding of this property is approached as a simple assignment from the settlors to the trustees. However, since this property might change frequently, and continuous additional assignments would be impractical, the initial assignment should cover “any and all tangible personal property now owned or hereafter acquired.”

Bank Accounts/ Taxable Investment Accounts. All retail bank accounts, such as checking and savings, and fully taxable investment accounts should be retitled into the trust. This is typically accomplished by presenting the bank or account custodian with a “Certification of Trust” that lists the minimum information that such institutions need in order to deal with the client as a trustee instead of an individual.

The vast majority of trusts are grantor trusts, meaning they are associated with the owners’ social security numbers, so there is no legal necessity to close existing accounts and open new ones for the trust. Nevertheless, in recent years, many banks and credit unions have resisted simply retitling existing accounts into a trust, so the opening of new accounts may be unavoidable.

Life Insurance. In most cases, insurance on the settlors’ lives will be made payable to the trust. If the settlors are the owners of the insurance, no changes other than the change of beneficiary need be made, and the settlors retain all ownership rights.

Retirement Benefits. Qualified accounts, such as a IRAs, 401(k)s, SEPs, etc., cannot be transferred into a trust while the owner is still alive; therefore, such assets have to be addressed through beneficiary designations.

Certain types of trusts can be named as the beneficiary, though transferring a qualified asset that way is complicated for both the successor trustee and the account custodian, so it is typically done only to address certain situations (e.g., beneficiaries who are minors, spendthrifts, or incapacitated adults, or who rely on needs-based government benefits).

If your beneficiaries do not fall into one of those categories, it is much easier to pass a qualified account to them outside of the trust via direct beneficiary designation.

Real Estate. Transferring real property into a trust occurs in one of two ways:

a present transfer of interest via some form of warranty deed; or
a transfer on death via a beneficiary deed.

The former is generally preferred, as it allows the successor trustees to easily manage the property in the event of the owner’s incapacity or unexpected death, but the latter can be a better option in the presence of complicating factors.

For instance, transferring a property into a trust almost always triggers the due-on-sale clause under a mortgage. Therefore, for real estate that is not owned free and clear, a beneficiary deed may be the better option to avoid probate without risking foreclosure.

Other sorts of property interest, such as a leases or rights of first refusal, are typically transferred into a trust via assignment, but real estate law is complicated, so be sure that your attorney is qualified to handle such transfers and has a full picture of what you own.

CONCLUSION

As this article hopefully has made clear, there are two essential steps related to setting up a trust: creating it and properly funding it.

By the time your trust is ready to execute, you will have invested a great deal of thought and effort in its creation. Do not sabotage your thoughtful planning by ignoring or taking shortcuts in the funding process.

Firm co-founder John R. Hoopes passes away at 71

Wed, 20 Sep 2023 17:05:32 GMT

Hoopes Adams & Scharber co-founder John R. Hoopes passed away September 14, 2023, at the age of 71.

Best Lawyers® selects Ryan Scharber for 2024

Thu, 17 Aug 2023 20:33:39 GMT

Best Lawyers in America has selected Chandler estate planning attorney Ryan Scharber for 2024. Ryan is an honoree in the categories of Trusts & Estates and Trust & Estate Litigation.

Irrevocable trusts in Arizona: Trustee reporting and notification requirements

Tue, 18 Jul 2023 21:24:11 GMT

If you are the successor trustee or a beneficiary of an irrevocable trust, you should be aware of some important reporting provisions contained in the Arizona Trust Code.

The most common type of trust in a typical estate plan is a “living” or revocable trust, which is usually controlled by the grantor or “trustmaker” (i.e., the person or couple who created the trust) and can be changed at any time during their lifetime.

Less common is an irrevocable trust, and that is the focus of this article.

A trust becomes irrevocable in two basic ways:

It is made irrevocable from its inception in order to achieve certain planning objectives, such as estate tax savings, creditor protection, gifting, or life insurance ownership.
It starts out as a revocable trust and becomes irrevocable upon the death of the trustmaker or their surviving spouse.

If you are the successor trustee or a beneficiary of an irrevocable trust, you should be aware of certain notification requirements and rights that the Arizona Trust Code provides, including the following:

The trustee must notify the trust’s beneficiaries that the trust exists, or has become irrevocable, within 60 days after the trust’s creation date or the date on which it became irrevocable (see “Notice Requirements” below).
After a beneficiary becomes aware of the trust, they can request from the trustee, and trustee must give them, a copy of the portions of the trust agreement that pertain to them.
Beneficiaries are then entitled to receive information about how the trust is being administered, including the right to receive annual reports of the trust’s assets, income, expenses, distributions, etc.

Annual Reports. The trustee of an irrevocable trust must give each “qualified beneficiary” of the trust an annual report, unless a beneficiary states in writing that he or she does not wish to receive the report.

If the trust is revocable, the trustee is obligated to give the annual report only to the trustmaker, i.e., the person who created the trust. In most cases, a revocable trust’s trustee and trustmaker are the same person or people. This requirement becomes a factor if the trustmaker resigns as trustee and, while they are still living, a successor trustee manages their trust.

The annual report to qualified beneficiaries must include a list of trust assets and summary information on trust liabilities, receipts, disbursements and, if practical, the fair market value of the trust assets. Determining who is a qualified beneficiary occurs when a report or other required notice is issued.

The three types of “qualified beneficiaries” consist of beneficiaries who:

are authorized to receive current distributions of income and/or principal from the trust;
will receive principal and/or income from the trust after a certain event has occurred (e.g., the child or children who step into the shoes of a beneficiary who passes away, etc.); and
would receive trust property and/or income if the trust terminated.

Notice Requirements. Within 60 days after (a) the trustmaker creates an irrevocable trust or (b) a revocable trust has become irrevocable, the trustee must notify the qualified beneficiaries of the following:

the trust’s existence;
the trustee’s name, address and telephone number;
the right of the beneficiary to request a copy of relevant portions of the trust instrument; and
the right of the beneficiary to receive the annual report of trust property described above.

This notice requirement applies only to (a) a trustee who becomes a trustee on or after January 1, 2009; (b) an irrevocable trust created on or after January 1, 2009; and (c) a revocable trust that becomes irrevocable on or after January 1, 2009.

The trustee must comply with the notice requirements before the trustee can split a trust into two or more trusts or combine two or more trusts into one trust, unless the trust agreement itself provides that the notice is not required. For example, if a revocable trust for a married couple provides that one or more trusts, such as a Family Trust and Survivor’s Trust, must be established and funded upon the death of the first spouse to die, qualified beneficiaries must be given notice when those new trusts are created.

Again, this notice requirement does not apply if the trust agreement itself provides otherwise. These notice requirements may be restricted or removed entirely by an amendment to a revocable trust. If the trust was already irrevocable as of January 1, 2009, the trustee must comply with these notice requirements, unless some other provision in the trust agreement provides a way around them. Again, your estate planning attorney’s careful review of a trust that is irrevocable as of January 1, 2009, is necessary to determine whether anything can be done to eliminate these notice requirements.

Non-Judicial Modification. The Arizona Trust Code makes it easier to modify a trust without a beneficiary having to go to court. Any trustee, heir, devisee, child, spouse, creditor, beneficiary or other person who has an interest in (or a claim against) a trust estate may enter into a binding non-judicial settlement agreement with respect to any issue involving a trust, provided the settlement agreement (a) does not violate a “material purpose” of the trust and (b) includes terms and conditions that a court could properly approve.

This provision applies to a trust that became or will become irrevocable on or after January 1, 2009. (Identifying the “material purposes” of a trust after the fact can be tricky; statements in the trust itself that certain provisions are “material” may be added by an amendment to a revocable trust.)

Trust Protector. In recent years, a growing number of persons creating irrevocable trusts have included provisions that appoint an independent party (a friend, attorney, CPA, other professional, etc.) as a “trust protector,” to provide flexibility in exercising discretionary powers over the trust, such as amending the terms or removing and appointing successor trustees. ( See related article, “ Should You Name a Trust Protector? ”)

In the past, the use of trust protectors has been limited due to uncertainty over whether, and to what extent, a trust protector has fiduciary duties to the beneficiaries of the trust, i.e., duties similar to those of a trustee of the trust. The Code eliminates this uncertainty in favor of saying a trust protector is not a fiduciary and, thus, makes it easier to appoint and use trust protectors.

Conclusion . If you are a beneficiary of an irrevocable trust and are unclear as to whether you are receiving the information to which you are entitled, you should consult your estate planning attorney.

If you are the trustee of an irrevocable trust, you or your trust attorney should review the provisions of the trust to determine whether, and to whom, you have a duty to report and provide notice. Failure to properly carry out the reporting requirements imposed by the Arizona Trust Code can subject the trust to needless expenditures and, in some cases, subject you to personal liability.

In either case, the prudent use of an experienced trust attorney can help ensure that the provisions of the trust are honored and that all statutory rights and requirements are observed.

Reasonable compensation for Arizona trustees and personal representatives

Fri, 16 Jun 2023 15:57:37 GMT

For individuals serving in a fiduciary role, reasonable levels of compensation vary from case to case, and their determination is very fact specific.

“Can I get paid? If I can, how much?” Those are among the most common questions we receive from individuals who, perhaps for the first time, are serving as the trustee of a family member’s trust or as personal representative of their estate.

Let’s take those two questions in order.

The first one is easy: Yes – Arizona law provides that a trustee (see A.R.S. § 14-10708 ) or personal representative ( A.R.S. § 14-3719 ) is legally entitled to “reasonable” compensation for their services.

The answer to the second – how much? – is more elusive. We will devote most of this article to a general discussion of the factors that come into play.

Before we get into that, let’s clear the air on something. If you don’t want to be paid for your efforts, that’s up to you. However, please don’t feel that wanting to be paid for your services reveals some sort of character defect. Serving as a trustee or personal representative (PR) – let’s use the catch-all term “fiduciary” – is an important job that needs to be done right. Depending on the size and nature of the decedent’s assets and liabilities and the beneficiary situation, a conscientious fiduciary is likely to devote many hours to unfamiliar duties, at inconvenient times, under emotionally trying conditions and close scrutiny, and it would be unreasonable for anyone to expect them to do it for free.

Reasonable Compensation

Many factors influence what is “reasonable,” and their impact on fiduciary compensation is very fact-specific and will vary dramatically from case to case. Let’s take a look at some of those factors.

What the Decedent Intended. The will or trust might specify what the fiduciary’s compensation will be – an hourly rate, a percentage of the value of the assets, or some other standard. If no specific number is mentioned, the statutory standard of “reasonable” might be used. In uncommon cases, the will or trust might prohibit compensating the fiduciary altogether.

In any event, the decedent might not have the final say. The statute governing trustee compensation provides that, in certain circumstances, “the court may allow more or less compensation.” Similarly, the statute governing PR compensation states: “If a will provides for compensation of the personal representative and there is no contract with the decedent regarding compensation, [the PR] may renounce the provision before qualifying and be entitled to reasonable compensation.”

What Is Customary. In a probate estate, where the court approves the method or rate of payment to the PR, the court will try to determine what compensation is “customary” for estates of a similar nature and that are administered by a PR of similar experience. The determination might start with a fee structure of an attorney, paralegal, or professional fiduciary and perhaps discount it as appropriate to reflect the non-professional PR’s relative lack of skill or experience.

Two resources mi ght give you a different starting point and “comp”:

the fee schedule of the Maricopa County Public Fiduciary, and
an online tool (to which we cannot attest), “ AZ Compensation Calculator ,” provided by EstateExec.

The Size and Nature o f the Estate. Some estates require more time and effort than others. If the assets consist mostly of bank deposits and securities and there are few debts beyond a few months’ bills, a “standard” hourly rate and the expending of relatively few hours will keep the fiduciary compensation fairly low.

Conversely, if the estate has diverse holdings, such as business or real estate ownership, and/or a long line of creditors or plaintiffs, and/or assets that involve high levels of care or risk, that will justify compensation on a greater scale.

Degree of Difficulty. The size and nature of the estate might be relatively simple, but other factors can still result in high fiduciary compensation:

If the fiduciary lives in another state, travel time and cost reimbursements could be substantial (trustees are entitled to reimbursement for any expenses they incur in the course of performing their duties).
If the fiduciary’s responsibilities force them to take time away from their job or business, they should expect to be reimbursed for their lost wages or profits.
If the decedent left behind a lot of children or other beneficiaries, communicating with them and sorting out their residue from the estate will make more work for the fiduciary.
If the decedent left behind children or grandchildren who have “issues” or special needs, ensuring their continuing attention and care will likely fall on the fiduciary.
If an heir or beneficiary is looking over the fiduciary’s shoulder and challenging their every move, the fiduciary should expect to be paid for the extra time and trouble. Ditto if the decedent’s children don’t like each other, and ditto to the third power if one of the children is the fiduciary.

Who’s Doing the Work. If the fiduciary hires a law firm to manage the trust or probate estate, that will justify the payment of fees paid at a professional rate (to the law firm), and it will reduce the hours of work performed by the fiduciary. In that scenario, if the will or trust calls for the fiduciary to be paid a percentage of the value of the estate, the court would likely downsize the fiduciary’s compensation to reflect the cost of services performed by the professionals who are actually doing the work.

Closing Comments

Record-keeping. If it hasn’t already become clear, keeping good records is essential if you are to justify your fiduciary fees and repayment of expenses. A daily diary of time and services will prove invaluable in filing your compensation request with the probate court or fending off challenges from beneficiaries who view every nickel paid to you as a pro rata cut in their distribution.

The website of the aforementioned EstateExec suggests these contents of your diary (per day, per task):

nature of the task (e.g., drove to bank to get medallion stamp for IBM stock)
amount of time spent (e.g., 2 hours)
hourly rate for the task (e.g., $25/hour)
results (e.g., sold the car for Blue Book value)
parties involved in the task
type of asset

Priority of Payment. To draw to a close on an upbeat note, know that, in Arizona, if there’s not enough money to satisfy all of the estate’s obligations, fiduciaries get paid first.

As set forth in A.R.S. § 14-3805 , here is the priority of payments from an estate or trust:

Costs and expenses of administration
Reasonable funeral expenses
Debts and taxes with preference under federal law
Reasonable and necessary medical and hospital expenses of the last illness of the decedent, including compensation of persons attending him
Debts and taxes with preference under the laws of this state
All other claims (e.g., unsecured creditors)

And then, whatever is left goes to heirs and beneficiaries.

Delegation. If by this time you have concluded that no reasonable amount of compensation can justify your shouldering the burden of serving as a trustee or PR, consider delegating your responsibilities to a law firm (such as Hoopes Adams & Scharber) that is experienced and efficient in this area and can serve as your legal advocate and defender. To discuss a probate or trust administration matter with Ron Adams or Ryan Scharber , call us at 480-345-8845.

Stress test: Due diligence in a business sale

Fri, 19 May 2023 16:14:15 GMT

For many sellers, withstanding the challenges of the due diligence phase depends on keeping their emotions in check and anticipating the buyer’s requests for information.

If you have been through the sale of a business, you have likely experienced the tension, tedium and conflict of “due diligence” – a key phase of the deal during which the buyer truly gets to know the business they are buying.

If the sale of your business will be your first such transaction, brace yourself for a potentially bumpy ride, as the euphoria of a signed letter of intent ( see related article ) gives way to the aggravation of the buyer’s seemingly never-ending requests for documentation.

Anticipating what the buyer will require, perhaps with the guidance of a business broker or M&A intermediary, can help the seller smooth out the road. When the buyer issues their umpteenth request for meaningless documents or information, the seller’s ability not to take such requests personally, and to remember that the buyer really does want to buy the company and this is “just business,” can keep the deal moving forward.

The Benefits of Due Diligence. From the buyer’s perspective, due diligence is the process of ensuring that, before a deal is finalized, things actually are as they appear to be.

While it takes work, due diligence helps squeeze risk out of a sale, benefiting the buyer and, in many cases, the seller. For the buyer, the process safeguards against buying a business that doesn’t measure up to the seller’s representations. For the seller – particularly in deals involving earnouts, seller carrybacks, or other post-closing obligations – due diligence can reveal potential problems that would surface only after the deal is done.

Document review and the answers to due-diligence questions are critical. It is a complex, time-consuming process, but with so much on the line with most business sales, neither buyer nor seller should make a major decision without a solid foundation of accurate information.

Preparation . While the scope of information required by the buyer is typically very broad, in most deals the central focus is on the subject company’s financials. That should come as no surprise; the purchase price is usually based on some multiple of the company’s net revenues and adjusted earning capacity, and the buyer will want to know that they are getting what they are paying for.

The financials also serve as a roadmap to the subject company’s operations, which will lead to questions. The answers will spark more questions, and that back-and-forth, rooted in the financial records, is a major contributor to the length and emotion of the due-diligence phase.

Here is a short (and incomplete) list of basic records and reports that will provide the buyer’s starting point for financial due diligence:

income statements, for every year
balance sheets, for every year
sales data, for every year
accounts receivable aging
bad debts
capital equipment lists (age, condition, and value)

Your income statements and balance sheets should show both actual and “recast” financial information. By recasting your financial statements, you are able to show your business’s true earnings and net worth, in a form that buyers want to see, cleansed of personal expenses and assets that you might have run through the business.

(To take their financial review a step farther, your buyer might perform a “quality of earnings” review. Such reviews are common in larger transactions, especially where the buyer is a private equity firm or other type of professional buyer. A quality of earnings report helps the buyer evaluate the business’s true profitability by adjusting EBITDA – earnings before interest, taxes, depreciation, and amortization – to reflect any non-recurring revenues and expenses.)

After that, the types of information that a buyer (or seller) may request varies with the type and size of the business and the specifics of the deal. Here is a general list of non-financial issues and information requests that are likely to arise during due diligence.

Employees : organizational structure, employee census (including position, hire date, DOB, wages/salaries, benefits, pending retirement), employee manuals and personnel policies, benefit plans, and retirement and pension plans
Legal issues : entity documents, operating agreements, contracts, licenses, leases, employment contracts, pending litigation, pre-litigation disputes, etc.
Government compliance : tax returns, payroll records and reports, company- and industry-specific issues (federal, state, local), regulatory compliance (e.g., environmental reports), etc.
Customer lists
Supplier lists and agreements
Marketing materials
Data security
Intellectual property : trademarks, copyrights, patents, proprietary processes, operational and procedural manuals
Product and service lines
Insurance policies

For a more comprehensive list of information requests, see a 2019 Forbes article, “ A Comprehensive Guide To Due Diligence Issues In Mergers And Acquisitions .”

As you prepare your business for sale, it’s never too early to start gathering the documents and information that you can anticipate being requested by a sophisticated buyer. Organizing your information in advance heads off surprises, casts you and your business in a positive light, builds buyer trust and confidence, and shortens the due diligence phase en route to a successful closing.

More about Hoopes Adams & Scharber's Business Law practice.

Letters of intent in a business sale: 7 seller FAQs

Wed, 12 Apr 2023 15:52:30 GMT

In a business sale, the letter of intent is a vital document, and sellers should thoroughly understand its purpose and scope.

In most business sales, the deal begins with a discussion between a buyer and a business owner (or the owner’s M&A broker) and moves from the “talking” stage to the “serious” stage when the buyer presents the seller with a “letter of intent” to purchase the seller’s company.

After it is signed by both parties, the letter of intent provides a launching pad for everything that follows, through the negotiation and due diligence phases to the ultimate sale. To help business owners prepare for its arrival and execution, we offer brief answers to seven fundamental questions that, if not frequently asked, should be.

1. What is a “letter of intent”? In a business sale, a letter of intent (LOI) is a buyer-originated document through which the buyer expresses its intent to buy the subject business. It should provide:

a written expression of the parties’ intent to enter into a deal;
an outline of an agreement in principle for the buyer to purchase the seller’s business at an offered price or range and under certain terms;
an expression of the type of transaction, e.g., ownership purchase, asset purchase, merger, or reorganization of some type;
confidentiality protection for the seller;
an outline of the buyer’s financing – whether it will be through third-party financing or the buyer is proposing that the seller carry back some portion of the purchase price;
a timeline for the buyer’s due diligence and closing;
the buyer’s exclusive right to purchase the company during a specified time period; and
a time period within which the parties would strive to enter into a definitive agreement.

2. What is an LOI’s purpose? In the M&A context, the LOI’s fundamental purpose is to formally acknowledge the parties’:

intent to enter into a business purchase or merger, and
good-faith desire to proceed in negotiations.

It bridges the temporary gap between a verbal expression of interest and a definitive purchase agreement. While the LOI provides the basic terms and conditions of the eventual contract, it should acknowledge that negotiations are still in progress.

3. Why is an LOI important? Negotiating the purchase and sale of a business is expensive and time-consuming for both parties, and an LOI can give both parties some assurance that the associated costs and risks are justifiable.

An experienced buyer will not commit time and money to due diligence, analysis, and legal, tax and accounting services unless they believe they have an earnest seller and will have an exclusive right, expressed by a “no shop” clause, to buy the company.

Meanwhile, a prudent seller will not subject its business to the disruption and exposure of the due-diligence process unless the buyer is committed to the deal.

4. Is it legally binding? By its language and content, an LOI can be either binding or non-binding. Given the uncertainty of how a deal will progress, in most cases neither the buyer nor the seller wants to be ultimately bound by the LOI and will state in the LOI that it is non-binding. In that circumstance, either party should be able to walk away from the deal without legal liability.

In rare cases, courts have ruled that an LOI itself can be a binding contract and enforced by the party that wants to move forward, if it contains all the material terms of an agreement and, as one judge wrote, “is complete, clear and unambiguous on its face.” At a minimum, an LOI will usually impose upon the parties at least the obligation to negotiate in good faith toward a definitive agreement.

Also, while the majority of LOIs have provisions that are non-binding (e.g., the buyer must buy the company), other provisions are binding, such as the exclusivity period, confidentiality protection, etc.

5. What should a seller look (and look out) for? Be on the lookout for “poison pills” that some buyers might try to sneak past an unwary seller. Language stating that the parties have agreed to anything should raise a red flag. Also, sellers should be alert to unintended presumptions or default events, such as, “Unless we hear from you to the contrary …”

In addition to vigilance against unwanted language, sellers should expect to see provisions that are common to most well-structured LOIs. In addition to identifying the structure of the transaction, i.e., whether ownership or assets are to be purchased, the parties and their contact information, and the deal’s price and terms, an LOI might address such issues as:

whether it is legally binding or non-binding
confidentiality and non-disclosure protection
exclusivity
guidelines for negotiations
scope and guidelines for due diligence
conditions for closing
governing law.

6. What if I want to make changes before I sign it? An LOI is not a one-way proposition to be dictated by the buyer; rather, it is an agreement between the buyer and seller. It is intended to protect both parties, and the seller has the right to negotiate its terms.

7. What happens after the letter of intent is signed? The signing of an LOI typically triggers the due-diligence period, during which negotiations occur, the purchase agreement is drafted, and the buyer’s requests for company information are satisfied.

When the parties reach the point where the buyer feels comfortable that the seller has portrayed the business and assets as advertised, the parties will then initiate the bulk of the definitive documents through their attorneys.

Keeping It Simple. In contrast to the final purchase agreement, a letter of intent should be relatively brief, focusing mostly on the major issues that will help the buyer and seller reach common ground and justify the risk and expense of pursuing the deal.

More about Hoopes Adams & Scharber's Business Law practice

Ryan Scharber repeats as a Super Lawyers "Rising Stars" honoree

Wed, 05 Apr 2023 20:52:57 GMT

Hoopes Adams & Scharber partner Ryan Scharber has been selected as a Super Lawyers "Rising Stars" honoree (Estate Planning & Probate) for 2023. It is his fifth selection.

Should your LLC be taxed as a subchapter S corporation?

Mon, 20 Mar 2023 15:19:45 GMT

In many cases, an S corp election can reduce each member’s tax liability.

If you are a business owner and you chose the “limited liability company” form of entity, you were probably motivated by three key characteristics of an LLC:

protection from personal liability for the company’s obligations;
relatively little formality or reporting to government entities; and
avoidance of double taxation.

Other popular features of an LLC are its existence as a separate legal entity, apart from the owner(s); perpetuity of existence; flexibility in management structure; and freedom in transferring financial interests.

For the purposes of this article, let’s get back to the subject of taxation.

Tax problem. An LLC is a pass-through entity; that is, instead of paying income taxes, its net profits and losses “pass through” to its member(s) via a Schedule K-1, the contents of which are reported on the individual income tax returns.

That is how LLC members – like partners in a partnership or shareholders in an S corporation – avoid the double-taxation issue that they would incur if they were shareholders in a C corporation.

That’s the good news.

The bad news: As a general rule, each member must pay self-employment taxes on their share of the LLC's profits – to the tune of 15.3% – regardless of whether they actually receive their share of the profits, which have already passed through to them.

S corp election. A popular solution to this dilemma is for the LLC to elect to be taxed as an S corporation. After the election is approved by the IRS (eligibility and process are discussed below):

The LLC pays each member a “reasonable salary” (also discussed below), which replaces the self-employment tax with conventional federal withholding and FICA taxes that are applied only to the salary amount(s). Half of the FICA taxes are paid by the LLC, while the other half is withheld from the members’ paychecks.
The member salaries and employment taxes are deducted from the LLC’s taxable profits.
The net profits (after salaries and employment taxes) pass through to the member(s).
The pass-through profits are still taxable to the member(s), but they are reduced by the salary and payroll tax deductions, and what passes through is not subject to payroll taxes.

Threshold . If your LLC does not generate much (if any) profits, the S corporation election is probably not worth the trouble.

In a single-member LLC, the election starts to make sense when the member’s aggregate self-employment tax burden is at least the same as the tax burden that the LLC would incur as an S corporation.

If a conventional single-member LLC is generating profits of at least $40,000, it’s worth doing the math. If profits exceed $60,000, you are likely to be better off as an S corporation taxpayer paying a reasonable salary to each member.

Reasonable salary. Because the IRS does not specifically define “reasonable salary,” you will be left to make that determination, with the guidance of your tax professional or business attorney.

Consider this standard: If you are involved full-time in the business of your LLC, pretend that you are going to step out of active involvement, and then estimate how much would you have to pay a non-member to take over your job. That would seem to be a reasonable salary to pay yourself now.

Eligibility . To qualify to be taxed as an S corporation, your LLC must meet certain requirements:

formed in the U.S.;
no more than 100 members;
all members are individuals (i.e., not other LLCs, partnerships or corporations);
all members are U.S. residents; and
there can be only one class of membership interest.

The election . S corporation elections are initiated by filing IRS Form 8832 (Entity Classification Election), followed by IRS Form 2553 (Election by a Small Business Corporation) by March 15 of the year for which you wish to begin being taxed as an S corp.

Tax return . After the IRS has approved your election, your LLC would use IRS Form 1120-S (U.S. Income Tax Return for an S Corporation) to report its taxable income or losses. It would also provide each member with a Schedule K-1 that shows their pro-rata share of the LLC’s taxable activity.

Do it right . In theory, an LLC member can initiate the S corp election.

However, to achieve all of the desired benefits of owning an LLC and electing to be taxed as an S corp, seek the guidance of your business lawyer or tax professional, to ensure that the election:

satisfies the IRS,
aligns with the LLC’s operating agreement and other governing documents, and
supports the interests, objectives, and tax situation of each member.

To determine whether an S corp election makes sense for your LLC, contact Ron Adams or Ryan Scharber .

Right to occupy: After your death, would your spouse be able to stay in your home?

Mon, 13 Feb 2023 15:38:31 GMT

A right-of-occupancy provision in your trust can satisfy two competing desires: for your adult kids to inherit your home and for your spouse to live in it.

Does this really happen? It’s more common than you might assume. While Gordon could have updated his will and re-titled his house so that he and Blanche would own it with rights of survivorship, that might not have been what he wanted. It’s not unusual in second marriages for the spouse who owned the house to keep it in their name only – intentionally or by oversight – and have it pass to their kids.

How, then, could Gordon have reconciled two competing desires – i.e., for his kids to inherit his home and for Blanche to have a place to live?

Right of occupancy. A scan of the options available to Gordon reveals yet another application of a trust as an estate planning tool.

To achieve his two objectives, Gordon could have:

created an individual revocable trust;
named himself as the initial trustee;
named one of his kids as his successor trustee;
conveyed his house to the trust; and
granted Blanche a “right to occupy” for some period of time.

A right-to-occupy provision can be worded (and the trust appropriately funded) to address the grantor’s intentions, the occupant’s needs, the residual beneficiaries’ interests, and the many issues that can arise from the resulting situation. The language of the trust should answer these questions:

Who has the right of occupancy? This is presumably the surviving spouse (in our example, Blanche), but what if Blanche has kids of her own who need a place to live? Or Blanche re-marries and wants to continue to live at Gordon’s home with her new husband?

How long does the right exist? The trust can state that the right of occupancy will expire after a specific time period following the grantor’s death or will continue for the rest of the occupant’s life or for as long as the occupant wishes to stay.

What might trigger an early expiration? The trust can provide that the right to occupy would expire if the occupant moves out for a minimum period of time.

What about the costs of maintaining the property? The trust should assign to the occupant or the trust itself the responsibility for costs related to the home’s upkeep, such as ongoing expenses (routine repairs, basic utilities, landscaping, property taxes, HOA fees, etc.) and major capital improvements (replacement of the roof and HVAC equipment, pool re-plastering, etc.).

A right-to-occupy provision combines two areas of law – sophisticated estate planning and real estate law – that parties should never tackle on a do-it-yourself basis.

Even under the best of circumstances (Gordon’s kids are wealthy, love Blanche, and want only the best for her), the formalities of this arrangement must anticipate that something will go wrong and how it will be addressed. For example, what if the good relationship between Blanche and the kids goes sour? Or one of Gordon’s kids falls on hard financial times and is desperate to get their money out of the house? These and other eventualities need to be identified and buttoned down from the outset.

What about the mortgage? This has little to do with Blanche’s right-of-occupancy arrangements, but it does introduce another planning issue.

Let’s assume that Gordon had a mortgage on his home. If the lender learns of Gordon’s death, it will likely call the loan due, and Gordon’s kids would need to be prepared to pay it off or refinance the mortgage.

The better solution would have been for Gordon to purchase a life insurance policy that, upon his death, would pay off the mortgage.

Your change in marital status. Last month’s feature article, “ Is It Time for an Estate Plan Review? You Be the Judge ,” included a list of triggering events that could give rise to an estate plan review.

Those events included, at #6, “Your Marital Status Has Changed.” If you have been married, divorced, separated or widowed since you executed your estate planning documents, a review of your plan and its related legal and ownership documents could be very important.

It can help you head off a Blanche-and-Gordon scenario or even more serious consequences of an obsolete estate plan.

Is it time for an estate plan review? You be the judge

Thu, 19 Jan 2023 15:12:23 GMT

Our online self-assessment tool can help you recognize how the passage of time and any number of triggering events can impact your will, trust, and other planning documents.

In a perfect world, you could create an estate plan and be done with it, putting it on the shelf and then waiting for it to do its thing.

But, alas, even in a perfect world, circumstances change – and it is that rascally “change” that makes periodic reviews of your will, trust and other estate planning documents such a good idea.

To help you evaluate the condition of your will or trust, we’ve provided a self-assessment tool – “How Current Is My Estate Plan?” – that you can use to ascertain the need for a plan review.

If you check enough boxes to warrant a review with Ron Adams or Ryan Scharber, just click “Contact Me,” and we will schedule your meeting.

TRIGGERING EVENTS

The Tax Laws Have Changed (or Changed Their Impact on You). Estate plans can be affected by at least four types of tax: gift tax, estate tax, inheritance tax, generation-skipping tax, and income tax (including capital gains). Whether the tax laws have changed, or existing tax provisions affect you differently than before, the impact on your estate plan could be significant.

Your Ship Is Coming In. If you anticipate a big investment pay-off, the purchase or sale of a business, a sharp increase in business profits and/or value, a generous inheritance, or winning the Powerball, think about redirecting some of your impending fortune to kids, grandkids, charities, etc.

Your Ship Came In. Ditto if the value of your estate has significantly increased since you created your plan.

Your Ship Sailed. Fluctuations in the stock market and real estate might make your estate look a lot different now than a few years ago. You may be able to take advantage of depressed asset values and still-low (by historical standards) interest rates in making lifetime transfers, whether through gifts or intra-family transactions.

You’ve Become Self-Employed. If you have transitioned from employment to business ownership, planning for succession, asset protection, and other concerns are important issues that didn’t matter until now.

Your Marital Status Changed. Marriage, divorce, separation, or the death of a spouse has a huge impact on the effectiveness of your will or living trust and on your wishes for how and to whom your assets are to be distributed. Also affected are retirement assets, life insurance and jointly titled bank accounts, brokerage accounts and real estate.

You’ve Become a Parent. For many people, this is the first occasion for doing an estate plan. Most importantly, be sure you name a guardian for your children and provide for them financially in case something happens to you.

Your Child Has Become an Adult (at Least Chronologically). You might have made planning decisions regarding your children, when they were still in diapers, that warrant revisiting. Do they have opportunities, limitations or needs now that you didn’t anticipate then? Does the way they live their life create legal exposure for you?

Your Kids Have Become Parents. It has been said that grandkids are God’s reward for having children, and you may respond by considering, for the first time, what “generation skipping” really means, and planning initiatives such as trusts for your grandkids’ education, special needs, etc.

You’ve Retired … or Are Thinking About It. For most people, retirement brings a change in income, or income from a different source. Those changes can impact your estate plan.

You’re Getting Older (Part 1). If you’re older now than when you created your plan (very probable), preparing for long-term care, health challenges and other costs of being human may be more of a priority.

You’re Getting Older (Part 2). Even if you’re fit as a fiddle and plan to live forever, Uncle Sam is eyeing your retirement accounts. If you’re approaching or at the point of taking required distributions from your IRA, 401(k) or other qualified plan, that can affect your other planning.

An Heir or Beneficiary Has Passed Away. If someone you named in your will or trust has died, make sure that your documents’ instructions adequately describe who gets what in the absence of the deceased heir or beneficiary.

Your Intended Trustee or PR Is No Longer a Good Candidate. A change in the circumstances of a person you have named as a personal representative, trustee, guardian, etc., is a common stimulus of amending your planning documents. Perhaps they have passed away, have become ill or infirm, or are not the person you thought they were when you selected them.

You’ve Taken Up a Cause. You would like to provide for a charity, religious organization, or other worthy cause that wasn’t on your radar screen when you set up your estate plan.

You Moved from Another State. Arizona’s tax, trust, community property and inheritance laws may be just different enough from the laws of your former state to cause a problem with your will or trust. ( See related article. )

As we mentioned above, you can use our self-assessment tool to check the box of each estate planning variable that applies and to initiate a plan review with Ron Adams or Ryan Scharber .

No conflicts: Coordinating your LLC operating agreement with your personal estate plan

Tue, 20 Dec 2022 17:26:33 GMT

Business planning is an opportunity to kill two birds with one stone: Maximize the business and personal benefits of your LLC’s operating agreement, and resolve any conflicts with your personal estate plan.

The ease of forming an LLC has been a mixed blessing, as its simplicity and relative informality has allowed for many risky shortcuts – mostly notably with respect to the entity’s operating agreement. Many organizers used a “boilerplate” agreement that was inadequate to the situation, or they skipped the operating agreement altogether (Arizona’s original 1992 LLC law did not require one).

Those shortcuts became a real issue in 2020, when the current Arizona Limited Liability Company Act went into effect. Literally overnight, on September 1, 2020, LLCs that did not have an operating agreement suddenly had one imposed upon them, via a litany of controversial default provisions contained in the Act. Similarly, if an operating agreement did exist but did not address one or more default provisions, the Act filled the vacuum, often to the detriment of the LLC’s members.

Two default provisions in particular created problems for multi-member LLCs. The Act:

imposed fiduciary duties on LLC members and managers, creating legal grounds for inter-member lawsuits, in instances where there was no operating agreement or the operating agreement did not address that issue; and

required that all distributions made by an LLC before its dissolution and winding up must be equal among members, regardless of ownership percentages.

If those issues inspire you to take a fresh look at your operating agreement (or to create one), let us suggest a few additional issues that, while you are under the hood, you can address to align your agreement with your estate planning objectives.

Planning Questions for Your LLC Operating Agreement

If your LLC has multiple members, will all members’ ownership shares and contributions be equal, or will ownership shares vary with the contribution amounts?

How will voting power relate to ownership shares or contributions?

How will new members be admitted, and what will be their contribution amount?

How will living members be removed or allowed to withdraw, and what will happen to their capital contributions?

If a member dies, what will happen to their ownership interest and capital contributions? Will there be a buy-sell agreement? Will the surviving members be allowed (or required) to purchase the decedent’s interest? Can the decedent’s interest be inherited by, or transferred to, a third party without the other members' approval? Will a surviving spouse be forced to sell their interest to the members?

If there is a buy-sell agreement, how will the purchase of a member’s ownership interest be funded (e.g., cash on hand, member contributions, life insurance)?

How will decisions be made? Does approval of major issues, such as a business sale or a modification of the operating agreement, require a simple majority, a super majority, or a unanimous vote?

How will the business be managed day to day? If there will be a managing member, what will be the limits on their authority? Will they be compensated for serving as managing member?

How will management authority be transferred if the managing member resigns or cannot serve?

How and when will profits and losses be distributed or allocated among the members? What events will trigger a distribution?

How will the LLC’s taxable profits and deductible losses be allocated among the members?

If the LLC is dissolved, how will its assets and liabilities be distributed?

Answering these questions in the context of your overall estate planning is an opportunity to kill two birds with one stone: maximizing the business and personal benefits of your LLC’s operating agreement, and resolving any conflicts between your business planning and your personal estate planning.

Estate planning for business owners: a will or trust is just the start of your ultimate plan

Mon, 14 Nov 2022 14:47:29 GMT

Our list of often-overlooked questions can help you strengthen your business succession planning and ensure a solid future for your spouse and children.

An 800-word article cannot begin to address all of the scenarios, options and decisions that may apply to your personal and business situation. Instead, we offer a few (OK, more than a few) questions that, thoughtfully considered, might provide a useful start in formulating plans for your business’s ownership and operations in case you should die while still running the show.

Consider questions such as these:

Are you married or single?

If you are married, is your spouse involved in the business?

Do you live in a community property state (such as Arizona) or a separate property state?

Do you have children? Are any of them involved in your business?

If you want the “involved” child to run or own the business after your death, how will you ensure equal or equitable treatment of your involved and uninvolved children?

If the business would need to be run by a key employee or other non-family member, have you identified and prepared that person to assume operational control?

Can the business afford to pay a manager who can run it as effectively as you?

How would you ensure that your spouse or children receive income from the business?

If there are no obvious successors to manage your business, what provisions should you make for its continued operation, sale or liquidation?

How is your business owned? Is your business interest owned directly, or is it held in a Trust? Are your business interests and personal assets held in the same Trust?

Is it a sole proprietorship (Schedule C taxpayer)? Where will the business go after you die? Is it subject to probate? If you are married, is your spouse willing and able to continue running the business, or would the business need to be sold or liquidated? If it is to be sold or liquidated, how will it be operated, and who will operate it, until that can happen?

Is it a single-member LLC? Who is the “member” – you only, your marital community (i.e., you and your spouse), your Trust?

Is it a multi-member LLC? Are the other members family or non-family? Does it have an operating agreement? If so, does your operating agreement address what happens to a member’s ownership interest when they die? Are there buy-sell provisions in the operating agreement that would allow (or force) the other members to buy your interest from your spouse, Trust or Estate? Are those buy-sell provisions adequately funded (by insurance, member contributions, etc.)? How is the value of your interest to be determined? If there are no buy-sell provisions in your operating agreement, or you have no operating agreement, what is to keep a deceased member’s spouse or children from taking the decedent’s place at the “table”? Are your fellow members in the LLC OK with that?

Is it a partnership? How many partners do you have? Do you have a partnership agreement and, if so, does your partnership agreement address what happens to a partner’s ownership interest when they die? Are there buy-sell provisions in your partnership agreement?

Is it a corporation? Is it a C corp or an S corp? Who owns the stock in the corporation? Are there other shareholders? Is there a buy-sell or shareholders agreement that addresses what happens to a shareholder’s stock upon his or her death? Do you have a board of directors that would make company decisions in your absence?

If your business has multiple owners, are there any conflicts between the business’s governing documents and your personal estate planning documents regarding how your interest will be conveyed, and to whom?

Would your death create an estate tax liability? How would the tax be paid (cash, life insurance, business liquidation, etc.)?

Would your death trigger any contingent liabilities to commercial creditors, i.e., the ability of a lender to call a loan? If your business has outstanding loans, your death will likely trigger default provisions in the loan documents, including any personal guarantees. How would the debts be paid?

The questions could go on indefinitely, but perhaps we’ve made our point – i.e., for business owners, estate planning does not end with a Will or a Trust. That is just the first step.

The process ends when you feel confident that you have considered every important eventuality, and, with the help of an experienced business lawyer and estate planner, created a business succession plan that will either preserve your company as a source of wealth and income or replace its value for your family’s benefit.

To start the discussion, contact Ron Adams or Ryan Scharber at 480-345-8845.

For personal representatives, collecting the decedent's assets is a critical duty

Thu, 20 Oct 2022 15:52:05 GMT

In the initial phase of probate, a personal representative’s attention is on preparing an asset inventory, determining which assets are subject to probate, and keeping the decedent’s heirs in the loop.

collect the assets of the decedent,
pay any outstanding bills or creditors that need to be paid, and
distribute the decedent’s assets to whomever is supposed to receive them under the Will (or, if no Will exists, under state law).

This article, which is an excerpt from our Arizona Personal Representative Handbook , focuses on the first duty: gathering the decedent’s assets.

Initially, you (as the PR) must identify and collect the assets of the decedent’s estate and protect those assets from harm. For example, you may need to secure the decedent’s primary residence to protect it against vandalism or to prevent family members from removing items from the home.

Preparing an Inventory. Identifying the decedent’s assets may not be an easy task, particularly if the decedent did not retain good records. You may also have to spend considerable time poring over the decedent’s bank and other account statements to determine where the decedent’s monies were kept. You will also need to inspect the contents of safe deposit boxes and locate life insurance policies and retirement plans. In many instances, copies of the decedent’s income tax returns can be a good source of information to identify assets and accounts that the decedent owned.

You must be able to account for all of the decedent’s assets as they existed on the date of the decedent’s death. You must then be able to determine what the value of the decedent’s estate was as of that date. For bank and investment accounts, determining value is easy. However, for many other kinds of assets, professional appraisals might need to be obtained.

This course of action is essential not only when you cannot determine how much a particular asset is worth; it may be required if an estate tax return must be filed. If the decedent’s estate has a value greater than that which can pass free of estate taxes ($12.92 million for an individual in 2023), an estate tax return must be filed, accompanied by professional appraisals of assets.

Informing Heirs. In addition, regardless of whether an estate tax return is required, you must prepare and submit to heirs, within 90 days after your appointment, an inventory and appraisement of estate assets. The inventory and appraisement must identify each asset owned by the decedent and provide the fair market value of each asset as of the date of the decedent’s death.

In some cases, it will be impossible for you to ascertain that fair market value without a professional appraisal. Real estate is one good example of when a professional appraisal may be needed, but other types of assets (e.g., art, jewelry, antiques, and stock in a closely held company) may be particularly hard to value without a professional appraisal or valuation.

After the inventory and appraisement are complete, you must mail copies to all parties interested in the estate, including heirs and others named in the Will, as well as any creditors who have filed claims against the estate (see “ Notify Creditors ” in the Personal Representative Handbook). You must then file a pleading with the Court affirming that this requirement has been met.

Alternatively, you can file the inventory and appraisement itself with the Court and then mail a notice to all interested parties that you have done so.

The former option is almost always used because it preserves confidentiality, whereas the latter option makes the inventory and appraisement part of the public record.

Distinguishing Assets Subject to Probate. Because not all of the decedent’s assets will need to go through the probate process, it will be important for you to distinguish between probate and non-probate assets. Only those assets that at death were titled in the decedent’s name alone, without a beneficiary designation, will need to go through probate. Most notably, this excludes from probate any assets:

owned jointly by the decedent and another person;
any assets held in a trust or held by an entity in which the decedent had an ownership interest; or
any asset that had a beneficiary designation.

The first two types of assets are controlled by the terms of the joint ownership, trust or entity to which they belong. The third type of assets, which can include life insurance policy benefits, IRAs and retirement plans; “pay on death” (POD) or “transfer on death” (TOD) bank and brokerage accounts; and even real estate for which a beneficiary deed has been recorded, are considered “non-probate transfers” and never enter into the probate process.

Access to Assets. As mentioned above, after the extent and value of the decedent’s assets at death are determined, you must secure valuable personal property, such as jewelry, artwork, guns, etc. If the decedent had a safe deposit box and you have access to it, you should inventory its contents and keep them in your custody. Especially important are any documents that may be helpful in administering the estate (e.g., the decedent’s original Will or other estate planning documents).

Access can be tricky. Upon the death of the last lessee of a safety deposit box, the box may be opened only by two employees of the bank in the presence of any person who presents himself or herself and claims to be interested in the contents. At that point, the bank employees may remove only any document that appears to be testamentary in nature and deliver it to the person nominated in the document as PR or deliver it to the clerk of the Superior Court. The bank employees may also remove any life insurance policies and deliver them to the beneficiaries named therein. At that point, all other contents of the box are retained by the bank and deliverable only to the person legally entitled thereto – typically, the court-appointed PR.

Be aware, though, that you have no duty to inform the decedent’s banks regarding the decedent’s death - at least not right away.

The preliminary information-gathering phase is also a good time to collect important documents, such as bank statements, tax records, deeds to real property, titles to vehicles, etc.

Along the way, you will need to apply to the Internal Revenue Service for a taxpayer identification number (EIN) for the estate (this simple step can be completed online at the IRS website ). As you gather the assets of the estate, and after you receive the EIN, you will then open an estate bank account into which you will deposit all cash proceeds.

As we mentioned at the beginning, gathering the decedent’s assets is one of several important duties that the law imposes on a personal representative. You can undertake those duties directly, or you can rely on the services of an experienced probate attorney .

Who needs asset protection? Maybe you

Tue, 27 Sep 2022 15:37:32 GMT

Asset protection is by no means the exclusive domain of the rich and famous; its value can apply to a diverse range of situations and wealth levels.

Asset Protection Candidates. Asset protection strategies can be beneficial to people in a wide variety of circumstances, including the following:

business owners i n high-risk, high-liability industries (e.g., manufacturing, medical supplies, pharmaceuticals, transportation, construction, retail, commercial real estate, insurance, business services, lending, securities, investment, mining, real estate development);

owners of businesses that deal directly with the general public;

business owners and employers who may incur personal liability for business obligations, such as wage-and-hour and HIPAA claims;

healthcare professionals;

major borrowers;

attorneys, accountants and other professionals who are vulnerable to professional liability claims;

corporate board members and officers;

owners of “dangerous assets” that pose a threat to the physical safety of another individual (including relatively passive assets, such as real property, and assets that pose a more direct threat, such as motor vehicles, equipment or property for rent, contaminants, explosives, etc.);

owners of businesses that produce or use intellectual property (logos, photographs, illustrations, written text, proprietary processes, etc.);

owners of businesses that own related assets (e.g., a company that directly owns trucks and the real property where the trucks are parked and/or maintained);

owners of multiple businesses;

general partners in a real estate or other partnership;

any persons and families who have unprotected cash, investments, business ownership or other assets that would be at risk in a lawsuit;

parents of teenagers or dependent adult children;

individuals who have a history of failed marriages;

high-profile individuals and public figures (e.g., athletes, entertainers and celebrities) who might be perceived as having substantial wealth or liquid assets; and

private citizens whose high net worth makes them a target for creditors.

Risky Situations. If any of those descriptions apply to you, you are a likely candidate for asset protection. If you’re still uncertain, another way to evaluate your wealth exposure is to answer the following easy questions. A “yes” answer to a few of them could warrant a consultation with an asset protection lawyer:

Do you have a net worth over $2 million?

Do you have liquid personal property with a value of more than $1 million?

Do you consider financial privacy to be a priority? That is, do you want to keep your ownership of certain assets from being made public?

Have you recently sold a business, received an inheritance, or experienced a financial “windfall” for which protecting the proceeds is a priority?

Are you about to get married?

Are you a guarantor, indemnitor or surety, where your liability is contingent on the character or financial health of others?

Do you have children who are prone to risky activities?

Do you have disabled or special-needs family members?

Are you a lessor of equipment or commercial property?

Are you a residential landlord?

Asset Protection Tools. In the real world, asset protection defies “one size fits all” generalities. An effective plan is extremely situation-specific and must reflect the nature and value of your property, the most likely threats to your wealth, your marital and family status, your objectives in pursuing a strategy, and more.

An asset protection plan is likely to include some combination of these and other tools:

domestic asset protection trusts;
retirement accounts, including 401(k)s and non-inherited IRAs;
LLCs and limited partnerships;
gifting of assets into irrevocable trusts;
transitioning non-exempt assets into exempt assets;
life insurance and annuities;
property and casualty insurance;
corporations, including professional corporations; and/or
international or “offshore” investment structures.

Exploring the Possibilities. It should be apparent, from reviewing the risk scenarios described above, that asset protection is by no means the exclusive domain of the rich and famous. Equally important, in most cases it does not require a major investment.

To discuss your asset situation and the risks you wish to avoid, contact Ryan Scharber at 480-345-8445 or by email to schedule an appointment.

Small Estate Affidavits: Avoiding probate in property disposition

Fri, 29 Jul 2022 14:59:56 GMT

For decedents who owned property of relatively modest value, Arizona law provides for ownership transfers that do not require probate court oversight.

Small Estate Affidavit

A small estate affidavit, also known as an Affidavit for Transfer of Personal Property, allows an heir to transfer or claim the estate’s assets free of probate, provided that the net value of those assets qualifies for small-estate treatment.

To qualify, the value of the decedent’s total personal property (e.g., cash, bank accounts, securities, business interests, vehicles, and other non-real estate assets), minus any liens or encumbrances on those assets, must be $75,000 or less.

The small estate affidavit cannot be utilized until at least 30 days after the decedent’s death.

The “ Small Estate Affidavit(s) for Transfer ” provided by Maricopa County Superior Court provides a good example of affidavits used throughout Arizona.

Real Property Transfers

If the decedent was the sole owner of a parcel of real property (i.e., the property was not jointly owned with survivorship rights) and had not created a beneficiary deed (which would trigger an automatic transfer to an intended recipient), the disposition of that property would likely be subject to probate.

However, similar to the small estate situation described above, real property transfers can be accomplished outside of probate, provided the net value of the parcel is $100,000 or less. In this case, “net value” equals the total assessed value less the value of any liens or other encumbrances.

See “ Affidavit for Transfer of Title to Real Property ,” Maricopa County Superior Court.

In Arizona, such an affidavit cannot be filed until at least six months after the owner’s death.

Filing with the Court

An Affidavit for Transfer of Personal Property does not have to be filed with the probate clerk, and it can be produced directly for the third-party institutions that control the decedent’s assets.

In contrast, an Affidavit for Transfer of Real Property does have to be filed, along with a certified copy of the death certificate, and a copy of the will (if any). Once processed by the probate clerk, the real estate affidavit is then recorded in the county where the property is located.

A Workaround, Not a Plan

In most cases, affidavits such as those described above provide a fallback option, for personal representatives or other interested parties, in cases where the decedent did not properly title or otherwise plan for the disposition of their assets.

The use of such documents is an indication that the decedent did not exercise the most prudent level of planning. In nearly all cases, properly drafted wills, trusts and other estate planning documents and beneficiary designations are the best way to avoid probate and ensure the smooth transfer of personal and real property after death.

If you are uncertain as to the ownership status of any of your assets – whether held personally or in a trust – scheduling a review with Ron Adams or Ryan Scharber can provide certainty and peace of mind.

Dying without a will (intestate): A look at Arizona's laws of intestacy

Wed, 15 Jun 2022 18:27:38 GMT

Under Arizona’s intestate succession statutes, who is entitled to the Decedent's property is largely a function of how potential heirs are related to the Decedent and how each category of relationship ranks in the statutory pecking order.

In the absence of a properly draft and executed Will or Trust, dying “intestate” triggers a situation in which claims against the Decedent’s estate must be validated and settled by the courts, in a vacuum formed by ignorance of the Decedent’s wishes.

It is not an exaggeration to state that intestacy creates a potential free-for-all (in fact, we use that very phrase in our web page describing Trust, Probate and Estate Litigation ). However, putting aside legal hyperbole, the potential chaos of dying intestate is tempered somewhat by Arizona laws that provide two hierarchies: one setting forth a structure for who will manage and distribute the Decedent’s assets, and the other governing “intestate succession” – i.e., who gets what, based on competing relationships to the Decedent.

Managing the Process

In cases of intestacy, Arizona law ( A.R.S. § 14-3203 ) defines who has the right to serve as the “personal representative” of the Decedent’s estate. Roughly summarized, here is the priority among people who, by law, in the absence of a will, may be entitled to serve in that capacity:

The Decedent’s surviving spouse.
The Decedent’s other heirs (described below).
The Arizona Department of Veterans’ Services (if the Decedent was a veteran of the armed forces).
Forty-five days after the death of the Decedent, any creditor (except for a funeral director who has the Decedent's remains).
The public fiduciary of the Decedent’s county.

After their appointment by the court, the personal representative (PR) is bound to carry out duties that are similar to those of a conventional PR who was named in a Decedent’s will. (See our popular handout, “ Arizona Personal Representative Handbook .”) The PR will first pay all valid claims against the estate (e.g., bills, debts, and other creditor claims) and then distribute the remaining assets – according to state law contained in Title 14 of Arizona Revised Statutes.

Before we get into the distribution of assets, it is important to know that not all assets are affected by intestate succession laws. Examples of “non-probate” assets, which are not the responsibility of the PR, include:

cash held in a payable-on-death account
life insurance proceeds carrying valid beneficiary designations
motor vehicles titled with a co-owner or subject to transfer-on-death registration
property held in a trust
real estate held in joint tenancy (or community property) with rights of survivorship or subject to transfer by a beneficiary deed
retirement account proceeds carrying valid beneficiary designations
securities held in a transfer-on-death account

Intestate Succession

Under Arizona’s intestate succession statutes, who is entitled to receive the Decedent's non-probate property is largely a function of how potential heirs are related to the Decedent and how each category of relationships ranks in the statutory pecking order.

If the Decedent (“Blake,” for the purposes of this discussion) died with:

Children but not a spouse, Blake’s children inherit everything.
A spouse but no children (or any other descendants), Blake’s spouse inherits everything.
A spouse and descendants of Blake and that spouse, Blake’s spouse still inherits everything.
A spouse and descendants of Blake, at least one of whom is the product of a different relationship, Blake’s spouse inherits half of Blake’s separate property, but none of Blake’s half of their community property. (Blake’s descendants inherit half of Blake’s separate property and all of Blake’s share of the community property co-owned with the current spouse.)
Parents but no spouse or descendants, the parents inherit everything.
Siblings but no spouse, descendants, or parents, Blake’s siblings inherit everything.
No living relatives, Blake’s probate assets become the property of the State of Arizona.

Have a Will

If you or someone you care about does not have a will, or if their will was executed long ago, wading through the aforementioned priority of intestate succession should provide adequate motivation to create at least a simple will.

A will can be a relatively simple document, and it need not be expensive. See our rate schedule for singles and for couples and families , and call today to schedule an estate planning appointment (480-345-8845).

New to Arizona? Our community property laws may conflict with your estate plan

Wed, 25 May 2022 15:55:42 GMT

Community property: To help ensure that your intentions are honored regarding the ownership of your pre-move assets and any assets you acquired after moving to Arizona, you would be wise to schedule a review of your will, trust and ownership documents.

The reason: If you moved here from any of the 41 states not mentioned above, you should assume that your will, trust, ownership documents, etc., will not provide in Arizona the relative certainty that you enjoyed in your previous state.

(The property laws of the eight other “community property” states are similar to Arizona’s, and the estate planning impacts of your move to the Grand Canyon State may not be as severe.)

Community Property in Brief. In Arizona, assets acquired by a married couple – cash, investments, personal property, real estate, business interests, retirement accounts, etc. – or by either spouse during the marriage, are considered community property, with each spouse owning an undivided half interest in each asset. In most cases, it does not matter who purchased the asset, who generated the income used to purchase the asset, or in whose name the asset is titled.

There are exceptions. Examples of one spouse’s “sole and separate” property include assets acquired before marriage, a business started before marriage, a retirement or pension account that originated before marriage, or a gift or inheritance received at any time.

Even those exceptions are not absolute. For example, if the value of one spouse’s separate asset – e.g., a business or a pension account – increases during the marriage, the amount of the increase may be considered community property. Also, if separate-property cash becomes commingled by placing it in a joint bank account, it too will likely be treated as community property.

Quasi-Community Property. If those provisions seem confusing, the confusion can reach new heights when a married couple moves to Arizona from a non-community property state. That is when an estate plan review becomes especially important.

Under Arizona law, assets acquired by a married couple, or by either spouse, while they lived in a non-community property state are generally considered not as community property but as “quasi-community” property.

If, after moving to Arizona, one spouse dies or the couple divorces, how the courts treat the couple’s quasi-community property is unpredictable and very fact-specific. As a consequence, if the spouses’ estate plans do not expressly address the ownership of the assets that they owned when they moved to Arizona, the courts’ orders regarding the disposition of those assets could easily conflict with the wishes of either or both spouses.

To help ensure that your intentions are honored regarding the ownership of your pre-move assets and any assets you acquired after moving here, you would be wise to schedule a review of your will, trust and ownership documents by an experienced Arizona estate planning attorney .

Will contests: Challenges in making a case for mental incapacity

Wed, 27 Apr 2022 14:54:55 GMT

In a Will challenge alleging testamentary incapacity, the courts look closely at the specific circumstances of the case, and few conditions or arguments are certain to achieve a predictable result .

Regarding the second requirement, courts consider the testator’s mental capacity at the time they signed their Will and try to determine, in part, whether the testator:

understood that they were executing a Will and what that meant;
knew the nature and extent of their property; and
knew to whom they were bequeathing their property (or, as was described in a 1954 Arizona decision, In Re Walter’s Estate, the “natural objects of one’s bounty”).

In general, Arizona law (A.R.S. § 14-2712) starts with the presumption that the Will-maker’s testamentary capacity – i.e., that they were competent and of a sound mind – existed at the time they signed the Will. Courts also tend to view a Will as the “voice” of the testator; as that person can no longer otherwise express their wishes, courts tend to adhere fairly closely to the written Will.

As a consequence, if there are no allegations of undue influence, the person challenging the Will generally bears the legal burden of establishing mental incapacity.

Executing a Will and Understanding What It Means. Satisfying this standard touches on the fundamental concept of mental capacity. A person can demonstrate mental capacity by making decision and communicating them verbally or in writing to constitute a Will.

“Generally” should apply to determinations of capacity in most respects, as courts are to determine capacity on a case-by-case basis. In its 1952 decision in In Re Westfall’s Estate, the Arizona Supreme Court cited an Oklahoma case that stated, “There is no rule by which it may be determined, with precision, where (testamentary) capacity ends and incapacity begins, but this question should be determined from all the facts and circumstances of each particular case .” (Emphasis added.)

Against the backdrop of those facts and circumstances, allegations of mental incapacity must clear a fairly high bar. As examples, a moderate level of senility by itself is generally not sufficient; neither is a generally deteriorating mental state, eccentric behavior, failing memory, confusion, or other conditions often associated with aging.

In the context of making a Will, someone may be found to have lacked mental capacity if they could not:

understand information about a particular decision;
remember that information long enough to make the decision;
weigh the information to make the decision, or
communicate their decision.

Again, such determinations are case-specific; in a Will contest, a challenger should not assume that any apparent mental condition short of serious mental illness or a vegetative state is certain to be perceived as incapacity.

Knowing the Nature and Extent of One’s Property. In this area, Arizona courts have not been of much help, as there is a general lack of guidance in determining how familiar a testator should be with what they own and are bequeathing.

Without judicial guidance, the specific facts and circumstances of the case, and the evaluation by the court and the parties to the dispute, will take on great importance.

Knowing to Whom the Property Is Left. In describing the heirs named in the Will, on more than one occasion Arizona courts have used the phrase “natural objects of one’s bounty” to illustrate the importance of not only understanding – at the time the Will was executed – to whom property is being bequeathed, but also the nature of their relationship to the testator (e.g., spouse, child, sibling, cousin, friend, neighbor, etc.).

If a Will challenger can show that, at the time the Will was signed, the testator was consistently unclear as to whom they knew (among the Will’s beneficiaries) and what their connection was to each, such evidence may strengthen their argument for mental incapacity.

Conclusion . In the introduction, we identified two common grounds – undue influence and mental incapacity – for contesting a Will.

We have discussed them separately, but it is important to recognize that the two can be connected. For example, would a certain level of influence over a person of “sound mind” be legally acceptable, while the same level of influence over a person of questionable capacity would be “undue”?

Again, this is where the courts will look closely at the specific facts and circumstances of the case, and anyone contemplating a challenge or defense of a Will should recognize that, in an estate controversy, few conditions or arguments are certain to achieve any particular result.

More about Hoopes Adams & Scharber's Estate Controversy practice.

Will contests: Arizona's 8-factor test for undue influence

Tue, 22 Mar 2022 21:05:25 GMT

What began in 1956 as an affair between an opportunistic man and a woman who "had a weakness for men" ended with a defining Arizona Supreme Court decision that for more than 50 years has provided the litmus test for undue influence in Will creation.

Sordid Background. The case involved a lawsuit challenging the legitimacy of the Last Will and Testament of Mrs. Bond Sneed McCauley, who died in Phoenix in 1959.

Bond was married three times. Her first and second marriages, which ended in divorce, produced a son, Arthur, and a daughter, Lillian.

In her second divorce, the property settlement included the creation of an irrevocable trust that provided income to Bond for the rest of her life. Upon her death, the income would be divided equally between her two children.

In November 1956, while still married to her second husband, Bond met Cleyburn McCauley in Houston, where McCauley had recently relocated from Oklahoma, leaving a failed business, his third wife, and two children.

Almost immediately, McCauley sought to profit from his relationship with Bond. As the Supreme Court’s opinion notes, “Long before they were married, [Bond] supplied McCauley with funds with which to take her out. At one time she loaned him $750. At another time she co-signed a $1,000 note with him for his benefit. He tried to acquire her automobile worth $2,000 for $100 and endeavored to sell to the trustees of her trust a $7,100 note for $7,000 when in fact the note had been discounted by $2,500.”

Within two weeks of her divorce, Bond began to see McCauley frequently.

In 1957, McCauley filed for divorce from his wife in Oklahoma. On October 28 of that year, McCauley’s divorce decree was issued, and, on that same day, McCauley and Bond were married.

The ensuing drama, deceptions, gold-digging and legal maneuvering are described in vivid detail in the Arizona Supreme Court opinion . We will not attempt here to describe it further, except to note that, in the first year of their marriage, McCauley hired an attorney to (a) break the trust that Bond had set up for the benefit of her two children and (b) draw up a new Will for Bond.

Bond signed the new Will in 1958, while she was hospitalized. The new Will left half of her estate to McCauley. (In the trial that followed, there was testimony that McCauley arranged to receive only half because, his attorney advised, there would be a better chance of defending a Will contest if McCauley were given less than the whole, leaving something for Bond’s children.)

She died a year later.

Legal Challenge. McCauley, acting as the personal representative of Bond’s estate, submitted the new Will in probate.

Bond’s ex-husbands, each acting as guardian ad litem for Arthur and Lillian, filed with the Court a petition opposing probate of the Will, claiming that the document was the result of McCauley’s undue influence over Bond.

A Maricopa County Superior Court judge found that the purported Will was procured by fraudulent representations and undue influence by McCauley and entered judgment in favor of Arthur and Lillian.

McCauley appealed, but the Supreme Court upheld the trial court’s decision.

Writing for the majority, Chief Justice Fred C. Struckmeyer stated, “[From] the beginning, McCauley dominated this woman, who admittedly had a weakness for men, to his own financial benefit. It taxes my credulity far beyond the breaking point to believe that this domination did not amount to undue influence.”

8-Factor Test. In its decision, the Court provided a list of eight factors to help determine whether a party contesting a Will has established that the Will was procured through undue influence.

Allowing for additional circumstances to be considered, the enumerated factors specify whether:

The alleged influencer has made fraudulent representations to the “testator” (the maker of the Will).
The execution of the Will was the product of hasty action.
The execution of the Will was concealed from others.
The person benefited by the Will was active in securing its drafting and execution.
The Will as drawn was consistent or inconsistent with prior declarations and plannings of the testator.
The Will was reasonable rather than unnatural in view of the testator’s circumstances, attitudes, and family.
The testator was a person susceptible to undue influence.
The testator and the beneficiary had been in a confidential relationship.

Current-day Will contests are also influenced by other contents of the Court’s McCauley opinion, such as the following:

Under some circumstances, undue influence can be presumed. “Some confidential relationships in conjunction with other basic facts, such as proponent's activity in procuring the execution of the Will and his being named as its principal beneficiary, give rise to a presumption of undue influence.”
Marriage does not rule out the possibility of undue influence. “[The influencer’s] marriage to [the testator] does not completely insulate [the influencer] from a possible finding that [the influencer] unduly influenced [the testator]” in executing the Will.
A pattern of influence can contribute to the presumption of undue influence. “Where the contestant has presented evidence from which a reasonable person could conclude that the person charged with exerting undue influence had a disposition to exercise such influence, that he had an opportunity to exercise undue influence, that some influence was exerted, and that the Will seems to result from such influence, a question of fact is presented.”

Conclusion. As with all complex legal challenges, a potential claim of undue influence must be evaluated with respect to the case’s specific facts and circumstances.

McCauley ’s eight-factor test provides a useful set of guidelines that, with the perspective of an experienced estate controversy attorney, a potential challenger can use to assess the potential merits of a Will contest.

"That's not what Mom would have wanted": A look at Will contests in Arizona

Wed, 16 Feb 2022 15:45:22 GMT

Mental incapacity and undue influence are two major grounds for Will contests, and Arizona laws offer specific provisions concerning both.

The “t estator” (i.e., the maker of the Will) lacked mental capacity or was not of sound mind when they signed the Will. ( See related article: " Will Contests: Challenges in Making a Case for Mental Incapacity .")

The testator was under the “undue influence” of another party at the time they created and signed the Will. ( See related article: " Will Contests: Arizona's 8-Factor Test for Undue Influence .")

The Will does not faithfully reflect the testator’s wishes.

The Will was forged or not legally executed.

The Will has been superseded by a subsequent Will or governing document.

The Will does not meet Arizona’s legal requirements (see A.R.S. Title 14 – Trusts, Estates and Protective Proceedings ).

For the purpose of this article, we will focus on two of the most common premises for a will contest: mental incapacity and undue influence . (It is not uncommon for these issues to be raised in tandem, as some Will contests allege that the former made the testator susceptible to the latter.)

Mental Incapacity

Arizona law (A.R.S. § 14-2501) sets forth two prerequisites for making a will: The testator must be (1) age 18 or older and (2) of sound mind.

Regarding the second requirement, courts consider the testator’s mental capacity as of the time they signed their Will. The court will try to determine, in part, whether the testator:

understood that they were executing a Will and what that meant;
knew the nature and extent of their property; and
knew to whom they were bequeathing their property.

In general, Arizona law ( A.R.S. § 14-2712 ) presumes that testamentary capacity – that the person was competent and of a sound mind – existed at the time the Will was signed. Courts also tend to view a Will as the “voice” of the testator; as that person can no longer otherwise express their wishes, courts tend to adhere fairly closely to the written will. As a consequence, the person challenging the Will generally bears the legal burden of proving otherwise.

We emphasize “generally,” because Subsection F of the above-referenced statute provides important exceptions related to the second major topic of this article.

Undue Influence

Undue influence occurs when a third party coerces or otherwise exerts power over the testator in such a way that the Will does not reflect the testator’s wishes and/or improperly favors the person who exerted the power, so that the person exerting the power would get something he or she wanted. When determining whether a Will was the product of undue influence, Arizona courts consider an eight-factor test described in a 1966 Arizona Supreme Court decision, In Re Estate of McCauley . The analysis involved in such cases can get rather complex, but the basic outlines of most undue influence cases are pretty straightforward.

Example . Grace has two adult children: Monica, who lives near Grace and has frequent contact with her, and Brenda, who lives in another state. After Grace’s death, the value of the assets that Grace’s Will bequeaths to Monica are substantially greater than the assets left to Brenda. Brenda might allege that Grace’s Will favored Monica only because Monica selfishly exercised undue influence over Grace’s decision-making at the time Grace prepared and signed her Will.

While, as we mentioned above, the burden of proof is generally borne by the person alleging the undue influence, there are exceptions, depending on the facts of the situation.

Under Arizona law, A.R.S. § 14-2712 (E), undue influence is presumed to have occurred in either of two situations:

A person who had a confidential relationship to the creator of the [Will] was active in procuring its creation and execution and is a principal beneficiary of the governing instrument.

The preparer of the [Will] … is a principal beneficiary of the governing instrument.

In the example of Monica and Brenda, if the court finds that (a) Monica had a “confidential relationship” with her mom; and (b) Monica had meaningful involvement in structuring the terms of her mom’s Will, undue influence by Monica would be presumed, pursuant to Subsection F of the above-referenced statute. The legal burden would then shift to Monica to show that, “by a preponderance of the evidence,” she did not exert undue influence.

Who Can Contest a Will, and When?

Before anyone can legally contest a Will, the Will must first be submitted to the court in a probate proceeding.

During the Will’s time in probate, and for up to three years following the death of the testator, an interested person can object to the Will’s validity.

It is important to note that not just anyone can contest a Will. The person initiating the contest must have legal standing as an “interested person” – e.g., the testator’s spouse, a child, or another person who is named in the Will. Interested persons can also include parties who can show that they should have been named in the Will or would have received an inheritance if the person had died intestate (i.e., without a will). Other players in a contested probate might include creditors or other parties that can show they have a valid claim against the estate.

Conclusion

While many of the issues discussed above have general application from state to state, the Arizona-specific references illustrate that, in a Will contest, location matters. Any interested person seeking to challenge the terms of a Will would be wise to seek experienced legal counsel, in the correct jurisdiction, to determine the validity of their objection.

More about: Hoopes Adams & Scharber's estate controversy practice

Parents: Include guardianship nominations in your estate plan

Tue, 23 Nov 2021 15:36:23 GMT

When we think of “estate planning,” our first thought typically involves directions for our property after we are deceased. But did you know your estate plan can include legal directions for the care of your minor children?

In the unfortunate and unlikely event that minor children (under 18 years of age) lose their parents, and those parents do not have proper guardianship documents in place, the courts will be in charge of deciding the parents’ legal successors.

This presents a number of issues. First, the individuals appointed by the court as the children’s guardians might not be the parents’ first choices. Second, failing to have temporary emergency guardianship papers leaves children at risk of your state’s child protective services agency intervening for the children’s temporary custody before they are placed with family or relatives.

To avoid these issues, we suggest including two documents in your estate planning:

a temporary emergency guardianship document and
a permanent guardianship document.

The temporary emergency guardianship designates who is legally authorized for the temporary legal custody of your children in the event neither parent is alive or able to function as a parent. This document is vital for avoiding confusion at schools or day care centers, which will resort to state child protective services in the event no legally designated person is present for their care. This document generally consists of a list of friends and family whom you trust to watch your children for a few days or weeks until the permanent guardians can assume their role.

The second and more vital document is the permanent guardianship document, which designates who ultimately has priority for legal custody and care of your children. Typically, parents choose to designate the children’s grandparents or other family members – single or married – as potential permanent guardians, but they can also choose good friends or other non-relatives. When the guardianship document is executed, the guardians assume all of the legal responsibilities (custodial, medical, educational, religious, etc.) of the children as a parent would.

We are often asked whether guardians have to adopt the children. The answer is “no”; the only reason a guardian would take the additional step of adopting a child is if the guardian wants to place that child into a priority position for inheritance purposes. Otherwise, guardians may choose to keep the children’s inheritance separate from that of their own children.

On a related note, the final consideration for parents is how to manage the inheritance of their minor children after the parents are deceased. While the guardians make all of the financial decisions for the children, including the management of the children’s financial property, it can be wise to have a separate person designated for the management of the children’s inheritance of your estate.

The best way to accomplish that goal is to pass on your minor children’s inheritance in trust and appoint a trustee to manage the children’s inheritance. While the guardian may be the same person as the trustee, it is wise to appoint a separate person as trustee to appropriately invest and distribute funds to your children – ideally someone who is good with money.

While it is an unhappy topic to consider, having guardian designations in place will help ensure that, in any scenario, your children will be in good hands.

Remarriage and the kids' inheritance

Fri, 15 Oct 2021 15:25:05 GMT

When a divorced or widowed parent remarries, that event not only can disrupt family dynamics; it can also trigger financial and legal turmoil if the kids perceive their new step-parent as a threat to their birthright.

In a remarriage or blended family situation, keeping peace in the family is an achievable goal, provided there is effective estate planning, a clear understanding of the estate plan’s objectives, and an equitable balancing of all parties’ interests.

For the purposes of the scenarios described in this article, the “parties” are John, the original husband; Linda, John’s wife; David, whom Linda married after John passed away; and, finally, the children of John and Linda.

Remarriage Scenarios

Created several years ago, John and Linda’s estate plan provided that, upon the first spouse’s death, all of his or her assets would pass to the surviving spouse.

When John passed away, his sole and separate property and his half of their community property went to Linda, just as they had planned. Also as each had planned, John and Linda’s children would inherit Linda’s property upon her death.

Then Linda met David. They fell in love and were married.

The possible scenarios going forward, and the likely consequences, are too numerous to describe here. But some of the more common situations might look like this:

David was a wealthy man who, if Linda predeceased him, would have no need for her assets. Linda created a new estate plan but reaffirmed that, upon her death, all of her assets would go to the children from her marriage with John.

David was a man of modest means and married Linda for purposes ranging from true love to, in the view of her children, pursuing a financial windfall. Linda was concerned that, if she pre-deceased David, he would face financial hardship. Thus, her new estate plan left a significant sum to David and the rest to her children, who resented David as a gold-digger depriving them of their rightful inheritance.

In this doomsday scenario for Linda’s kids, the facts are similar to the immediately preceding situation. However, in this case, before her death Linda began showing early signs of dementia. Unknown to her children, David took her to a new estate planning attorney who prepared a will that left everything to David. When Linda died, David received her entire estate, and when David died, his kids got everything, effectively disinheriting Linda’s kids.

(Each of these scenarios assumes some form of estate planning; when there is no will or trust, and the parent dies intestate, the situations can become more complex. That is a topic for a future article.)

Having “the Talk”

It almost goes without saying that the prospect of losing a portion of one’s inheritance can strain the relationship between an adult child and their parent. Communicating that concern in a respectful way is generally a responsible strategy.

Once a second marriage is in the picture, you might initiate a polite conversation with your parent and ask something like, “Have you thought about your estate plan? Are you planning on making any changes?”

Phrasing your questions that way does not question your parent’s judgment or cast aspersions on their soon-to-be spouse. Rather, it can open a useful conversation that helps your parent focus on planning issues (if they haven’t already done so) and gives you a chance to express that you want to be sure that their planning reflects their intentions for their estate.

If they have no planning in place at that point, it’s also very reasonable to suggest, “You really need to go see an estate planning attorney, to at least get a will or trust and create your beneficiary designations.” That way the conversation is less about your greed than about it is about your parent having their affairs in order.

Simple Solution?

As in the case of John and Linda, most estate plans provide that, upon the death of the first spouse, that person’s share of the estate goes to the surviving spouse, without allocating (to their kids or other beneficiaries) the decedent’s share of their estate. The result: The surviving spouse owns and controls everything, including the ability to change the plan. It’s a very common scenario (one that may closely describe your plan) and it can proceed very smoothly – unless remarriage muddies the waters.

For forward-looking parents who want to protect their kids’ interests, one way we deal with that is to create a written agreement in conjunction with the couple’s estate plan. The agreement provides that, after the death of the first spouse, the surviving spouse will not change the estate plan, at least not in a way that could negatively affect the distributions to their kids.

In the document, each of their kids is named as an express third-party beneficiary of that agreement. If, after the death of the first spouse, the surviving spouse does try to change the estate plan to the kids’ detriment, the agreement gives the kids a legal claim against the surviving spouse.

We readily admit that this is not an ideal solution, as drawing up in advance the rules of legal engagement between children and their widowed parent is distasteful to many.

However, it does provide a clear plan, agreed to by the spouses when future events are still unknown, for preserving their wishes for protecting their kids’ inheritance.

More articles about Estate Planning and Marriage

It’s worth noting that, while this article is written from the perspective of protecting the kids’ interests, we see situations where it is actually the second spouse – the step-parent – who is the “innocent party.” The marriage between the surviving spouse (“Linda” in the above scenario) and the second spouse (“David”) may have been a very healthy, happy, and enduring union that was marred only by one or more kids’ resentment of the man they never wanted their mother to marry. In such cases, if a legal shield is needed, it may be to protect the interests of the second spouse from his or her step-children.

Estate planning and unintended consequences of marital separation

Fri, 17 Sep 2021 16:16:42 GMT

In Arizona, divorce and legal separation have the same effect when it comes to estate planning – but the similarities do not extend to mere physical separation.

When a couple’s marital problems escalate to the point of physical separation, they have three main options: (1) living apart, without a change in marital status; (2) legal separation ; or (3) divorce (in Arizona, properly known as a “dissolution of marriage”).

The last two options have the same legal effect when it comes to your estate planning documents. That’s because the laws of Arizona and many other states protect the separate property of legally separated couples described in estate planning documents, even if the estate planning documents themselves do not specifically describe what happens in the event of legal separation or divorce.

Under Arizona law, this means that, even if your estate planning documents fail to mention that divorce removes an ex-spouse as a beneficiary, an ex-spouse nevertheless cannot inherit as a beneficiary under estate planning documents following divorce. In this way, legal separation and divorce have much in common: Both keep sole and separate property separate, even for purposes of inheritance.

Additionally, legal separation and divorce may have legal benefits:

the community property relationship is ended;

the parties are financially separated, and there is a division of assets, debts and taxes;

spousal maintenance may be awarded; and

if the couple has minor children, parenting issues (child support, decision making, parenting time, etc.) must be addressed.

Where divorce and legal separation protect the integrity of separate property for inheritance, mere physical separation does not. While some states have common law marriage, there is never such a thing as “common law divorce,” and a court order recognizing the couple’s separation is still needed.

When spouses are physically separated, they might enjoy the benefit of deescalating an uncomfortable situation, and sometimes they increase the chance of reconciliation. However, as we discuss below, this leaves the spouses’ estate planning vulnerable.

If reconciliation is unsuccessful after physical separation, taking the next step – legal separation – can be difficult.

As a result, we have seen several instances in which physically separated spouses go their separate ways, move on to the next chapter in their life, and conduct their lives as though they were divorced or legally separated. Major decisions are made and key actions – and in many cases inactions – occur without much thought to the marriage that they never officially dissolved. This is a major mistake.

The tranquility of physical separation is disrupted from an unanticipated source – the couple’s estate planning documents (which one or both parties forgot to change) – with profound financial implications for both spouses. Without obtaining a legal recognition of the separated marriage, an ex-spouse may inherit from the estate, contrary to the other spouse’s wishes. Even worse, we have seen step-children cut off from inheritance to which they were otherwise entitled because their parents failed to legally dissolve their union or to update their estate planning documents.

Document Review

Even if potential reconciliation is a factor in choosing to simply remain physically separated without obtaining a divorce or legal separation, each party should take a critical look at all documents that give their spouse any rights or powers with respect to property or decision-making.

Those documents include:

last will and testament
trust agreement
general powers of attorney
financial powers of attorney
health care powers of attorney
HIPAA release forms
bank accounts
pay-on-death or transfer-on-death account designations
life insurance policies
retirement accounts
non-retirement investment accounts
real property deeds
LLC and corporate documents

Whether divorce, legal separation, or physical separation is the chosen route, times of marital discord are among life’s most difficult experiences, and that difficulty often tempts people to set aside seemingly non-essential issues such as those discussed above.

To avoid unintended consequences, divorcing or separating spouses should address these important issues right away; tackling them head-on while their legal option is under construction can help them avoid costly and painful legal problems for themselves and perhaps their loved ones down the line .

Ron Adams selected by "Best Lawyers" for the fifth straight year

Thu, 19 Aug 2021 19:33:53 GMT

Chandler business, real estate and estate planning attorney Ron Adams was first selected by Best Lawyers in 2018.

Conservators' role in protecting vulnerable adults

Thu, 12 Aug 2021 15:50:16 GMT

In our celebrity-focused culture, it often takes a public airing of high-profile individuals’ legal laundry to focus the attention of everyday people on issues that might concern them privately.

Conservatorship vs. Guardianship

“Conservatorship” and “guardianship” are similar enough in practice that one could be excused from using those terms interchangeably. However, they are not synonymous, and if you have a loved one who is not as sharp as they used to be in managing their assets, or whose physical condition or decision-making ability are declining, understanding the difference might be helpful.

In Arizona, a conservator and a guardian are two types of fiduciaries that are appointed by a court in response to the needs of a person whom the court has found to be partially or totally unable to manage themselves or some aspect of their life. Simply put:

a co nservator is responsible for the finances and property of a “protected person”;

a guar dian is responsible for an “incapacitated person” in a broader sense, making decisions about the person’s care, living arrangements, etc.

As with most probate-related issues, the time and expense involved with getting appointed by a court vary significantly with the context of the situation. For instance, when a child with special needs turns 18, his or her parents will typically need to be appointed as guardians to preserve their parental authority past the age of majority. Such cases can usually be handled quickly and efficiently. But if an adult with significant assets suddenly becomes incapacitated, then a conservator will need to be appointed, and that invites numerous types of controversy, as interested parties can end up fighting over who has priority for appointment, how much is being spent, how the assets should be invested, etc.

Just as you can avoid sending your heirs to probate court after death by executing the proper combination of wills, trusts and beneficiary designations, you also can avoid the need for a guardianship or conservatorship with the proper combination of powers of attorney. It is almost always less expensive to avoid court involvement through estate planning than it is to roll the dice on a probate commissioner’s ruling when the unexpected happens.

Situations

As our society progresses through the largest intergenerational transfer of wealth in history, there is arguably more at stake financially than ever in managing the affairs of a vulnerable adult. While the positive side of estate planning remains a primary focus of our law firm, we are experiencing a growing demand for legal representation involving:

adult children whose inheritance is threatened by financial mismanagement;

disputes among siblings and interested parties; and

contested guardianships and conservatorships.

We are also frequently asked to represent conservators and guardians (and, more commonly, personal representatives and successor trustees) who are alleged to have breached their fiduciary duties. Those duties include:

acting at all times in the best interests of the vulnerable adult;

keeping the vulnerable adult’s assets separate from the fiduciary’s assets;

not using the vulnerable adult’s assets for the fiduciary’s benefit;

investing the vulnerable adult’s assets in a conservative, low-risk manner; and

keeping accurate records, filing tax returns and reporting to the court as required.

If you anticipate the need to protect the interests of a loved one who, due to age, illness, injury or dementia, is becoming increasingly vulnerable, or if you anticipate taking on a fiduciary role, please contact your Hoopes Adams & Scharber attorney (480-345-8845) to discuss the situation.

Doing the job right: eight key duties of a successor trustee

Thu, 24 Jun 2021 17:44:19 GMT

Avoid any actions that even appear to be improper, and at all times do your best to be – in fact and by your actions – completely above reproach.

Ryan Scharber's November 2020 article, “ Falling Short: Harsh Consequences for Breach of Fiduciary Duty ,” described how, for a person serving in a fiduciary capacity, failing to meet a standard of conduct can carry serious liability.

That article seemed to inspire some of our readers who were serving as a successor trustee to reaffirm their commitment to the proper execution of their duties. One client told us, “I don’t want to just avoid making mistakes. I want to do the job right, out of respect for my late brother and his kids.”

When asked general questions about the duties of a trustee, our response almost always includes a link to our Successor Trustee Handbook , which consistently ranks among the most popular destinations on our website.

The following excerpt summarizes eight important duties that are described briefly below and in greater detail in our full handbook.

Duty 1. General Prudence

As the trustee, you are duty bound to deal with the trust property as a “prudent person” would deal with the property of another. Your actions will be judged against what a reasonable person would have done in the same circumstances, given the same limitations to which you were subject, and armed with the same information that was at your disposal. If you conduct yourself properly, you will generally avoid personal liability if something bad happens with the trust assets.

2. Carrying Out the Terms of the Trust

One of the trustee’s most important duties is to become thoroughly familiar with and closely follow the trust’s provisions. It will be difficult for anyone to fault your performance of your fiduciary duties if everything you do is in accordance with the terms of the trust.

3. Loyalty

You must always act to further the interests of the trust and its beneficiaries. You should not enter a transaction that gives you an opportunity to benefit yourself, especially at the expense of the trust. If there is a conflict between the interests of the trust and the interest of you or a third party, the interests of the trust and its beneficiaries come first.

4. Not Overly Delegating

As trustee, you are responsible for the trust, and you should not turn over its complete administration to others. This does not mean that you must actually perform all of the administrative work yourself; you can delegate certain administrative details to persons qualified to handle them (for example, to an accountant or attorney). But remember: You, as trustee, are the person ultimately responsible for the trust’s administration.

If you are one of two or more trustees, you have an obligation to be fully involved and to know what your co-trustees are doing on behalf of the trust. Each trustee is responsible to the beneficiaries for any misconduct by another trustee.

5. Reporting and Accounting

The trustee of an irrevocable trust has specific notification and reporting requirements. Unless the trust expressly states otherwise, a trustee of an irrevocable trust must keep all “qualified beneficiaries” (described in the Successor Trustee Handbook) reasonably informed about the administration of the trust and must give them information they need to protect their interests. A trustee also has an affirmative obligation to respond to a beneficiary’s request for information related to that administration.

6. Segregating Trust Assets

You must keep the trust property separate and distinct from your own property. You should have one or more separate bank accounts for the trust, trust assets must always be readily identifiable as such, and its assets should never be commingled with yours.

7. Getting Help When You Need It

When uncertain about how to proceed, consult the lawyer for the trust. Do not make your best guess; if something goes wrong, and you have not obtained professional guidance, you may expose yourself to personal liability for any losses suffered by the trust.

8. Protect and Preserve Trust Assets

For some types of trust assets, protecting them may require insuring them. In those cases, consult a competent insurance agent regarding proper coverage. Few things are worse than having a trust asset destroyed, through no fault of yours, and you being required to make reparations to the trust from your own assets.

Closing Comment: Avoid the Appearance of Impropriety

If a beneficiary questions your decisions or actions as trustee, you generally bear the burden of proving that you acted properly, and they probably will not extend to you the presumption of innocence.

Avoid any actions that even appear to be improper, and at all times do your best to be – in fact and by your actions – completely above reproach.

See the full text of our Successor Trustee Handbook and its companion Personal Representative Handbook .

7 key legal steps to protect you and your business

Tue, 06 Apr 2021 21:20:38 GMT

There is more to business success than turning a profit. In the long term, the health of your company may depend as much on repelling legal threats as it does on meeting production and sales targets.

Observing the following seven protections is a good start toward safeguarding your business and personal assets and achieving long-term success.

1. SELECT THE PROPERTY BUSINESS STRUCTURE. Structuring your business properly and selecting the correct form of business entity can be the difference between success and failure when it comes to your liability shield. Failing to set up a business entity, failing to register your business entity in the proper jurisdiction, or classifying your business inappropriately can potentially expose you to personal liability for your business’ debts and obligations.

2. PRACTICE GOOD CORPORATE HYGIENE. Simply generating your liability shield is not enough. Depending on which type of entity you select, various ongoing maintenance requirements keep that liability shield in place. If a plaintiff wins a significant judgment against your business, their attorney may try to convince a judge to “pierce the corporate veil,” which involves disregarding your liability shield and allowing the creditor to apply the judgment against your personal assets as well as the business’s.

Successfully defending against such gambits includes:

keeping business and personal assets separate, i.e., not commingling personal and business monies, or paying personal expenses out of business accounts;

adequately capitalizing your business;

maintaining required formalities, such as creating an operating agreement for a limited liability company and bylaws and other necessary documentation for corporations;

maintaining ongoing business records, such as regular accounting of its assets; and

making it obvious to customers, clients, suppliers, and other parties to your agreements that they are dealing with your business entity and not you personally.

That final step is easily missed when partners, members or shareholders are first getting their business off the ground. If you execute a document and do not make it clear that you are signing in your capacity as a manager or officer of the entity, then you may be personally on the hook for an ensuing liability.

3. PAY ATTENTION TO YOUR GOVERNING DOCUMENTS. Implementing bylaws, an operating agreement for an LLC, or a shareholder agreement between owners of the corporation can head off unnecessary litigation. While it may not seem urgent at the time of business formation, when enthusiasm and good will are at their peak, a well-planned operating agreement or shareholder’s agreement is the important rulebook that LLC members or corporate shareholders can reference if disputes arise. It should set forth everything about your business, from its purpose to how disputes are handled to how business interests are managed in the event of an ownership breakup.

It is imperative that those governing documents include a “business prenup” or succession plan that sufficiently outlines how business interests are handled at time of dissolution of the business, or the death, incapacity or divorce (among other things) of one of the owners. When drafted appropriately, the governing documents will smoothly guide members and shareholders through transition periods without the need for court intervention.

4. REQUIRE NONDISCLOSURE AND NON-COMPETE AGREEMENTS. When dealing with a co-owner or key employee, it is important to protect your business’s relationships and other competitive assets. Often times, because a small business has a unique product or service or a limited area of influence, a removed owner or terminated employee can put your company’s interests at risk by immediately going into business against you.

Appropriately worded nondisclosure and non-compete agreements can help protect your business from such risks. However, to be enforceable, restrictive covenants must be reasonable as to time, location, and content. Consulting with a legal professional before drafting these agreements can help you produce an enforceable document that will survive legal challenges.

5. PROTECT YOUR INTELLECTUAL PROPERTY AND TRADE SECRETS. Your company’s intellectual property and trade secrets need to be protected not only from dissociated owners and employees, but also from the greater market.

First, identify those assets, confirm that they are actually owned by you or your company, and determine the entire scope of your intellectual property rights.

Next, plan for the best way to protect identified intellectual property and consider formal and non-formal legal protections, such as patents and registered trademarks and copyrights.

Keep in mind that not all intellectual property is equal; in some cases, simple non-disclosure and non-use clauses signed by your employees might be the only action needed to protect your company’s intellectual property.

6. PROTECT YOUR ASSETS VIA SEPARATE LLCs. While creating the right structure can protect you from personal liability, another angle to consider is the protection of various assets with separate LLCs. In this way, your business’s foundational assets can be protected from the liabilities accrued from the operational side of the business.

For instance, it is almost always a good idea to spin off the ownership and management of real estate into an entity that is separate from the entity that handles the day-to-day business operations. Another example is possibly creating one LLC to own valuable equipment and machinery, which then leases that equipment and machinery to the operating LLC. Then, if the operating entity is the target of a lawsuit, separate ownership of the equipment and machinery reduces their exposure.

7. COMMIT ALL BUSINESS TRANSACTIONS TO WRITING. All agreements and transactions with vendors, suppliers and customers should be committed to writing. Failing to establish a written record of the transaction could result in lost business or assets, or raise uncertainty over what the actual transaction was supposed to be.

Always include all parties’ names, titles and contact information, the details of each party’s obligations, and, if applicable, payment terms. Be cautious in using contract templates downloaded from the internet, as they may not be sufficiently clear or applicable to the laws of your state.

Beyond formal agreements, it is important to document in writing what may seem like casual conversation. For example, when you are negotiating a contract with a potential customer or client, immediately confirm by email the terms discussed or agreed to, so that misunderstandings are minimized, your interests are protected, and momentum to a more formal agreement can be preserved.

Digital assets: your estate in the cloud

Thu, 04 Mar 2021 21:06:19 GMT

Proper management of one’s digital assets is no longer just a good idea. In estate planning, it’s a practical necessity.

Neglected Property

As people of all ages increasingly store their important documents and other property in a digital format, it seems logical that they would include their digital assets as part of their estate. However, that’s generally not the case.

According to a 2020 survey by the Law Society, a legal organization in England and Wales, only 26% of the 1,000 survey respondents reported knowing what would happen to their digital assets after their death, and only 7% had included any digital assets in their will or trust.

Assuming that comparable percentages hold true in the U.S., home to an estimated 30 million Bitcoin owners, it does not require much imagination to visualize the chaos that looms for personal representatives and successor trustees seeking to get a firm handle on the estates for which they are legally responsible.

The practical challenge: Managing assets held in an online account for which the log-in credentials are unknown.

UFADAA

To get ahead of the curve and help fiduciaries carry out their duties, most states (including Arizona) have adopted the Uniform Fiduciary Access to Digital Assets Act (UFADAA) or its revised version.

Arizona adopted the Revised UFAADA in 2016, empowering trustees, personal representatives, guardians, conservators, and agents under powers of attorney to access and distribute the digital assets of the deceased or incapacitated person to whom they owe a fiduciary duty.

UFAADA provides a priority system for distribution of digital assets:

First, if the company holding the digital assets allows the account owner to name another person to have access to the user’s digital assets, the owner’s online instructions will have priority. This is by the far the preferred arrangement.

Second, if the owner does not name another person, the owner may provide for the disposition of digital assets in a will, trust, power of attorney, or other written instrument. This is a major inconvenience for the fiduciary, as gaining access to the account requires submitting to the company the proper estate documents and convincing the company to cooperate.

Third, if the owner has not provided any direction, either online or in an estate plan or other written document, the company’s terms of service for the owner’s account will determine how the account and its contents are to be managed. For the fiduciary and the owner’s beneficiaries, this can be a disaster: If the terms of service do not address fiduciary access, the law requires the custodian of the digital assets to provide only limited access.

Planning for Your Digital Assets

To take advantage of UFAADA’s first step, be sure to include a provision in your will, trust, power of attorney, etc., that designates who has access to your digital assets and what will happen to your digital assets upon your death or incapacity. If such a designation is not properly outlined in your estate planning documents, your appointed fiduciary may have little or no access to your digital assets.

In the absence of such a provision, the UFAADA is useful only to the extent that the online custodian chooses to cooperate.

Password Vault

While adding a “digital asset” provision to your will or trust generally requires the assistance of an estate planning attorney, there is one strategy that you can and should pursue totally on your own: storing all of your account credentials in an online “vault,” keeping the vault up to date, and placing your vault credentials with your will or trust.

Your estate plan is a reflection of the importance you place on proper management and distribution of your assets after you are gone, and, whether it’s a trust or a simple will, its creation involved a significant financial investment.

It would be a shame to undermine your carefully conceived instructions, and waste the cost of your plan, by inadvertently placing your important assets beyond your fiduciary’s reach.

Personal property memorandum: A valuable bit of do-it-yourself estate planning

Tue, 09 Feb 2021 15:13:15 GMT

Marking up or adding pages to your will or trust, on your own, is almost never a good idea. But there is one bit of do-it-yourself estate planning that you should seriously consider.

As we progress through life, changes in our situation and how we want our assets to be managed and distributed often give rise to changes in our estate planning documents. (See our popular article, “ Has Your Estate Plan Aged as Gracefully as You? ”)

Because some changes seem minor and easily made, we occasionally are asked by estate planning clients whether they can make a minor tweak to the will or trust that we prepared for them. Our usual answer: Yes, in theory you can – but you have to be really careful. First, tell me what you want to change …

As tempting as it may be to make a first-hand revision to one’s estate planning documents, and as easy and harmless as it might seem, you should bear in mind that faulty documents – including documents that started out in good condition but were inadvertently corrupted – are a leading cause of estate- and inheritance-related lawsuits and family legal squabbles.

Sometimes the damage was done by the changes per se, such as creating a conflict with another provision of the plan, adding a provision that cannot be carried out, or lacking clarity with respect to the maker’s intent.

Or, even if the changes themselves didn’t cause a problem, they weren’t properly executed, witnessed and/or notarized.

In most cases, asking your estate planning attorney to make a minor change to a will or trust shouldn’t be an expensive proposition. Before you start marking up your documents, at least check with your attorney to:

tell him or her what you want to accomplish (there might be a better way to achieve your objective), and

get a fee estimate (revisions made by your attorney now will almost certainly cost less than scorched-earth litigation after you are gone).

A GOOD DO-IT-YOURSELF IDEA

In case you are thinking that the purpose of this article is to preserve our monopoly in the field of document management, let’s shift the focus to a documentation role that you are uniquely qualified to fill, all by yourself: creating a personal property memorandum.

A personal property memo is a document that is separate from, and in addition to, your will or trust. It allows you to specify which items of tangible personal property (described below) are to go to which recipients.

“Tangible personal property” includes things like furniture, jewelry, clothing, antiques, art, collectables, memorabilia, equipment, accessories, etc. In some states, including Arizona, it can include cars, aircraft, boats and other licensed vehicles.

Tangible personal property does not include real estate, cash, bank accounts, investment accounts, debt instruments, intellectual property, insurance policies, or intangible assets, such as LLC interests or corporate stock.

You can write a personal property memorandum at any time after you write your Will, but you will want to be sure your Will references the fact you may create a separate personal property memo and incorporates that memo by reference.

Your memo can be very simple, but it needs to be clear. You can hand-write the memo, or type it and print it out. A typical personal property memo simply references the particular piece of tangible personal property and who you want to receive it.

Also, the memo has to be signed by you, but your signature doesn’t have to be witnessed or notarized. And you can change your memo whenever you want, as often as you want, without disturbing your will or trust. If you want to make changes, don’t mark up your existing memorandum; rather, make a new memorandum and destroy any previous versions.

You should either keep your personal property memorandum with your other estate planning documents, or leave a note with those documents that tells your trustee or personal representative where to find your memo.

Finally, even if your will or trust calls for leaving everything to one person (such as your spouse), a personal property memo can still be useful, in case your spouse passes away before you do. Also, in case you contemplate leaving everything to your children, to be divided among them, a personal property memo spares your personal representative or trustee the challenge of making equitable distributions, and it helps prevent intra-family conflicts over who was promised what.

Falling short: harsh consequences for breach of fiduciary duty

Wed, 11 Nov 2020 15:09:19 GMT

Serving in a fiduciary role carries with it a standard of conduct that is governed by state law. As one of our recent cases illustrates, failing to meet that standard can carry serious outcomes – especially when the victim is a vulnerable adult.

(In this article, we will use certain terms for the parties to a POA: principal , which refers to the person who granted the POA, and agent , or “attorney in fact,” which describes the person to whom the POA was granted.)

On the day before Smith passed way, Miller, acting as Smith’s agent under the POA, wrote a $300,000 check on Smith’s bank account, endorsed the check, and deposited the check into her account. (Had she waited until Smith died, the POA would have automatically expired, along with her authority to act on Smith’s behalf.)

As Smith’s agent under the POA, Miller was in a position of trust and confidence and owed him fiduciary duties – including the duty of loyalty – that barred her from exercising that authority for her personal gain. In this instance, Miller committed a gross breach of fiduciary duty by endorsing to herself and depositing the $300,000 check.

Further, Smith’s reliance on Miller made Smith a “vulnerable adult,” which means Miller’s act of self-dealing qualified as “financial exploitation” under Arizona law. That statute, A.R.S. § 46-456 , allowed Smith’s estate to seek treble (a lawyerly word for “triple”) damages, plus reasonable court costs and attorney fees.

"Presumed Illicit"

When a fiduciary agent uses their authority to enrich themselves at the expense of the principal, the transaction is presumed illicit – unless the agent can prove by clear and convincing evidence that they were carrying out the principal’s wishes as expressed under a sound mind.

In Miller’s case, no such evidence existed to exonerate her. As a consequence, it was not a question of whether she would have to make restitution to Smith’s estate, but how much she would have to repay. Under A.R.S. § 46-456, she could have been personally liable to Smith’s estate for over $1 million. She could also have faced criminal charges for her conduct and been added to the Elder Abuse Registry.

Facing those devastating consequences, Miller promptly repaid the amount she withdrew from Smith’s bank account, and the personal representative of Smith’s estate accepted the repayment as full satisfaction of Miller’s obligation.

We hope that the preceding account will provide a refresher for fiduciaries on how to live up to the responsibilities imposed them. If you have any questions about your fiduciary duties, or if you question whether a fiduciary is living up to the legal standards, please contact us at 480-345-8845.

New Arizona LLC law went into full effect September 1, 2020

Tue, 01 Sep 2020 17:47:47 GMT

To help our LLC clients avoid the new law's unfavorable default provisions, we offer a $750 flat-fee option for updating most operating agreements.

Given the turmoil of the last few months, many LLC managers and members have been focused more on their business's survival than on its governance. Nevertheless, on September 1, the 2018 Arizona Limited Liability Company Act (ALLCA) went into full effect, totally replacing Arizona's original LLC statutes.

The new law imposes various default provisions that, if not affirmatively addressed, could undermine some of the benefits that you expected to achieve by choosing an LLC form of entity. Those provisions include:

fiduciary duties
contributions and distributions
record keeping
personal liability
indemnification
dissolution.

FLAT FEE FOR OPERATING AGREEMENT UPDATE

Your LLC can avoid the new law's default provisions, including the imposition of fiduciary duties, with a review and revision of your LLC's operating agreement.

This need not be a complicated or expensive process. If we drafted your operating agreement, we can update it for a flat fee of $750. The fee includes a meeting or phone call to review your operating agreement, determine your preferences with respect to the default provisions, and draft a new agreement to be signed by you and your members.

If we did not draft, or you do not have, an operating agreement, we can still assist you, but we can estimate the fee only after an initial review of your agreement.

FOCUS ON MULTI-MEMBER LLCs

While the new law does not distinguish between single-member and multi-member LLCs, as a practical matter the default provisions are not as troubling for most single-member entities.

Our main emphasis at this time is to ensure that all of our multi-member LLC clients have an operating agreement that complies with the new law and meets the needs of the LLC's members.

To get the ball rolling, contact Ron Adams or Ryan Scharber by email or phone (480-345-8845).

In turbulent times, asset protection grows in popularity

Tue, 11 Aug 2020 18:36:17 GMT

Asset protection can take assets that are subject to legal claims and reposition them beyond the reach of creditors.

First came the requests to review estate plans, take a fresh look at family and financial issues, discuss long-term care options, reconsider powers of attorney and selections of personal representatives and successor trustees, and update wills and trusts.

The second wave has been sparked by new interest in a planning option for which many clients had previously assumed they were ineligible: asset protection.

IS ASSET PROTECTION FOR YOU?

As we discuss further on our asset protection webpage , the benefits of asset protection extend beyond conventional estate planning and are not limited to the very wealthy.

Asset protection strategies can benefit people in a wide variety of categories, such as:

business owners in high-risk industries

physicians, attorneys, accountants and other professionals who are vulnerable to professional liability claims

corporate directors and officers

any persons and families who have unprotected cash, investments, business ownership or other assets that would be at risk in a lawsuit.

HOW ASSET PROTECTION WORKS

In general, asset protection means taking "non-exempt" assets (i.e., assets that are subject to creditors' claims) and repositioning them as "exempt" assets that creditors cannot touch.

Asset protection also includes positioning non-exempt assets in vehicles that are difficult to "break into" and cause a creditor to re-evaluate whether it is worth the time, expense and trouble of trying to pursue those protected assets.

Most asset protection plans are totally domestic - that is, they do not require an offshore component - but some situations call for an international planning strategy.

ASSET PROTECTION TOOLS

Asset protection tools vary in their applicability and may include:

domestic asset protection trusts

LLCs and limited partnerships

gifting of assets into irrevocable trusts

transitioning non-exempt assets into exempt assets

life insurance and annuities

corporations, including professional corporations.

Each of these tools is generally designed to protect different kinds of assets.

A NOTE OF CAUTION

Even more than other planning strategies, asset protection requires thinking ahead and an in-depth analysis of your assets, potential liability risk factors, and objectives. As a result, the earlier you start the process, the better.

If an unforeseen liability arises, it is probably too late to start planning. Asset protection is of very little help in defending against a pending lawsuit; its greatest value is in protecting your assets against future threats.

A REMINDER ABOUT LLCs

As we mentioned in our June issue , the Arizona Limited Liability Company Act goes into full effect on September 1. Because LLCs are important components of many asset protection strategies, it is very important that your LLCs' operating agreements properly address the default provisions that the new law imposes.

If we drafted your operating agreement, we can update it for a flat fee of $750. The fee includes a meeting or phone call to review your operating agreement, determine your preferences with respect to the default provisions, and draft a new agreement to be signed by you and your members.

If we did not draft, or you do not have, an operating agreement, we can still assist you, and we can estimate the fee after an initial review.

If the ongoing events in our society have left you wondering whether your planning adequately addresses the current volatility and protects your hard-earned assets, call Ron or me to schedule a phone call or meeting, or contact us via our online " Make an Appointment " tool.

We can help you analyze your situation, identify potential exposures, and, if needed, recommend strategies to maximize your protection.

Good news for retirement-age taxpayers: RMDs are waived for 2020

Wed, 06 May 2020 18:32:17 GMT

An underpublicized provision of the federal CARES Act offers a tax savings for many retirement-age Americans and could buy time for retirement portfolios to recover from the market downturn.

Last month we published a summary of recently enacted financial relief measures for individuals and businesses. The summary included some major provisions of the federal CARES Act.

The $3 trillion package was so enormous that relatively little attention has been paid to one provision that, for roughly one in five retirement-age Americans, represents a significant tax savings: the waiver of required minimum distributions (RMDs) from individual account retirement plans* and individual retirement accounts (IRAs) for 2020.

The new CARES Act allows account owners to:

skip their 2019 RMD - if it was their first year and they had not yet made an RMD by April 1, 2020; and

skip their 2020 RMD.

The CARES Act waiver means that you are not required to withdraw your RMDs from your retirement plan or IRA in 2020 if you:

reached age 70½ in 2019 or before; or

attain age 72 in 2020; or

first attained age 70½ in 2019 and delayed taking your first RMD until 2020 (which, under normal circumstances, must be withdrawn by April 1, 2020).

The waiver also applies if you have an RMD requirement for 2020 and are a beneficiary (a) under an inherited IRA or (b) of a deceased participant who had an account in a retirement plan.

Furthermore, if you are a beneficiary required to take all distributions from the plan or IRA within five calendar years following the death of the participant in the retirement plan or the IRA account holder, the 2020 year does not count in determining your five-year period.

Note: The waiver of the RMD requirement does not apply to benefits payable from a defined benefit plan, as such benefits are typically paid in the form of a lifetime annuity.

Aside from the tax benefits, the waiver allows your RMD to remain in your portfolio, where it may help your portfolio recover from the recent market volatility.

RMD Rollbacks. There have been conflicting reports about the fate of 2020 RMDs taken before the CARES Act went into effect. Initially, some articles said that, if you took your RMD before the waiver became available, you could not pay it back, and what you withdrew would be taxable.

While that may be technically true, you may have options. If you have already taken your RMD for 2020, you may be able to "rollback" the withdrawal to your retirement plan, if your plan accepts rollbacks, or to your IRA within 60 days from the date of withdrawal.

This rollback option is not available for 2020 RMDs received by a beneficiary under an inherited IRA or of a deceased participant in a retirement plan.

See Also:

" The Top 8 Must-Know Rules for COVID-19 RMD Waivers Under the CARES Act ," Forbes , 4-13-20

" What the CARES Act Means for You ," Vanguard, 4-24-20

" CARES Act Drastically Changes Required Minimum Distribution Rules for 2020 ," Forbes , 4-30-20

*Individual account retirement plans include 401(k), profit sharing, 403(b) and state-sponsored 457(b) plans, and in this article are referred to collectively as "retirement plans."

Ryan Scharber joins Napa Legal Institute

Thu, 09 Apr 2020 19:10:39 GMT

Ryan Scharber has been accepted for volunteer service by the Napa Legal Institute and serves on its Corporate Governance Working Group and Planned and Charitable Giving Working Group.