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Is It Time to Update my Estate Plan?

There have been some significant changes in the estate planning realm in the last few years. If you have not updated your estate plan in the last 3 years it may be time for a tune up. Often we are asked in our firm how often an estate plan should be updated. The answer to that is - it depends. It depends on your goals and what it is you are trying to achieve with your estate plan. It depends on whether things have changed in your life since the plan was originally put into place. The real question is not how often it should be updated, but how often should it be reviewed by an estate planning attorney? Our recommendation is at least every 3 years you should have a review of your estate plan with your estate planning attorney. This will ensure that things are up-to-date and working accordingly. Below are a few of the important changes that have taken place in the last 3-6 years.


Medicaid Triggers – If you need to go to a nursing home or need other long-term care, Medicaid triggers allow your Trustee to allocate the assets in a manner to help prevent everything you own from being spent-down in order to qualify for Medicaid.  Without the Medicaid triggers in your Trust and Property Power of Attorney, your assets will have to be spent-down before you can qualify for Medicaid. .


Beneficiary Trust – We hardly ever want an outright distribution to beneficiaries.  If beneficiaries get assets in their own names, they are subject to the loss of all their assets in the event of a bankruptcy, a claim by a creditor, or an ex-spouse in a divorce. Furthermore, if a beneficiary has a substance abuse problem or is not acting in a responsible manner, he or she could waste the legacy you left behind for them.  If your Trust is properly drafted, distributions to your beneficiaries are kept in an irrevocable trust and can be protected from the above perils.


HIPAA – Authorization to Disclose Protected Health Information – No one has the surety of obtaining your personal health information, which is now “protected” under the Health Insurance Portability and Accountability Act, unless they have the proper HIPAA form. This is a form proscribed by federal law.  It needs to be in the proper format in order for your agents and family members to have access to your medical information if they need to make decisions about your health care or to exercise your elections under your Living Will.


Mental Health Care Power of Attorney – If you need the highest level of mental health evaluation and do not have a Mental Health Care Power of Attorney, you are facing the necessity of a court order, which comes only after the court appoints potential strangers to be your attorney, physician and social worker.  The process in the courts is very expensive, time consuming and invasive.  The Mental Health Care Power of Attorney allows the evaluation without court involvement.


Decanting and Special Co-Trustee Provisions – The decanting provisions of the Arizona Trust Code provide greater ability for the survivor to have the trust amended after the first death.  They also give your beneficiaries better flexibility and protection with their separate beneficiary trusts after you are both deceased.  Upon the first death, the decedent’s share is placed into an irrevocable trust, known as the Family Trust, or commonly, the B trust.  The survivor cannot make changes to this trust, even if there are changes in the law that would make changes necessary or advisable.  When you are both gone, your beneficiaries cannot make changes to their beneficiary trusts.  If the survivor or the beneficiaries could make changes, the trusts would not be irrevocable, there would be no protection from creditors, ex-spouses, bankruptcy, and the estate could be subject to estate taxes.  If there are changes in the law that must be addressed in the irrevocable trusts and your trust contains the decanting powers and special co-trustee provisions, the survivor or beneficiary, as the case may be, can create a new irrevocable trust with all the necessary provisions, and a special co-trustee can decant, or pour, the assets from the existing irrevocable trust into the newly created trust that contains all of the necessary updates.


Arizona Trust Code Reporting Requirement - Under the Arizona Trust Code, once a trust becomes irrevocable (the Family or B trust upon the first death), the trustee has the obligation to give a detailed annual accounting to all of the beneficiaries.  This includes all money earned or spent by the trust, and a valuation of all assets, among other matters.  If any of the beneficiaries is a charity, the trustee may also have to provide the annual report to the Arizona Attorney General’s office.   It is possible to amend your trust to avoid this invasive and expensive requirement.


New Certification of Trust – Most estate plans include an old Certificate of Trust, a one or two page document that is proof that you have a trust.   If you opened an account at a bank or brokerage firm or elsewhere, the Certificate should have sufficed to prove to the institution that you have a trust, and should have given enough information for the institution to open the account in the name of the trust.  However, we have found that many institution are requiring a complete copy of the trust.  There is no legal requirement for such a demand; the institutions do not need an entire copy; they do not understand your trust when they get it; they probably don’t know what to do with it; and now your information could be in their database.  If you have the new Certification of Trust with the provisions and formatting set forth under the Arizona Trust Code, all you need to provide as proof of your trust, absent a showing of real need, is a copy of the first and last pages of your trust with the Certification.  This helps protect your privacy.


Community Property Agreement – If you convert all of your jointly held assets to community property, they get a full step-up in tax basis upon the first death.  If the survivor needs to sell an asset, he or she will not have to pay any capital gains tax on gains accrued since the asset was acquired.  There are only nine community property states in which this is available, and fortunately, Arizona is one of these states.  Recent Supreme Court decisions have made it possible for a properly drafted Community Property Agreement to convert IRAs, 401(k)s and other retirement assets to community property, giving much better flexibility and protection to the surviving spouse.


Special Formula General Power of Appointment – Although a proper Community Property Agreement will provide a full step-up in tax basis of assets on the first death, there will almost always be capital gains taxes upon the second death.  As the family, or B Trust is irrevocable, it takes the cost basis as of the first death.  Upon the second death, the increased value of the assets in the B trust from the date of the first death trigger a capital gains tax when sold by the beneficiaries.  It is now possible to wipe out any capital gains taxes in the B trust after the surviving spouse passes away This can now create a step-up in tax basis of all assets on the second death and allow your beneficiaries to avoid capital gains taxes.


Qualified Trust – You must be very careful how you coordinate any IRA, 401k, 403b, pension plan or other qualified (tax deferred) assets with your trust.  If you simply make your trust beneficiaries the named beneficiaries of your retirement plans, they will not have the same protections of the beneficiary trust discussed above.  If you make your trust the beneficiary of the qualified plans, and it is not a qualified trust, it will cost your beneficiaries up to 40% in federal and state income taxes.  This becomes an extremely important issue.  To receive all the protection for beneficiaries without exposing them to extra income taxes, you must include in your trust the technical provisions of IRS Code Section 401 (a)(9) and the corresponding regulations.  Adequately drafted qualified trusts, with proper funding, are very rare.


Discretionary Distribution – Upon the passing of the first spouse, the survivor is typically the trustee under both the survivor’s trust and the family /B trust.  And typically, the intention of the couple is that the survivor will have full access to all assets in both trusts.  Almost all trusts provide that upon the death of one spouse, the survivor shall receive all the income from the B trust.  However, if the survivor gets in a wreck and gets sued, a judgment creditor stands in his or her shoes, and if there is a mandatory distribution of the income from the B trust to the survivor, the creditor can get it.  Likewise, if the survivor has to go into a nursing home or receive other long-term care, he or she could have to spend all of the B trust assets before qualifying for Medicaid.  It is now possible to give the survivor, as trustee, discretion to take from the B trust anything necessary for health, education, maintenance and support, all the income, and even an annual percentage of the B trust assets; if this is done at the discretion of the survivor, or other trustee, it offers much more protection from other persons or entities.


If you would like additional information on any of these changes please feel free to give us a call. If you have not been in to see your estate planning attorney in the last three years do not procrastinate. Make your appointment today to have your estate plan reviewed. Many of these changes could end up saving your loved ones thousands of dollars when you become incapacitated or pass away.


dave-eastmanContributed by Morris Hall, PLLC Arrowhead, Phoenix and Scottsdale Estate Planning Attorney and Partner, David T. Eastman.


Why Choose Morris Hall, PLLC:
You have a number of options when it comes to estate planning, so why pick Morris Hall?  First off, estate planning and asset protection are a very complicated endeavor and you should only trust someone who focuses exclusively on those matters.  Also, Morris Hall is a proud member of The American Academy of Estate Planning Attorneys (AAEPA) which provides us additional support, advanced training, tools and information that is not available to others – which means that we can better protect your assets and your loved ones.  We are one of only three firms in Arizona that belong to the AAEPA and are the only firm in New Mexico that has been granted membership.  If you have assets and loved ones that you want to protect, you are in good hands with Morris Hall.  Contact us today at 888.222.1328 to schedule an appointment!

This blog should be used for informational purposes only.  It does not create an attorney-client relationship with any reader and should not be construed as legal advice.  If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.


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