We are thankful to Provider Attorney Joseph Udall for all his help and efforts in making this invaluable service to our members possible.

Arizona’s legislature made this law retroactive to ALL trusts created before this change in the law.  This means, at the very least, most trusts should be reviewed within the next year or so, to make sure there are no unintended consequences from the existing trust language.

Some of the important new changes in the law include:

New rules for Irrevocable Trusts and Revocable Trust that become irrevocable (such as at the death of the Settlor(s), imposing a duty on the Trustee to keep beneficiaries “reasonably informed about the material facts of the trust”, in order to better protect their interests.

Defining the term “Qualified Beneficiaries” as those beneficiaries who have a specific right to be informed about the material facts of a trust.  In the past the law was vague on who could request and receive information about the trust. Some interpretations said that no-one had the right to demand information while others interpreted then current law to include any “potential” beneficiary as having the right to demand information about the trust.

Stipulating that information required to be available to “qualified beneficiaries” could be limited to the material facts specifically pertaining to that beneficiary, and not necessarily include information specific to other beneficiaries.

“Special Needs” trusts will be better recognized under Arizona state law, and it will be more clear that a special needs beneficiary’s creditors can not attack even a self-settled special needs trust.  This is important as all Revocable Living Trusts prepared by the Arizona Provider Attorneys for AmeriEstate Legal Plan contain provisions for a special needs beneficiary sub-trust.

New rules of perpetuity allowing Trusts to remain in force for up to 500 years, in case Settlors wish to have all their assets remain in trust for the use and enjoyment of their descendants, such as a family or vacation property, or to provide continuing income streams for multiple generations.  The previous law limited a Trust’s existence to 90 years after the death of the Settlor.

Requiring the Trust to specifically state the “Material Purposes” of the Trust and allow for future Trustees to amend administrative provisions if circumstances or changes in the law make it difficult for the trust to complete its stated objectives.

New clarifications in the rules and legal authority to act in cases where there are multiple Successor Trustees acting as “Co-Trustees”.

Among the items included in the Arizona Trust Code:

Mandatory Rules

The Trust must now explicitly state the material purposes of the Trust such as:

1.    The management by Trustee of Settlors’ assets during Settlors’ lifetime.
2.    The payment of income and principal to Settlors.
3.    The non-judicial administration and distribution of Settlors’ assets upon the death of Settlors in the manner set forth in the Trust.
4.    Avoiding probate at a Settlor’s death.
5.    Avoiding a conservatorship proceeding upon a Settlor’s incapacity.
6.    The reduction or elimination/minimization of federal, state and local estate and gift taxes by use.
7.    Spendthrift provisions protecting trust assets from the creditors of beneficiaries, except child support judgments against a beneficiary, and of course claims by the IRS or other government agency, provided a statute exists that allows it..

Other mandatory rules include:

1.  The duty of a Trustee to notify “qualifying beneficiaries” within 60 days whenever a trust becomes irrevocable or there is a change in Trustee for an irrevocable trust. The Trustee will be required to  provide all qualified beneficiaries notice of the existence of the trust, portions of the trust agreement relative to the beneficiary’s interest, and the right to receive financial statements annually.  Remember that not all trusts for married couples become irrevocable (partially or fully) upon the death of the first spouse (eg. A-Marital Trusts).  In those cases no notification is required.

2. The requirement that an odd number of Successor Trustees must act by majority consent and unanimous consent is not allowed when there are an odd number of Successor Trustees.  e.g.  2 out of 3 co-trustees provides majority rule.

3.  New Rule Against Perpetuities allows trusts to continue for up to 500 years before mandatory termination. Arizona’s previous law extended the “rule against perpetuities” to 90 years; this change makes the creation of multi-generation trusts much easier.

Important Definitions:

A. A “qualified” beneficiary is any beneficiary who is eligible to receive either an income or principal distribution at the present, or who would be entitled to receive a distribution if all of the current beneficiaries died or if the trust terminated. This includes current discretionary beneficiaries, remainder beneficiaries, the takers in default under a testamentary power of appointment or an unexercised nontestamentary power of appointment, and the appointees under an exercised nontestamentary power of appointment.

B. A “nonqualified” beneficiary is any person or entity who has any interest in the trust, vested or contingent, who is not a qualified beneficiary. Nonqualified beneficiaries might include the Settlor’s siblings who receive the remainder interest in a credit shelter trust if both the Settlor’s widow and child died. Those siblings are not “qualified” beneficiaries because if the widow died or the trust terminated at the present time, the child, and not the siblings, would be entitled to the trust assets. Also, charities or the Settlor’s intestate heirs named in the family disaster clause are nonqualified beneficiaries.

Remember; spend some time with your loved ones, because they are not going to be around forever.

Life is not measured by the number of breaths we take, but by the moments that take our breath away.

These Guidelines are designed as an aid to those of you who have been entrusted to serve as successor trustee(s).  It is not possible to answer all of your potential questions.  However, we hope to answer those which will come up with some regularity.

You may have assumed the duties as successor trustee either because of the incapacity or death of the primary trustee(s).  Therefore, these Guidelines are divided into two groups.  The following discusses what to do upon the death of the Settlor(s) of a Trust.

Succession Because of Death

If you have assumed the duties of successor trustee because of the death of one or more of the original trustees, your task is as follows:

1.  Locate all of the assets of the Trust.  If the Settlors have been maintaining the Asset Inventory section of their Family Trust Portfolio, this should be a simple matter.

2.  Determine whether a Credit Shelter Trust is to be created and, if so, obtain from the IRS (Form SS-4) a tax ID number for the Credit Shelter Trust upon the death of the first spouse, and retitle the appropriate assets into the Credit Shelter Trust under that trust’s tax ID number.   Assistance from an attorney and/or accountant is recommended to make sure this aspect of settlement is done properly.

3.  File the annual form 1041  (trust tax return) with the Internal Revenue Service.  This form requires you to show the income of the trust, its expenses, and the manner in which the income was distributed.  If the income has all been distributed, the trust will pay no tax, and this return is merely an information return. This form has a number of lines, but you will not be using most of the lines. With some guidance from your CPA or attorney, you should be able to complete the form.

4.  Verify the date of death value of all assets.  This value will become the new tax basis for the assets, and therefore, it is very important.

5.  Determine whether or not all of the real estate owned by the Settlor(s) has been transferred to the Trust.  Check for copies of recorded Deeds in the Family Trust Portfolio or check with the County Recorder’ office.

6.  Determine the expenses of last illness, taxes due and owing, funeral expenses and debts of the Settlor(s).  The funds of the Trust must first be used to pay these items.

7.  Once you are sure that all of the expenses have been paid, distribute the trust assets.  Make sure you have allowed for any income tax due and payable on the last year’s income of the Settlor(s).  You may be responsible for any shortage of these funds.  It is not uncommon to make a partial distribution of funds initially, with a final distribution once all expenses have been paid.

8.  Depending on the size of the estate, a Federal Estate Tax Return must be filed.  Because of the complexity of this return, we suggest you employ an attorney or accountant to assist you.

You may have assumed the duties as successor trustee either because of the incapacity or death of the primary trustee(s).  Therefore, these Guidelines are divided into two groups.  Following is a discussion of the steps you should take if assuming responsibilities as a result of incapacity of the Trust’s Settlor or Original Trustee.

Succession Due to Incapacity

If you have taken on the primary trustee responsibilities because of the incapacity of the primary trustee(s), you should take care of the following items:

1.  Locate all of the trust assets and make certain that title to the assets have been transferred into the name of the trust.  If there are assets which have yet to be transferred into the trust, the person or persons holding a Durable Power of Attorney can complete the transfers.  Since a Power of Attorney is no longer effective after the death of the Principal, it is important not to delay this step.

2.  Determine the needs of the Settlor or Settlors.  It will be your responsibility to manage their funds, and to take care of their financial needs to the extent the funds of the trust permit.

3.  If long term nursing home placement is a possibility, consider whether or not it may be advisable to “gift” trust assets to someone other than the Settlor.

4.  Provide an annual account to the beneficiaries of the Trust which tells them what funds were in the trust, how much income the trust had, and how that income was spent.

5.  File the annual form 1040 of the Settlor(s) with the Internal Revenue Service.

Some would argue that a Living Trust should be managed by a professional, or corporate trustee and they charge fees commensurate with executors fees for a Will going through Probate.  There can be many reasons why the services of a corporate trustee would be preferable to using a family member,  however, in most cases, trusted family members can and do successfully settle trust estates without undue complication.

Unless the Settlor pre-determines the fees that may be charged by an individual or professional for managing and settling a Trust,  a typical trust will usually allow for “Reasonable Compensation by a Trustee”.   Reasonable compensation is often a standard approach since the courts have essentially defined that term to be the fees usually and customarily charged by professional corporate trustees in the geographic area where the Settlor died, or where the Trust administration is to take place.  It varies a little from here to there but is generally around .75% to 1.75% of assets under management on an annual basis (if the trust is managed for beneficiaries over time as opposed to being all distributed outright).

There can be additional fees associated with real estate commissions, brokerage fees to liquidate real estate or stocks, tax preparation fees from an accountant… all of which can generally apply anyway whether you are dealing with a Probate or a Trust.   The key expense items that usually are not part of a Living Trust’s settlement are court costs and attorneys fees.

Here is something important to note… most successor trustees who are beneficiaries DO NOT charge any Trustee Fee (maybe just reimbursement for out of pocket expenses)… The reason being that trustee fees are taxable to them… inheritance is not.  Sometimes taking a fee is warranted by a beneficiary who is acting as a Successor Trustee,  but it usually the exception more than the rule.

The bottom line is that a properly prepared and funded living trust, even if administered by a Successor Trustee who is a paid Corporate Trustee, should still be significantly more economical than the cost of Probate Administration in most cases.  In the wider analysis, the comparison of costs should not be the only factor looked at.  You should also look at the length of time each method will take, the likelyhood of any heirs who might seek to contest your wishes, and the short and long term needs of the beneficiaries.

The following sections discuss certain Internal Revenue issues. PLEASE NOTE THAT THIS IS FOR REFERENCE FOR OUR CLIENTS AND IS INTENDED TO BE A STARTING POINT FOR YOU IN YOUR DISCUSSIONS WITH YOUR TAX ADVISOR. This is not intended to be a comprehensive discussion but merely seeks to answer some basic questions which may arise.

SEE YOUR TAX ADVISOR!

When to Get a New Tax Identification Number
for a Revocable Living Trust

According to the Internal Revenue Service (IRS) the Trustee of a revocable trust should file annual income tax returns (Treas. Reg. 1.671-4), and obtain an employer identification number. (Rev. Rul. 63-178, 1963-2 C.B. 609) IRS Form 1041 when the trust is revocable.

HOWEVER, if the grantor or settlor of a revocable trust or his or her spouse is a trustee of that Trust, then the items of trust income and deduction are reported directly on the Settlor’s own tax return and the trust uses the Settlor’s Social Security Number rather than obtaining a separate taxpayer identification number for the trust. (Treas. Reg. 1.6012-3(a)(9)).

In general, if at least one of the Settlors are also the Trustee for the Trust, then the use of the Settlor’s Social Security Number is recommended.  If on the other hand someone other than the Settlor(s) is acting as Trustee (during one or more of the Settlor’s lifetimes), then the use of a separate employer identification number may be preferable.  Keep in mind that once a Revocable Living Trust becomes irrevocable, such as upon the death of the Settlors, that the Successor Trustee must usually obtain a  separate employer identification number.

Income Tax Considerations

In general, the creation of a revocable trust has no significant income tax consequences during the Settlor’s lifetime. Because the trust is revocable, its income is fully taxed to the Settlor under the grantor (Settlor) trust rules regardless of whether it is distributed or accumulated. (I.R.C. 676.) The transfer of property to a revocable trust generally does not constitute a taxable event or otherwise trigger the realization of gain.

Asset Holding Periods

The holding period of assets transferred to a revocable trust includes the holding period of the assets in the hands of the settlor. Once the trust ceases to be revocable (for example, on the settlor’s death), the holding period begins anew. (Rev. Rul. 73-209, 1973-1 C.B. 614)

Sale of Principal Residence

Generally, the tax advantages on the sale of settlor’s principal residence are retained even if the residence is held in a revocable trust. (I.R.C. 121, Rev, Rul. 66-159, 1966- C.B. 152; IRS Letter Ruling 8007050)

Deductibility of Attorney Fees

The costs of establishing and maintaining a funded revocable trust will be borne in part by the federal government because such fees are incurred for the management, conservation, or maintenance of property held for the production of income and are deductible for federal income tax purposes to a considerable extent. (I.R.C. 212) These costs are, of course, subject to the two percent floor on miscellaneous deductions, under the Tax Reform Act of 1986.

In addition, legal fees incurred in establishing a revocable trust should be deductible on the same basis as that on which trustee’s fees are deductible. In fact, it may not seem unreasonable to regard the entire charge made by the attorney as allocable to the establishment of an arrangement for the management, conservation, or maintenance of property held for the production of income, at least if the trust is to be presently funded.

Once again see your tax adviser.

Our earlier blog was specifically focused on the amount of insurance available to folks who have their accounts titled in the name of a Revocable Living Trust.  You may recall in that blog, that the amount of insurance was calculated somewhat differently.

The insurance coverage for Living Trust owned accounts was calculated first by multiplying the number of Creators, or “Settlors” of the Trust times $100,000.  Then multiplying that number by the number of “Qualifying Beneficiaries”, to come up with your total insurance.

E.g.  If the Trust has a husband and a wife as the (2) creators or “Settlors” of the Trust, the first calculation is 2 x $100,000 = $200,000.  If the husband and wife have 3 children named as Successor Beneficiaries of the Trust, then the second part of the calculation is $200,000 x 3 (qualifying beneficiaries) = $600,000 TOTAL AMOUNT OF INSURANCE COVERAGE.  With the higher insurance limits passed in early October, these calculations will change as follows:

Under the new law the calculation will use the higher insurance limit of $250,000, and would therefore look something like this:

First calculation:  2 x $250,000 = $500,000

Second Calculation:  $500,000 x 3 (children as qualifying beneficiaries) = $1,500,000 TOTAL AMOUNT OF INSURANCE COVERAGE.

In addition, you may recall that there were two additional conditions imposed in order to qualify for the full amount of insurance as calculated above. 

1. The beneficies of your trust had to be “Qualified beneficiaries” , meaning the spouse, child, grandchild, parent or sibling of a Settlor.  
2. The beneficiaries names must be listed on your account paperwork kept at the bank.

The new law eliminates the use and definition of “Qualifying Beneficiary” so that now if you have a friend, relative such as Aunts, Uncles or Cousins, or even a charity, for example, named as a beneficiary of your trust, that the full additional $250,000 worth of insurance coverage for each such name listed will be available.

Sometimes our retirement years can present special challenges, and often people find themselves in need of extra income just to keep up.  Fortunately tools like the reverse mortgage have been developed to tap into the equity in our homes that often seemed locked away and unavailable.

How much can you get?  Usually in the neighborhood of 40% to 60% of your home’s value.  There are four factors that go into determining the amount available:

1. The value of the home
2. The number and ages of the homeowners
3. The interest rate offered
4. The maximum allowable loan limit as determined by the average values of homes in your county and the limits of the backing agency such as FHA

The Federal Deposit Insurance Corporation has it’s own rules that pertain to insurance coverage’s for various types of accounts. Their rules for Trusts can sometimes be confusing. We cannot give you any absolute advice on how much insurance is available under FDIC rules. In addition, the FDIC does not generally review individual trusts and tell you how much insurance would be available. What we can do is include here the general rules put out by the FDIC, and give you some questions to pose to your bank for an idea from them on how much insurance is provided. If you cannot get clarification to your satisfaction, you can be absolutely assured of complete protection if you keep no more than $100,000 in the name of your trust in any one bank.

The following information was obtained from the Federal Deposit Insurance Corporation (FDIC) as it relates to Bank and Savings & Loan deposits and how they are insured upon retitling into the name of a trust.

12 C.F.R. § 330.10(a). This regulation applies to revocable trust accounts held by all insured depository institutions, both banks and savings and loan associations (hereafter “savings associations”).

It is important to note that the special insurance coverage provided by the regulation quoted above depends, first of all, upon the proper titling of the trust accounts, and then, upon the listing of the trust’s beneficiaries by name in the deposit account records of the insured depository institution.

As far as account titling is concerned, the terms which must be used are said to be “commonly accepted terms such as, but not limited to, ‘in trust for,’ ‘as trustee for,’ ‘payable-on-death to,’ or any acronym [abbreviation] therefore.” 12 C.F.R. § 330.10(b) (emphasis added). Thus, if the title of a trust account suggests that a trust is involved, that title will usually be acceptable. For instance, a trust account entitled the “Jones Family Trust” or the “Jones Family Revocable Trust” would meet the proper titling.

The next requirement is that the trust’s beneficiaries be “specifically” listed in the insured depository institution’s “deposit account records.” The “specifically” means that the beneficiaries must be listed by name — for example, Ann Jones, Tommy Jones — not merely by the class to which they belong — that is, the requirement is not met by listing the beneficiaries merely as “my children.” As for the “deposit account records,” these are defined as “account ledgers, signature cards, certificates of deposit, passbooks … and other books and records of the insured depository institution, including records maintained by computer, which relate to the insured depository institution’s deposit taking function….” 12 C.F.R. 330.1(e). For most purposes, perhaps the signature card and the certificate of deposit are the best places for listing one’s beneficiaries.

In order to qualify for the special insurance coverage provided to revocable trust accounts by 12 C.F.R. 330.10, the following two conditions must be met upon the death of the last Settlor to die:

1. There must be one or more qualifying beneficiaries to benefit from the trust (that is, one or more of the beneficiaries upon the death of the last Settlor must be the spouse, child, grandchild, parent or sibling of a Settlor); and
2. A qualifying beneficiary, at the death of the last Settlor, must have a vested or non-contingent interest in the trust (such that the funds might be said to “belong” to the beneficiary). This “vested or non-contingent interest” for revocable trusts is defined far differently from the “vested or non-contingent interest” for irrevocable trusts and should not be confused with the irrevocable trust’s definition.

The first condition — that, upon the death of the last Settlor, there must be one or more qualifying beneficiaries of a Settlor to benefit from the trust — is not very difficult to satisfy. The separate insurance coverage of revocable trust accounts is dependent upon a showing by the Settlor that at his or her death, the funds in the account “shall belong” to the Settlor’s spouse, child, grandchild, parent, brother or sister. (”Child” includes a biological child, adopted child, and stepchild of the owner. “Grandchild” includes a biological child, adopted child, and stepchild of any of the owner’s children. “Parent” includes a biological parent, adoptive parent, and stepparent of the owner. “Brother” includes a full brother, half brother, brother through adoption, and stepbrother of the owner. “Sister” includes a full sister, half sister, sister through adoption, and stepsister of the owner.)

The second condition, however — that a qualifying beneficiary must have a vested or non-contingent interest in the trust — is much more difficult to satisfy. The FDIC defines a “vested interest” in the context of a revocable trust as:

1. An interest to which no defeating contingency is attached; AND
2. An interest where the person holding it has already been born, and his/her identity ascertained upon the death of the last Settlor to die (or upon the earlier default of the insured depository institution); AND
3. An interest where, no later than upon the death of the last Settlor to die, the trustee is instructed to set aside a share of the trust principal for this particular beneficiary (even if that share might later change in size, for example, when another grandchild of the Settlor is born after the death of the last Settlor, but before the funds are scheduled to be finally distributed; note, however, that this grandchild, because he/she was born after the death of the last Settlor, would not be considered a qualifying beneficiary because of requirement (2)); AND
4.  an interest where the beneficiary either receives an outright distribution of his/her share of the trust principal upon the death of the last Settlor OR can invade the principal of his/her share to an unlimited extent at his or her demand from that time on OR where the beneficiary will eventually take his/her share outright, provided that he/she survives for a given number of years or to a certain age, or, if he/she does not so survive, provided that his/her share in the trust will pass to his/her estate or his/her heirs at his/her death.

Assuming that a given trust fulfills all of the above requirements, the following example shows how an account holding the funds of that trust would be insured.

The Basic Operation of the Rule

Suppose that two Settlors, a husband and wife, establish a revocable trust for the benefit of the survivor of either one of them and their four children. Upon the death of the first Settlor, the trust is split into a marital trust for the surviving spouse and a family trust for the children. The trust defines how much is to go into each of these sub-trusts and provides that the surviving spouse will be able to invade the principal of his/her trust to an unlimited extent during his/her life, and, if he/she wishes, to dispose of the rest (if any) of the marital trust by will. The trust also provides that, upon the death of the last Settlor, the trustee is to set aside a share of the family trust for each of the Settlors’ children then living. Each child is to receive his/her share outright when he/she attains 21 years of age. If a child dies before reaching 21 years of age, his/her share of the trust will go to his/her estate or heirs.

What would be the insurance coverage of such a trust? It is important to remember that the amount of insurance coverage can change according to who is alive when the bank or savings association fails and according to whether the trust then in operation is a revocable or irrevocable trust.

While both the husband and wife are alive, the trust outlined above is revocable, so one would apply the insurance regulation at 12 C.F.R. § 330.10. Looking to the number of qualifying beneficiaries (here, children) who will have a vested interest upon the death of the last Settlor to die, one finds the four children. Thus, if the depository institution should fail while both spouses are alive, the trust would be insured for a maximum amount equal to –The number of Settlors then living (2) times the number of qualifying beneficiaries then living (4) times $100,000 = $800,000.

Upon the death of the first spouse, the trust remains revocable (because the surviving spouse still has the power to revoke it), and the rules for revocable trusts continue to apply. Once again, the qualifying beneficiaries who will have a vested interest in the trust upon the death of the last Settlor are the four children. Thus, if the depository institution should fail when the surviving spouse is alive, the trust would be insured for a maximum amount equal to the number of Settlors then living (1) times the number of qualifying beneficiaries then living (4) times $100,000 = $400,000.

Upon the death of the surviving spouse — that is, upon the death of the last Settlor — the trust usually becomes irrevocable (because usually only the Settlors have the power to revoke the trust and once they have died that power is gone). Because the trust is irrevocable, one must apply the regulation for irrevocable trusts. According to that regulation, in order for a beneficiary’s interest to receive separate insurance coverage, the beneficiary need not be only the spouse, child, grandchild, parent or sibling of the Settlor. Instead, the rule for irrevocable trusts adds together all of the “non-contingent trust interests” of the same beneficiary that are created by the same Settlor (in one or more irrevocable trusts) and insures that beneficiary’s total interest which is derived from that Settlor for up to $100,000, with such coverage remaining separate from that provided for other accounts maintained by the Settlors, trustees or beneficiaries of the irrevocable trust (or trusts) at the same insured depository institution. In addition, each trust interest in any irrevocable trust established by two or more Settlors is deemed to be derived from each Settlor pro rata to his or her actual contribution to the trust. Meanwhile, all interests of an irrevocable trust which are deemed to be contingent are added together and insured for up to $100,000, separately from the coverage for non-contingent interests. The FDIC defines a “non-contingent trust interest” as it applies to irrevocable trusts as a trust interest capable of determination without evaluation of contingencies except for those covered by the present worth or life expectancy tables of the Internal Revenue Code. See 12 C.F.R. § 330.13; 12 C.F.R. § 330.1(l).

In order for the special insurance coverage of the revocable trust regulation (12 C.F.R. § 330.10) to be triggered, the revocable trust agreement must provide that at least one qualifying beneficiary shall have a vested interest in the trust upon the death of the last Settlor. One of the requirements of a vested interest is that there is no condition attached to it, which would render it contingent. Because such conditions, or “defeating contingencies,” have a drastic effect on the insurance coverage of a trust, it is important to examine them more closely.

In Summary, if you have a Trust (either Revocable or Irrevocable), AND you have deposits in any one banking institution in excess of $100,000, you should carefully review these general rules governing FDIC Insurance and speak to your bank about the specific level of insurance available for YOUR accounts. Again, if you are not completely satisfied at the answers you receive, you should strongly consider maintaining no more than $100,000 in Trust owned bank accounts at any one Banking Institution.