In the 2019 whodunit movie “Knives Out,” the untimely death of a famous mystery novelist brings his family together for the reading of his last will and testament — only to find that a last-minute amendment leaves the author’s considerable wealth to his housekeeper. While not everyone has a fortune to leave behind, a proper estate plan — a trust, last will and testament, along with financial and healthcare powers of attorney — ensures that one’s passing does not precipitate the drama of a murder mystery.
“If someone wants to pick a fight, feelings are going to be hurt no matter what,” says Scott Jensen, partner at Guidant Law. “We’ll add in terrorem clauses — sometimes called no-contest clauses — that say that if someone wants to argue about what they’re getting versus what mom and dad [set aside in the trust] and brings legal action, their shares go to zero. It doesn’t inherently avoid controversies, but a trust is often more spelled out than the last will and testament, especially when it comes to controlling how and when someone is going to receive [money].”
Avoiding probate with a trust
Afsanieh Rassti, an estate planning attorney with Frazer Ryan Goldberg & Arnold, has a unique perspective, as she both drafts estate plans and pursues litigation when things “get messy,” she says. Most folks don’t have an estate plan, Rassti continues, which leads to confusion and opens the door for conflict.
“A revocable living trust is what most people need,” Rassti explains. “Since this document is revocable, it’s a living, breathing document that can be changed. If you are alive and in good health, only the creator or creators of the trust can make amendments to that agreement.”
Upon passing, that revocable living trust calcifies into an irrevocable agreement, meaning no further changes can be made. Not only does this type of trust provide clarity on how one’s assets should be distributed after their death, but it helps avoid the painful probate process.
“Probate is the court’s oversight of the administration of someone’s estate,” Jensen says. “If a person passes away in Arizona with personal assets worth more than $75,000 — such as a bank or investment account — that don’t have a beneficiary listed, you have to go through the court system and get letters of personal representative, which will allow you to talk to financial institutions to take care of whatever needs to happen in the estate. It’s the court giving someone the authority to legally take possession and distribute funds to beneficiaries.”
Real estate is treated differently, with a higher threshold of $100,000. Probate has mandatory reporting requirements so known creditors and others that have a debt to collect from the deceased have an opportunity to be made whole, since creditors get priority over beneficiaries. Going through probate is time consuming, increases administrative costs since attorneys are often involved and is a public proceeding, meaning some private information will also be brought to light.
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Even if someone sets up a trust, failure to properly transfer assets above Arizona’s value threshold into the trust while alive can induce probate, Rassti adds.
“You need a trust, but once it is put into place, many folks forget about it,” she continues. “Sometimes they neglect to put an investment account or title a property in the name of the trust. So, they might have a trust that’s funded with 90% of their assets, which are protected from probate, but they might have another asset outside the trust that triggers probate.”
Multiple types of trusts exist for different purposes — such as tax planning or gifting purposes — but Jensen says for most families, a revocable trust will suit their needs. High net worth individuals may enlist the help of someone such as Greg Oliver, regional director of trusts for BMO Harris Private Banking.
“I’m a trust administrator on the fiduciary side when BMO Bank is serving as trustee,” he explains. “That means members of my team are the trustee for the bank that’s dealing with the individual person. We can have co-trustees — a lot of times we’re working with surviving spouses. When you have a corporate fiduciary, you have a professional that’s engaged — it’s what we do every day for a living. If I go on vacation, someone else from the bank runs it, versus an individual or family member who is serving as trustee and has a lot more to think about than what’s going on with tax laws, statutes and duties that a fiduciary has.”
Other considerations
While a trust is a crucial part of any estate plan, it is just one piece. Financial and healthcare powers of attorney are critical if someone becomes incapacitated and unable to manage their financial and medical decisions by authorizing another person to do so on their behalf.
“By having those powers of attorney in place, it avoids any court intervention [such as] having a guardian or conservator appointed,” Rassti says. “A guardian would be appointed to manage any healthcare related decisions, and a conservator would be appointed by the court to make financial decisions on your behalf. I’ve done a lot of guardianship and conservatorships in the past, and those are intensive and can be permanent.”
The last will and testament is another important document that appoints an executor to manage the estate, distribute items, take care of burial arrangement, handle administrative issues and is the proper document in Arizona to name a legal guardian for minor children.
“If you choose not to have a trust and just want to stick to a will, it passes through probate,” Rassti says. “You can have beneficiaries designated on your bank accounts, life insurance, retirement, et cetera, but if there are assets in your estate that you do not designate beneficiaries or if you own real estate just in your name, that will have to go through probate court to get those assets distributed to your beneficiaries.”
Something called a pour-over will can be used in conjunction with a trust as a safety measure to ensure assets that weren’t included in the trust are rightly accounted for, Oliver notes.
“A pour-over will doesn’t avoid probate, but the will would say, ‘I want the personal representative to pour everything over that I didn’t properly fund in the name of my trust into my trust,’” he continues. “And then you would open up probate, have the creditors’ collection period, transfer over any assets outside into the trust and then follow the trust terms after that.”
After a proper estate plan is in place, Rassti says that it’s important to not let it sit untouched. “I review a lot of estate documents, and I run into a lot of problems because sometimes these documents were created 20 years ago and so much has changed,” she concludes. “My rule of thumb is that you want to review your estate plan every three to five years. Do it sooner if there’s a significant life change, whether that’s a new child or the death of a family member who is named in your trust, or as your executor or power of attorney. Meeting with your estate planning attorney is not a one-and-done deal.”
