What Is Estate Planning?

The process of preparing a plan to ensure that your property is distributed to who you want after you pass away in the most efficient manner. This includes planning to avoid probate, minimizing taxes and protecting beneficiaries from themselves (while they are minors and learning to manage wealth) and any potential creditors like a divorcing spouse or lawsuit from a car accident or business transaction.

What Is an Estate?

An estate refers to everything a person owns whether alive or dead such as your home, cars, bank accounts, and investments. This includes real property and tangible property.

How Do I Make an Estate Plan?

Dana and Associates offers a free Personal Family Legal Session to help families determine their estate planning needs and prepare for the future.

What Are Paperless Estate Planning Solutions?

Dana and Associates offers a three-part Paperless Estate Planning Solutions to inventory your digital assets, give access to digital assets to your successor trustee, and share your estate planning documents electronically.

Step One – Inventory

We include specific language in our trusts, last will and testaments and powers of attorney allowing fiduciaries to request an inventory of all digital assets. The inventory contains the following limited information:

  1. the type of account
  2. the value of the account
  3. the owner of the account
  4. if there was a beneficiary named.

This allows the fiduciary to access the information only and not the underlying assets. After they know what accounts exist, they can use the proper legal document that gives them the authority over the account. If the account is owned by the trust, the fiduciary can provide the trust to show they have authority or if it is in the name of an individual the fiduciary would provide the power of attorney if they needed to access the account.

Step Two – Digital Asset Trusts (DAT)

A Digital Asset Trust, or DAT for short, is a type of trust that allows your successor trustee to have limited access to email and other important information that is stored electronically.

Step Three – Digital Vault

After your legal plan is complete, the legal documents need to be stored somewhere safe, where the right people can access it when they need to. Our legal plans include access to a “digital vault” that allows you to store all of your estate planning documents and important information electronically. It also gives you the ability to share the document with whom you want when you want. You can choose to share a copy of it immediately with your successor trustee, Certified Public Accountant, or financial advisor or choose only to let them have access after you pass away.

This makes it possible for your family and trusted advisors access you will, trust, and powers of attorney and important information at any time, from anywhere.

What Is Probate?

Probate is the judicial process where the courts legally authenticate a last will and testament and appoint a personal representative to manage the estate. Probate is a lengthy and costly process that can be avoided using a trust. If a person dies without a valid last will and testament, it is said that they have died “intestate”, which means without a will. The Arizona Laws of Intestacy divide the property between spouse and family members. If there are no family members to claim the estate, then the assets are passed entirely to the state.

Informal Probate

The court supervises the probate, but there are no required court appearances. This requires an original copy of the Last Will and Testament or all the intestate heirs to agree in nominating a person or company to serve as the Personal Representative of the estate.

Formal Probate

Is where a court appearance is required to settle a dispute as to who will be the personal representative or as to the validity of the will or any other issue.

Who Is the Personal Representative?

The personal representative is appointed by the probate court and issued “Personal Representative Letters”, which show they have authority to manage assets of the estate. For intestate estates, the beneficiaries can nominate a personal representative, or if an agreement can’t be made the probate court will hold a hearing and the judge will decide who will be appointed as the personal representative.

The personal representative is responsible for finding all of the assets of the estate such as bank accounts, houses, and retirement accounts and settling valid debts of the estate.

Probate requires notifying all known creditors and posting an obituary in a newspaper to give any unknown creditors a chance to make a claim against the Estate. The date of the newspaper posting starts a four-month creditor period in which all claims are presented to the estate. Creditor claims received after the four-month period are disallowed.

After the creditor period, ends and all of the assets of the Estate have been collected the personal representative will have to settle with all creditors of the estate.

What Are Personal Representative Letters?

This is a document signed by the court that shows that the Personal Representative has the authority to act for the estate. They are also referred to as “PR Letters” or “Testamentary Letters”. This is what is needed to access bank accounts and assets in the name of the deceased and to sell real estate that was owned by the deceased.

What Is the Alternative to Probate?

The best way to avoid probate is with proper estate planning and a trust during your lifetime; however, there are a few other alternatives to probate depending on the value of the deceased’s assets.

If the total value of all the real property in the estate is less than $100,000 then a Real Property Affidavit is a substitute for probate. If the total of personal property is less than $75,000 it can be collected by a Personal Property Affidavit.

Real Property Affidavit

In Arizona, a real property affidavit can be filed six months after a person passes away to collect real property from the estate. This ends up being less time consuming and therefore fewer expenses than an informal probate but requires waiting for six months before the property can be collected. Although an informal probate usually takes close to a year to complete, the personal representative receives the authority to act for the estate once the court approves the probate application and issues the personal representative letters which takes approximately 4-8 weeks (2-3 weeks for our office to draft the initial probate documents and 2-5 weeks for the courts to process the documents). If there is a mortgage on the real property it is sometimes necessary to open a probate even if the value is less than $100,000 so the property can be sold in a timely manner.

Personal Property Affidavit

Personal Property Affidavit is a substitute for probate when the total value of personal property in the estate is less than $75,000. This can be filed 30 days after the person passes away and is permissive, meaning that companies can accept this as substitute for Probate and the personal representative letters (also called, letters testamentary or letters of administration), but they are not required to accept it. Usually, if the company has offices in Arizona they are familiar with this probate substitute and will honor it. It is not uncommon for companies not located in AZ to still require Probate and the letters issued from the court to prove the personal representative has the authority to act for the estate.

What Is a Last Will and Testament?

A last will and testament is a legal document that gives instructions on how to manage an estate. It will include who will receive your property (beneficiary), who is in charge, (personal representative) and who would care for your minor children (guardian). A will does not transfer property or retitle assets after someone passes away, so probate may be necessary before assets can be distributed to the beneficiaries. A trust, by contrast, avoids probate and can be administered without court involvement.

Who Inherits Arizona Property If There Is Not a Last Will and Testament?

If a person dies without a valid last will and testament, it is said that they have died “intestate”, which means without a will. The Arizona Laws of intestacy divide the property between spouse and family members. Below are the Arizona Revised Statutes give specific instruction

What Is a Trust?

A trust is a legal contract made by a person called the trustor, (sometimes called grantor or settlor) appointing a person or company to manage assets for the benefit of another person. The person managing the assets is called the trustee and then the person entitled to receive the assets is called the beneficiary. Usually, a person or married couple will serve in all three roles in their trust. They will make a trust (trustor) and manage it (trustee) for their own benefit (beneficiary).

How Does a Trust Work?

A trust is a legal document that details your wishes about the property held in the trust and how to distribute the property to your beneficiaries. Trusts avoid probate because they are private contracts that transfer ownership of your property so that the court does not have to after your death. There are three parties in the formation and distribution of a trust including the grantor or trustor, the trustee, and the beneficiary.

Who Is the Trustor?

In our practice, we use the term trustor, though the terms donor, grantor, settlor and trustmaker are all different names for the same role. The trustor is the person who creates the trust and is the person who puts assets into the trust.

Who Is the Trustee?

The trustee is the person who manages the assets inside of the trust. While you are alive you can continue to manage the assets in your revocable living trust as both the trustor and the trustee.

But what happens to a trust when the trustee dies? A good trust will designate a successor trustee to serve after you pass away or are unable to manage your own affairs due to disability.

Who Is the Beneficiary?

A beneficiary is a person or group of people to whom the trust is made to benefit. Often, we see assets passed down to the trustor’s children, families, and charitable causes. The trust avoids probate and protects the beneficiary by simplifying the transfer of assets and may also establish tax protections for their inheritance.

The trust should also designate who is to receive the assets in the trust after the death of the trustors, called the remainder beneficiaries.

The trust will also designate when and how the beneficiary will receive the assets in trust. The most common condition is an “Age Restriction Trust”, which designates the assets to be held for the beneficiary until they reach age eighteen or a determined age. While the beneficiary is under eighteen the trustee manages the assets and makes distributions as they see fit for “Health, Education, Maintenance and Support”.

If the trust fails to mention any of these important terms or they are unclear, then the beneficiaries of the trust will need to come to an agreement with the trustee. If they can’t reach an agreement, then it will have to be litigated in court.

What Is a Living Trust?

A trust that is created and effective when the trustor is alive is referred to as a living trust. It is also commonly referred to as a revocable trust or a revocable living trust, these are all the same thing and are the most common type of trust. Revocable, means the trustors have the ability to make changes to it. Living means that the trust is in existence now while the trustors are living. The main purpose of a revocable living trust is to pass assets from generation to generation without probate.

How Much Does a Living Trust Cost?

It might sound like a classic attorney answer, but it depends. Are you married? Do you have children with special needs? Do you want to leave money to charities after you are gone?

The cost of your trust package varies based on your wishes and you and your family’s needs. At Dana and Associates, we offer a free one-hour Personal Family Legal Session where you can meet with an attorney and to determine what your needs. You will then be will quote you a flat rate fee for the plan that is best for you.

What Is an Irrevocable Trust?

An irrevocable trust is a type of trust where the terms of the trust cannot be changed. After the trustor(s) of a revocable trust passes away no one can change the terms of their trust and therefore the trust becomes irrevocable at that time.

For estate tax planning and other advanced planning purposes some trusts are irrevocable from the moment they are created.

What Is a Trust Fund?

While technically a trust fund is any bank account that a trust owns, the term is commonly used to describe a type of trust that protects the money and assets it holds from potential creditors and taxes. It may be managed by a third party like a bank or law firm or managed directly by the beneficiary. There are many different names for these types of trusts, we refer to them as a Dynasty Trust.

What Is a Dynasty Trust?

Dynasty Trust is a trust designed to protect assets from potential creditors and estate taxes. The Dynasty Trust is a Sub-Trust, which means that the terms of the Dynasty Trust are contained within an article of a Revocable Trust. The trust will provide instructions to create the Dynasty Trust(s) upon the death of the last trustor. For the purposes of this FAQ, we will refer to the next generation who inherits the Dynasty Trust as the beneficiary.

What Are the Benefits of a Dynasty Trust?

Assets held in a dynasty trust are outside of the beneficiary’s estate, meaning they will NOT be subject to the estate tax when your child or beneficiary passes away. This also means that the assets are out of reach from potential creditors such as bankruptcy, a divorcing spouse or a car accident victim.

We have seen several people experience the loss of a loved one while they are in the middle of bankruptcies or other lawsuits. When these things occur simultaneously the results can be devastating, and inheritances can be lost completely. A dynasty trust protects your family after you are gone.

What Are the Downsides to a Dynasty Trust?

There is an increased cost to your estate plan to include a Dynasty Trust and there will be some increased administration costs after the death of the last trustor to create the dynasty trust(s). The dynasty trust once created will be required to file a separate tax return every year which will increase the annual cost of tax preparation.

How Do I Create a Dynasty Trust?

The first step to creating a dynasty trust is including the specific language in a revocable trust. After the passing of the trustor there is some administration work to ensure the creation of the dynasty trust including obtaining a new tax identification number for the trust and required notices to the federal Internal Revenue Service and state department of revenue.

What Is the Difference Between a Dynasty Trust and a Revocable Trust?

A dynasty trust is an inherited trust, while anyone can create a revocable trust. Once created the dynasty trust is an irrevocable trust and will have its own tax ID number and file its own tax return. A revocable trust does not have its own tax ID number (most of the time) and will use the trustor‘s social security number to track income. The main purpose of the revocable trust is to avoid probate.

Who Should Be the Trustee of a Dynasty Trust?

If a beneficiary stands to inherit a life changing amount of money, we recommend that an independent trustee be considered, at least for a period of time. We refer to this as protecting the beneficiary from themselves, which is more obvious for minor beneficiaries, but an eighteen-year old or a person of any age could benefit from the help of a qualified trustee to learn how to use the trust to minimize taxes paid and maximize the protections of the trust. Independent means any person or company other than the beneficiary. We generally do not recommend appointing siblings to be the trustee of another sibling as this may cause tension between them if there is a disagreement on how distributions are to be made or the investment of the trust assets. The trustee could be a trusted friend, family member, a bank, financial company, tax advisor or legal advisor. If a friend or family member is obtained, he or she should seek legal, tax, and financial counsel.

What Is Power of Appointment?

Power of appointment is a clause in a trust that allows the beneficiary to decide who will be the beneficiaries(s) of the trust upon their death. A narrow power of appointment can require the trust be sent to a specific beneficiary or class of beneficiaries like grandchildren. A broad power of appointment can allow for the trust to be appointed to anyone, except for creditors. A broad power of appointment gives a beneficiary the power to send the trust to their new partner, a charity or more importantly the power to prevent the next generation from automatically receiving the trust, which is why we sometimes refer to this power as the power of disappointment.

Sometimes the terms of the power of appointment require it to be exercised in a last will and testament and other times they can be exercised by a signed writing other than a will, either way it will not be effective until the beneficiary passes away.

Powers of appointment can be limited or general, which refers to their tax status. The dynasty trust will have a limited power of appointment, which means it is not subject to estate tax when it is appointed to the next beneficiary. A general power of appointment is subject to the estate tax.

What Is the Estate Tax Exemption?

The Estate Tax Exemption is the amount of money that can be transferred before the estate tax applies. Currently, the federal exemption is $10,000,000 adjusted for inflation. This means that if your estate is worth $11,000,000 that $10,000,000 would be exempt and the estate tax would be assessed on $1,000,000.

Are Inherited IRAs Protected From Bankruptcy and Creditors?

While IRAs may be protected in the event of a bankruptcy or lawsuit for the account holder, the Supreme Court recently found that an inherited IRA does not have the same protections (Clark v. Rameker). A Dynasty Trust with IRA Look-Through provisions can protect the IRA assets from bankruptcy and other creditors.

What Is an IRA “See-Through” Trust?

An Individual Retirement Account “See-Through” Trust, also called a Look-Through Trust, is a type of trust that qualifies for special tax treatment based upon the age and life expectancy of the individual beneficiary(s) of the trust.

Among other requirements, the trust must be irrevocable or become irrevocable upon the death of the original IRA owner. “See-Through” provisions can be added into a dynasty trust for beneficiaries inheriting IRAs or IRA “See-Through” provisions can be used in other types of trusts for spouses and other beneficiaries.

How Are IRA “See-Through” Trusts Taxed?

With a properly drafted IRA Look-Through trust the age of the oldest beneficiary will be used to determine the required minimum distribution amount. Although the payments will be made to a trust, the trust will be ignored or “looked through” for tax purposes. The tax treatment will be the same as an inherited IRA with an annual required minimum distribution regardless of the beneficiary’s age, and not at 70 ½ as it is for the account holder or spousal beneficiary.

If the income is distributed from the trust to the beneficiary, he or she will pay income tax according to his or her tax bracket. If the income is kept inside the trust the trust will pay the income tax according to the trust’s bracket.

What Are the Benefits of an IRA “See-Through” Trust?

IRA Look-Through Trusts allows retirement accounts to be controlled and protected by a trust but avoids the default IRA Trust Tax Treatment.

A Dynasty Trust with IRA Look-Through provisions allows protection and control when passing IRAs to children and other beneficiaries.

Naming an 18-year-old as the beneficiary of your IRA is theoretically the longest way to defer income taxes, but studies show that beneficiaries of retirement accounts usually liquidate them within a few years. Naming a trust as the beneficiary of an IRA is a way to control when withdrawals are made and therefore minimizing income taxes.

What Is a Special Needs Trust?

A Special Needs Trust or sometimes called a Supplemental Needs Trust (SNT) is a type of trust to provide for a beneficiary with special needs without disqualifying him or her from public benefits (like Supplemental Security Income, Social Security Disability Insurance, Medical, Medicaid, Arizona Long Term Care System).

The Special Needs Trust clearly states that the purpose is not to replace benefits and is only to supplement the beneficiaries needs that are not covered by the benefits. This means the trustee must pay special attention to the amount of income or assets a beneficiary is allowed to have and not make any distributions that would disqualify them.

Without a Special Needs Trust the beneficiary could lose his or her Supplemental Security Income (SSI) or Medicaid (ALTCS) benefits if the inheritance received increases his or her income or estate value. The Special Needs Trust names a trustee to manage the assets for the beneficiary and allows for discretion to supplement his or her needs.

What Is a Digital Asset Trust?

A Digital Asset Trust is a type of trust that allows your successor trustee to have limited access to email and other important information that is stored electronically. In the “pre-email” days, after a person passed away or became incapacitated the fiduciaries could check their mail to see what bank statements and bills arrived. In the age of electronic bill pay and online banking a Digital Asset Trust provides a way for your fiduciaries to get the necessary information, without sacrificing your privacy.

With a Digital Asset Trust, your fiduciary can get list your email address(es) and to access a list of emails received, without logging into your email. The trustee will not have access to the content and actual message and will only be able see a list of email senders, the email subject, and the date the email was received. This allows the trustee to discover any banks, financial accounts and any credit card bills so they can administer the trust and estate while still protecting your privacy.

The Digital Asset Trust can also be used to manage other digital assets like videos stored on YouTube or other media sources. Your iTunes account and many other services are single user licensing agreements, which means that your video and music collection are not digital assets that can be managed with a Digital Asset Trust.

Your attorney can answer questions about other types of digital assets during your Personal Family Legal Session.

What Are Digital Assets?

The Revised Uniform Fiduciary Access to Digital Assets Act (FADAA) defines digital assets as: “an electronic record in which an individual has a right or interest”. For example, the information your bank is storing about your account electronically, (account balance, dates of withdraw, etc.). The information about the account is your digital asset. The Revised Uniform Fiduciary Access to Digital Assets Act became effective in Arizona in 2016.

Even if you conduct all of your business on paper, (and you are borrowing a friend’s electronic device to read this) your bank and financial institutions are storing your information electronically on your behalf. This information creates digital records that you have a right or interest in.

The money in your bank account is an asset, the digital asset is the just the information about the account including the name of the account owner(s), the beneficiaries (if any) and the value of the account. This is all crucial information for your fiduciaries need to efficiently administer your estate plan. The Revised Uniform Fiduciary Access to Digital Assets Act gives you the authority to direct what happens to your digital information after you are gone.

Dana and Associates offers a three-part Paperless Estate Planning Solutions to help you manage your digital assets.

How Do I Set Up a Trust?

Hiring our law firm is the easiest way to create a trust because it ensures that the documents will be legal and correct. This saves you time and energy. At Dana and Associates, we offer a Personal Family Legal Session, which is a complimentary one-hour meeting with an attorney to determine your needs. The purpose of this meeting is to get to know you. Before the meeting, we will send you a Personal Inventory where you can provide some basic information about your family and an inventory of your assets such as your house, bank accounts, investment and retirement accounts, and life insurance.

When you meet with your attorney during your Personal Family Legal Session you will discuss your goals and wishes. If a trust is the best option for you and your family the attorney will then help design a plan for you that meets your personal needs and will quote you a flat fee to implement the plan. Within a few weeks, you will be given the opportunity to review the trust plan before meeting with one of our paralegals or attorneys to sign your documents.

After you have signed your trust documents you will return one to two weeks later for the Trust Asset Coordination Session. This is a meeting with an attorney where to discuss each individual asset in your trust and determine how each asset should be titled. This includes reviewing the beneficiary designations for your life insurance and retirement accounts (IRA, 401k, Annuity, Pension, etc.). You will receive your original legal documents inside of a binder and the attorney will review a few simple tools to help you organize your financial statements and other important information.

Why Should I Put My Assets in a Trust?

A Trust Avoids Probate

The probate process can be time consuming and expensive. It can be hard enough dealing with the loss of a loved one, but adding a court proceeding to the process makes it even more difficult. The stress of probate is exacerbated when the beneficiaries have different ideas on how the estate should be managed. By creating a trust and transferring your assets to your trust during your lifetime you can ensure that your loved ones will not have to face the hassle and expense of probate.

A Trust Avoids Conservatorship

Conservatorship is the legal process where a person is appointed to manage the assets of a minor or a person with a disability. If there is a beneficiary who is under eighteen he or she would not be able to open a bank account or receive the funds since he or she is a minor. A good trust will hold the assets for the beneficiary until the beneficiary is at least over age eighteen.

A Trust Gives You Control

The trustor sets the terms of the trust and appoints someone of confidence to take over the responsibilities of managing the trust when they no longer can, this person is called the successor trustee. The successor trustee would be appointed to manage the trust if the trustor is unable to manage their own affairs due to disability or after the death of the trustor. The successor trustee is a fiduciary, which means they have a legal obligation to follow the terms of the trust and to make the best use of the trust assets. In addition to determining who will receive your assets after you are gone, a trust allows you control when and how they will receive it.

A Trust Gives You Options

Certain trusts can take advantage of tax elections that other planning methods such as a will cannot do, in order to save in estate taxes and/or income taxes. Many families also worry about their assets ending up in the wrong hands. An estate plan utilizing a trust can protect assets from undesirable claims from creditors even after you are gone. Through planning, you can create a framework that supports your loved ones, but that also helps to grow your wealth for them after you are gone.

A Trust Protects Your Privacy

Besides being intrusive and costly probate also makes your information a matter of public record. A trust avoids probate and keeps your information out of the public eye.

A Trust Gives You Peace of Mind

By avoiding probate and letting you control who will receive your assets, and when and how they receive it a trust can provide peace of mind that your loved ones will be protected.

Why Do My Assets Need to Be in the Name of My Trust?

A common misconception is that once your trust documents are done and signed they are “good to go.” However, the trust must be funded. In order for your trust in to avoid probate it is essential that you retitle the assets into the name of the trust—in other words, the trust must own things or have a beneficiary interest in your things for it to really do what you want it to do.

So how do you ensure everything in is in your trust and it is funded correctly? Dana and Associates offers a complimentary Trust-Asset Coordination Session to meet with an attorney for personalized recommendations on how to title your assets to work with the trust.

Why Would You Put Your House in a Trust?

To avoid probate! Failing to plan for a home is one of the most common reasons people end up in probate court. Assets like bank accounts and retirement accounts allow you to easily name beneficiaries so the accounts transfer upon death without triggering probate, but with real estate, it takes more planning to avoid probate. Probate is avoided if there is a legal way to transfer title of the real estate upon the death of the owner(s), such as a trust.

Can I Avoid Probate If I Do Not Put My House in a Trust?

Probate can be avoided by having multiple owners, which is a good option for married couples, but usually not the best solution for children or other persons. It can create some liability issues as well as some potential tax issues. For married couples the deed will need to clearly show that the property was owned as Joint Tenants with Rights of Survivorship, which means that upon the death of one of the owners the property transfers to the other surviving owner(s), in order to avoid probate and transfer the interest of the deceased person to the remaining owner(s) of the property.

If the deed does not clearly show there were Rights of Survivorship, by default the property is owned as Tenants in Common and means that the deceased person’s interest of the property does not automatically pass to the remaining owners of the property and a probate or some court involvement will be necessary to transfer the interest of the deceased person.

How Do I Take Title of Real Estate?

“Taking title” refers to who and how someone is listed on a property title. There are several ways that you can take title to real estate in Arizona. The best way to take title of Arizona real estate will depend on the following factors: if you are single or married, if you intend to own the property with multiple owners, and more options if the other owner is your spouse.

If you are single and intend to be the only owner of the property than you will take title in your name. A probate would be required to transfer the property upon your death, so a trust should be considered with this option.

While it is possible to avoid probate by adding another owner to the property such as a child or friend that you would want to receive the property after your passing, multiple owners can create problems.

If you are married but receiving the property as a gift or an inheritance, then you have the option to take the title.

What Are My Real Property Title Options?

Tenants in Common means that the deceased person interest of the property does not automatically pass to the remaining owners of the property and a Probate or some court involvement will be necessary to transfer the interest of the deceased person.

Joint Tenants with Rights of Survivorship comes into effect after the death of one of the owners the property transfers to the other surviving owner(s).

Community Property with Rights of Survivorship is available only for married couples. Upon the death of one spouse, the property transfers to the other spouse and includes the benefit that could save income tax.

How Do You Transfer Real Estate Into a Living Trust?

Typically, real estate is transferred into a trust by changing the name of the ownership of the property to the name of the trust. This usually involves dealing with the county title office and paying retitling fees to get a new deed. At Dana and Associates, we take care of the transfer of real estate into your trust for you.

What Is Community Property?

In Arizona, all property acquired during a marriage, except for property acquired by gift, or inheritance is Community Property. In this type of ownership, each party is considered to own an undivided half interest of the property regardless of how it is titled. If husband deposits his paycheck into a bank account that is titled in his name alone the funds are still considered community property since they were acquired during the marriage. Community property laws provide protection to each party by splitting all of the assets equally upon the death of one of the parties or in the event of a divorce. Community property laws also have income tax advantages.

Even if you were married in another state, if you are living in Arizona the community property law will apply during your marriage. If the assets were acquired in another community property state, such as California or Nevada then the assets will be considered community property.

Separate Property

Separate property is anything owned before the marriage and any property received by gift or inheritance to an individual.

How Are Retirement Accounts Taxed?

***Disclaimer: These are general rules written by a lawyer for purposes of designing your estate plan. Consult with your CPA for specific income tax advice.

There are many types of income tax deferred retirement accounts including 401(k), 457(b), 403(b), and Individual Retirement Accounts. For this FAQ we will collectively refer to all of these types of accounts as IRAs. Tax deferred means that income tax is not due until the money is later withdrawn for retirement. In a non-tax deferred, or regular savings account, if the income was 100 and the income tax 30% that would leave 70 to be invested compared to a tax deferred account where all 100 of income is invested. This allows the account to accumulate faster however, income taxes are paid later when the money is withdrawn and If money is withdrawn before 59 ½ years old, there may be penalties for early withdrawal in addition to the income taxes owed.

At age 70 ½ years old, the owner of the account is forced to start taking money out of the IRA and paying income taxes on the amount withdrawn. This is called required minimum distributions (RMDs). The percentage, or rate of withdrawal increases with age.

The tax rate a person pays will depending on their tax filing status, which could be single, married or married filing separately. The rate or percentage of tax increases as the total income increases.

How Are Retirement Accounts Taxed With a Trust Named As the Beneficiary?

If a trust is named as the beneficiary of a retirement account, the income tax treatment is different than it would be if a person is the beneficiary. A person has a date of birth and therefore a life expectancy can be calculated. A trust, since it is inanimate, can exist forever and does not have a life expectancy. When a trust is named as the beneficiary of a retirement account, the default rule is that the trust is required to pay all the income tax within five years, which is much sooner than most individuals would be required to pay based upon their age.

The income tax rates for trusts is much higher than an individual. For example, in 2018 a trust reaches the highest tax bracket of 37% after $12,500 of income, where as an individual wouldn’t reach the highest bracket of 37% until they received $500,000 of income. This applies to income that is kept inside of the trust, income that is distributed out of the trust to an individual beneficiary will be reported on that individual’s income tax return and will pay income tax according to their bracket. (See a Certified Public Accountant for more details).

What Is the Estate Tax?

The estate tax, often referred to as the “death tax,” is a tax levied on the total value of an estate. Estate taxes only affect a select few; less than 0.1 percent of Americans will pay estate taxes in a given year.

The federal estate tax only applies when an estate is worth more than $10 million for an individual or $20 million for married couples. This amount that can be taxed before the estate tax applies is called the estate tax exemption. In addition to the federal estate tax, some states and cities also require an estate tax. Arizona does not have an estate tax.

Even though the estate tax only applies to a small fraction of population it is still valuable to consider asset protection. For example, we often recommend considering a dynasty trust whenever a single beneficiary stands to inherit more than $500,000.

What Is the Difference Between a Trust and a Last Will and Testament?

The main difference between a trust and a last will and testament is how your assets are retitled after you pass away. When your assets are properly held in a trust it is much easier to retitle the assets and distribute them to the beneficiaries because the successor trustee has immediate access to your accounts and assets. If you have been named a successor trustee, Dana and Associates can help administer the trust in order to distribute the estate.

If you only have a last will and testament, probate court may be a necessary first step to gain control over your assets in order to distribute your estate according to your wishes. This can be costly and time-consuming because of mandatory court fees and the process can take six months or more to complete. A common misconception is that a will is sufficient to avoid probate, but this is not true. Rather, the will is submitted to the courts during the probate process for court-supervised administration according to the terms of the will. If you have been named as successor trustee, call to schedule a Family Administration Session and Dana and Associates can help determine if a probate is necessary and if so guide you through the process.

What Is the Difference Between a Trust and an Estate?

A trust is a contract that explains your wishes for how to manage your property, it also can own the property or hold the property for your beneficiaries.

An estate is all property and assets that are held in your name (or the name of your trust). Your estate can include real estate, bank accounts, retirement and investment accounts, and personal property such as cars, jewelry, antiques, collectibles and the like.

Your estate is what you put into your trust.