Trusts and Elimination of Probate
In Arizona, a trust is a great tool to help benefit an individual or his/her family, in such a way that the person’s wishes are followed during their lifetime and after they have passed away.
There are different types of trusts for different purposes. The following is a list and explanation of the more commonly used trusts in Arizona.
1) Living Trusts
- The most common trust utilized in Arizona for estate planning and asset protection is a living trust. If properly used, a living trust can eliminate probate completely.
- It is used during the lifetime of the trustor (the person who makes the trust).
- The trustor designates who will administer the trust (trustee) and who will receive the trust principal or income; these are the beneficiaries.
- A living trust is generally revocable, which means it is changeable during the life of the trustor, however, at death a living trust becomes irrevocable.
2) Testamentary Trusts
- A Testamentary Trust can normally be changed up until the time the trustor passes away.
- A tTestamentary Trust goes into effect when the trustor passes away.
- A Testamentary Trust becomes irrevocable when the trustor passes away; meaning it cannot be changed.
3) Totten Trusts (accounts which are payable on the passing of the account holder)
- A Totten Trust is generally a bank account or a stock brokerage account for which the trustor has designated a beneficiary, who will be given the proceeds of the account when the trustor passes away.
- A Totten Trust typically avoids probate, however, and will not provide asset protection that can be provided in other types of trusts.
- A Totten Trust is generally revocable until the passing of the trustor.
- In Arizona, a Totten Trust cannot be revoked by the trustor’s last will and testament.
4) Special Needs Trusts
- A Special Needs Trust is used to provide for the welfare of a loved one with special needs.
- One of the principle reasons for using a Special Needs Trust is to provide for a loved one without causing the special needs person to be disqualified from eligibility for benefits and services that are provided by the government, e.g., Medicaid or Supplemental Security Income.
- Usually a Special Needs Trust can provide for education, travel, and furnishings, and in some cases, pay utilities for the beneficiary.
- A Special Needs Trust typically cannot be used to purchase food or to provide housing for the beneficiary, however, there are some exceptions to this general rule.
5) Honorary Trusts
- An Honorary Trust is created for the benefit of people, or entities, or pets and can even be for the benefit of some inanimate object, e.g., graves. For example, an Honorary Trust can be for the benefit of his/her pet to help ensure that the pet is taken care of in a manner the trustor wants after the trustor is incapacitated or passes away. Upon the death of the pet, any assets or funds held in trust will be distributed per instructions in the Honorary Trust.
- Trusts can also be drafted in such a way so as to protect trust assets from the creditors of trust beneficiaries. Trusts can also provide an additional level of creditor protection, i.e., protecting a beneficiary’s interest in a trust from unwanted creditors by using a spendthrift trust provision. Spendthrift trust provisions are not, however, absolute and claims for necessities and for alimony and child support, and other benefits or claims made by the United States or any state can be satisfied from trusts with spendthrift provisions.
- Purpose Requirements and Limitations. The purpose of a trust must be for a legal and valid purpose.
Private Trusts and Charitable Trusts
1) Private Trusts
- Unlike most other states, in Arizona, a non-charitable trust does not require an identifiable beneficiary. In this case, the trustee has a special power of appointment allowing the trustee to specify beneficiaries, as long as the trustee is not a beneficiary.
2) Charitable Trusts
- Unlike a Private Trust, a Charitable Trust cannot have an identifiable group of beneficiaries; rather, the beneficiaries need be an unidentifiable group of the public sector.
- The purpose of a Charitable Trust must be charitable, e.g., science, medicine, or religion.
Wayne Gardner, Attorney
Mesa, Arizona 85213