Tag Archives: Arizona law

Asset Protection in Arizona

Exemptions
Arizona allows various exemptions, protected by Arizona law, from most or all creditors after a judgment or bankruptcy filing.  These exemptions are different from corporate or limited liability company protection from creditors after a judgment or bankruptcy filing.

Some exemptions under Arizona law are:

  • Homestead Exemption – Up to $250,000 of equity in a primary residence either by a single person or a married couple – not $250,000 each if married. The exemption is automatic.
  • Household Goods – Household goods up to $6,000 in value.  This includes furniture and furnishings, appliances, and personal items.   
  • Personal Property – $300 cash, clothing up to $500, musical instruments up to $400, pets, a wedding ring up to $2,000, books up to $250, a bicycle, a firearm or a computer, all up to $1,000 each, a car up to $6,000 and a wheelchair.  Also an exemption of up to $5,000 for tools of the trade.           

Life Insurance

What about life insurance? Yes, as long as it is a whole life policy.  During the policy owner’s life the cash value of the insurance policy is fully protected after the policy has been in force for two years.  A.R.S. 33-1126(A) (6).  The policy must name a surviving spouse, child, parent, brother or sister, or any other dependent family member as beneficiary.  The death benefit is also fully protected from the insured’s creditors in Arizona.  A.R.S. 20-1131(A).  But, if the estate of the insured is insolvent, the surviving spouse and children are given up to $20,000 of claim-free insurance proceeds only.  A.R.S. 33-1126(A)(1).    

Annuity contracts are treated much the same way as life insurance. 

IRA and Deferred Compensation Accounts

Federal law protects the assets in a qualified retirement plan.  This includes all 401(k), 403(b), and TSA accounts.  Arizona law also protects assets in an Individual Retirement Arrangement (“IRA”) by statute.  A.R.S. 33-1126(B)  Since this is the case, putting an IRA into a trust is unnecessary if the objective is to protect the IRA from creditors. 
 
Under Arizona law, an inherited IRA has additional protection in the context of bankruptcy court.  Under various cases in Arizona and the US Supreme Court, (In re Thiem, Bktcy Ct AZ 1/19/2011, 107 AFTR 2d 2011-529), partly overruled in Clark v. Rameker (June 12, 2014), an Arizona statute appears to protect an Arizona resident’s inherited IRA assets from bankruptcy creditors.  Only Arizona, Alaska, Florida, Idaho, Missouri, Ohio, North Carolina, and Texas offer this extended protection.

Is Your Will Valid Under Arizona Law?

Recently, the law has changed in Arizona as to the validity of a Will. Arizona also allows electronic Wills under certain circumstances.  

For any Will executed on or after October 1, 2019, unless it is self-proved as prescribed in Arizona Revised Statutes Section 14-2504 or 14-2519, a person may not act as a witness to a Will if that person is a devisee under that Will or is related by blood, marriage or adoption to a devisee under that Will.  “Devisee” means a person who is designated in the Will to receive a devise (distribution) or who is a beneficiary of a trust that is designated in the Will to receive a devise.

A Will is self-proved if both the will maker and the witnesses have signed after proper attestations — dictated by statute — and had their signatures notarized. 

Arizona requires two witnesses.  Who is competent to be a witness? ARS Section 14-2505 says that a person who is generally competent to be a witness may act as a witness to a will.  Who is that?  A person at least 18 years of age and of sound mind is competent to be a witness.  

As to Electronic Wills:

In addition to the requirements of section 14-2504, to be self-proved, an electronic Will must meet all the following requirements:

1. Contain the electronic signature and electronic seal of a notary public placed on the Will in accordance with applicable law.  

2. Designate a qualified custodian to maintain custody of the electronic will.

3. Before being offered for probate or being reduced to a certified paper original, be under the exclusive control of a qualified custodian at all times.

Also, the journal to record the notary act must be in a tamper-evident electronic journal; no recording in a paper journal.  The electronic journal and the audio-visual recording are public records upon proper request to the notary.

TITLE CHOICES – REAL PROPERTY IN AZ

Arizona is a community property state so property acquired by a married couple is presumed to be community property unless legally specified otherwise. Title may be held as “sole and separate.” If a married person acquires title as sole and separate, his or her spouse must execute a disclaimer deed to avoid the presumption of community property. Parties may choose to hold title in the name of an entity, such as a corporation; limited liability company; a partnership, or a trust. Following are the most common examples of holding title.  How title is held has significant consequences so please consult a professional for further information.

COMMUNITY PROPERTY

Requires a valid marriage between two persons.

Each spouse holds an undivided one-half interest in the estate.

One spouse cannot partition (divide) the property by selling his or her interest.

Requires signatures of both spouses to convey or encumber.

Each spouse can devise (will) one-half of the community property.

Upon death the estate of the decedent must go through probate, affidavit or adjudication.

Both halves of the community property are entitled to a “stepped up”* tax basis as of the date of death.

JOINT TENANCY WITH RIGHT OF SURVIVORSHIP

Parties need not be married; may be many joint tenants.

Each joint tenant holds an equal and undivided interest in the estate, unity of interest.

One joint tenant can partition (divide) the property by selling his or her interest.

Requires signatures of all joint tenants to convey or encumber the whole.

Estate passes to surviving joint tenants outside of probate.

No court action required to clear title upon the death of joint tenant(s).

Deceased tenant’s share is entitled to a “stepped up”* tax basis as of the date of death.

COMMUNITY PROPERTY WITH RIGHT OF SURVIVORSHIP

Requires a valid marriage between two persons.

Each spouse holds an undivided one-half interest in the estate.

One spouse cannot partition (divide) the property by selling his or her interest.

Requires signatures of both spouses to convey or encumber.

Estate passes to the surviving spouse outside of probate.

No court action required to clear title upon the first death.

Both halves of the community property are entitled to a “stepped up”* tax basis.

TENANCY IN COMMON

Parties need not be married; may be many tenants in common.

Each tenant in common holds an undivided fractional interest in the estate. Can be disproportionate, such as 20% and 80%; 60% and 40%; etc.

Each tenant’s share can be conveyed, encumbered (mortgaged) or devised (willed) to a third party.

Requires signatures of all tenants to convey or encumber the whole.

Upon death the tenant’s proportionate share passes to his or her heirs by will, trust or intestacy.

Upon death the decedent’s share must go through probate, affidavit or adjudication.

Each share has its own tax basis.

*Stepped up tax basis. Under this rule, an heir receives a basis in inherited property equal to its date-of-death value. If your uncle bought XYZ stock in 1940 for $500 and it’s worth $5 million at his death, the basis is stepped up to $5 million in the hands of his heirs and all of that gain escapes federal income tax forever.

This rule applies to inherited property that’s includible in the deceased’s gross estate and to property inherited from foreign persons who aren’t subject to U.S. estate tax. It also applies to the inherited portion of property owned by an inheriting taxpayer jointly with the deceased, but not the portion of jointly held property that the inheriting taxpayer owned before inheritance. This rule does not apply to reinvestments of estate assets by fiduciaries.

How To Change an Irrevocable Trust – Decanting

Just like you decant a fine wine from a wine bottle into a new one, you can decant the assets of a not-so-fine irrevocable trust into a new trust. A revocable trust is, by definition, subject to revocation or amendment, so no need there. Decanting means changing, updating and modernizing an irrevocable trust.

The trust agreement itself may allow this, but in Arizona, the law addressing decanting is found at Arizona Revised Statutes 14-10819, “Trustee’s special power to appoint to other trust.” Essentially, it states that unless the terms of the instrument expressly provide otherwise, a trustee who has the discretion to make distributions for the benefit of a beneficiary of the trust may exercise — without prior court approval — that discretion by appointing the estate trust in favor of a trustee of another trust if the exercise of this discretion:

  1. Does not reduce any fixed nondiscretionary income payment to a beneficiary.
  2. Does not alter any nondiscretionary annuity or unitrust payment to a beneficiary.
  3. Is in favor of the beneficiaries of the trust.
  4. Results in any standard applicable for distributions from the trust being the same or more restrictive standard applicable for distributions from the recipient trust when the trustee exercising the power is a possible beneficiary under the standard.
  5. Does not adversely affect the tax treatment of the trust, the trustee, the settlor (the original trustmaker) or the beneficiaries.

Typical reasons to decant include correcting ambiguities or drafting errors, changing the trust’s situs to a more favorable place, splitting up or combining trusts to achieve administrative cost savings, or broadening a trustee’s powers under the new trust. This would include the power to distribute income and principal to beneficiaries resulting in certain tax savings. A trust can also be decanted from a settlor trust to a non-settlor trust or vice versa, reversing the responsibility of who pays income taxes.