SECURE Act 2.0
Congress recently passed SECURE Act 2.0. The updated law includes countless items that affect financial planning and tax planning, however there isn't much that affects estate planning. Only 2 items are worth noting here:
1. The age for required minimum distribution increased from age 72 to age 73.
2. There are no more mandatory lifetime distributions from Roth 401(k) accounts.
The IRS recently issued proposed regulations regarding the treatment of tax-deferred retirement accounts after the SECURE Act of 2019.
Here are 2 highlights relevant to estate planning:
Another note: these are proposed regulations, not final. The final regulations may differ from the proposed regulations.
The FDIC recently approved a rule to change how it calculates the amount of insurance is available for bank accounts held in trusts. Effective 4/1/2024, a trust account will be insured up to $250,000 per beneficiary, not to exceed five, regardless whether the trust is revocable or irrevocable or how the trust allocates inheritance among beneficiaries.
For example, a joint living trust for a married couple with 2 children might qualify for up to $1,000,000 of FDIC deposit insurance. But a joint living trust for a married couple with 5 children would only qualify up to $1,250,000.
The new rule is intended to simplify the calculation of an insurance pay-out in the event of a bank failure, which I do believe it accomplishes.
A revised 2022 edition of the Arizona Estate Administration Answer Book was recently published by Barnes & Noble Press.
Practical Answers to Common Questions for Any Size Estate in Arizona
The Arizona Estate Administration Answer Book is your best resource for understanding practical issues that commonly arise when responding to the death of an Arizona resident or property owner. Each chapter provides advice and explanations to help you wade through the complex, and often bizarre, legal requirements associated with estate and trust law in Arizona. Written in easy-to-read question and answer format, the Arizona Estate Administration Answer Book covers a comprehensive list of legal and non-legal matters including:
The 2022 edition is now available for instant PDF download from this website for $20.
The 2022 edition print book is now available from Barnes & Noble Press for $25.
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First, the good news:
On 1/1/2022 the Arizona homestead exemption amount increases from $150,000 to $250,000. The homestead exemption, which is automatic in Arizona, is intended to protect an Arizona resident's primary residence ("homestead") from creditors.
But the new law includes several intricacies that make it more complex than it initially appears. For example, the new law requires any existing judgment liens (recorded in the same county) to be paid when the homeowner either sells or refinances the residence.
The prior law stated that a homeowner with less than $250,000 equity could still refinance a home loan without having to first pay off any existing judgment liens. The new law does the opposite - effectively preventing the homeowner from exercising a cash-out refinance.
The homestead exemption is also complicated by federal bankruptcy laws. If the home was acquired within 1,215 days (3 years, 4 months) of filing the bankruptcy case, the exemption amount is currently limited to $170,350.
Many people I meet would benefit from an irrevocable asset protection trust, a strategy generally assumed to be too complicated and too expensive. But I am not referring to families with vast inherited wealth or the Mark Zuckerberg-type entrepreneurs. So how do you know if an asset protection trust might be right for you? Consider the value of these assets you may own:
If the combined value of these assets exceeds $500,000, then you are an excellent candidate for an asset protection trust.
So how does the asset protection trust work?
An asset protection trust is created when a person transfers ownership of an asset into an irrevocable trust, which is managed by a trustee for benefit of one or more beneficiaries. The assets you contribute to an irrevocable trust may qualify for protection from your future or unknown creditors. The catch is that you cannot name yourself as both trustee and beneficiary like you would normally in a revocable living trust for probate avoidance. In other words, you cannot establish your own irrevocable asset protection trust and retain the sole discretion to make distributions back to yourself. This arrangement does not provide any asset protection and is against public policy in all 50 states.
Some states like Wyoming and Nevada do permit self-settled asset protection trusts using a third-party trustee in that state, which means residents of those states may remain a beneficiary of the trust and, after any applicable statute of limitations expires, protect the trust assets from their own future or unknown creditors. Although Arizona law does not permit self-settled asset protection trusts (at least not yet; see update below), an Arizona trustor may still obtain the desired creditor protection by establishing the trust in Arizona, excluding the trustor as an eligible beneficiary, and relying on spendthrift or discretionary trust provisions available under Arizona law to protect the trust assets from creditors of the eligible beneficiaries.
But there is good news on the horizon for Arizona residents. In 2020, the Probate and Trust Section of the State Bar of Arizona adopted a proposed statute permitting self-settled asset protection trusts (a/k/a “qualified spendthrift trusts”), which may soon be enacted into law by the Arizona legislature and governor. However, even if enacted, I will continue to recommend establishing the asset protection trust as a third-party discretionary trust. This “hybrid” approach omits naming the trustor as an initial beneficiary (i.e., not self-settled) but permits an independent trust protector to later add the trustor as an eligible beneficiary, subject to the then-applicable qualified spendthrift trust rules.
For Arizona residents, I recommend two options when naming trust beneficiaries:
Option #1- Family Gifting Trust (Trustor’s Children are Lifetime Beneficiaries)
In Option #1 you would name one or more children (or other non-spouse beneficiaries) as eligible beneficiaries during your lifetime, excluding yourself or your spouse. The advantage is that you may serve as trustee and maintain full control of the assets in the irrevocable trust. The trust may be established as an individual trust or a joint trust. Although your beneficiaries would have a right to information about trust assets, you retain discretion whether to make any distributions to them during your lifetime. The trust assets are protected from your future or unknown creditors - because you are ineligible to receive distributions - and from creditors of the beneficiaries (using spendthrift or discretionary trust provisions available under Arizona law).
Option #2- Spousal Lifetime Access Trust (Trustor’s Spouse is a Lifetime Beneficiary)
In Option #2 you would include your spouse as an eligible beneficiary during your lifetime, and if desired, name your spouse as trustee. Similar to Option #1 the trust assets will be protected from your creditors during your lifetime - because you are ineligible to receive distributions - and from creditors of your spouse and beneficiaries. The difference here is that your spouse is an eligible beneficiary, allowing your spouse to receive distributions from the trust if there is a legitimate need. The trust must be established as an individual trust with any contributions coming from your separate property or your one-half of community property after partition.
Both approaches may be referred to as hybrid asset protection trusts because either may be drafted to include a provision giving an independent person or company called a trust protector the power to move the trust to another state or country that permits self-settled asset protection trusts (or simply wait until Arizona permits them). This change of governing law might permit the trust protector to add you as an eligible beneficiary later.
 There are exceptions to this general rule. For example, Arizona law does not shield the trust assets from child support claims. Also, the strategy is not likely to work if you transfer all your personal assets to the trust. You must remain solvent on your personal net worth statement, even after contributing assets to the irrevocable trust.
 19 states permit self-settled asset protection trusts in some variation. The most well-known are Alaska, Nevada, Wyoming, and South Dakota. Unfortunately, the full faith and credit clause of the U.S. Constitution makes it unlikely an Arizona court would respect the governing law of a self-settled asset protection trust established in one of these states for an Arizona resident. Foreign asset protection trusts avoid this problem in theory, but if the full protection of the trust is triggered by an actual threat, case law has shown the beneficiary also loses access to the trust assets unless willing to move permanently outside of the United States. This is an unintended consequence most people are not willing to accept.
Will a LLC protect an Arizona resident's personal residence and non-retirement brokerage investments?
No, because the LLC must have a legitimate business purpose. A business purpose would include providing a service, product, or usable space to an unrelated person or company. Every small business provides a service or product, or both, to the general public, while investment real estate provides a place to live or do business.
Your personal residence does not have a business purpose and neither does your personal investment brokerage account.
Arizona residents qualify automatically for a homestead exemption, which protects up to $150,000 of equity even if a judgment creditor forces a sale of the home. For homeowners with more than $150,000 of equity, I may recommend either a major increase in homeowners liability insurance coverage or transferring the home into an irrevocable Arizona-based hybrid asset protection trust. Neither solution requires a business purpose to implement.
Other reasons you should not transfer your personal residence into an LLC are (1) loss of exclusion of taxable gain upon sale of a personal residence, (2) loss of mortgage debt interest deduction, (3) loss of homestead exemption, and (4) possible increase in property taxes.
Likewise, while some may argue that a personal investment brokerage account has a business purpose, most would not. Therefore, I would be wary of transferring a brokerage account into an LLC unless perhaps combined with other assets that do have a business purpose. The safer approach is to either increase umbrella-type personal liability insurance coverage or transfer the brokerage account into an irrevocable Arizona-based hybrid asset protection trust.
In May 2020 the executive council for the Probate and Trust Section of the State Bar of Arizona approved a proposed statute permitting the creation of Arizona qualified spendthrift trusts. This type of self-settled trust is more commonly known as a domestic asset protection trust. The proposed statute (A.R.S. 14-10821) would establish a framework for Arizona residents to protect personal assets from future claims in a manner consistent with and subject to Arizona fraudulent conveyances laws. If enacted, Arizona would become the 20th state to allow self-settled spendthrift trusts.
The Estate Planning Toolbox
In order to be successful as an estate planning lawyer, I must break down complex topics to manageable teaching points. Here are a couple examples:
There are 3 tools in the estate planning toolbox for transferring assets upon death:
1- Beneficiary designation
There are no more tools.
Every estate plan will use a combination of these tools and each has its advantages and disadvantages. My job is to determine which tool is best suited for each asset, while making sure the client is comfortable using the tool.
There are 3 ways to leave inheritance to a beneficiary:
The outright approach is simple and everyone understands it.
The restrictive approach is useful when the inheritance would be subject to an identifiable clear and present danger (spendthrift habits, special needs, susceptibility to undue influence, need to maintain beneficiary's qualification for government-sponsored health benefits or supplemental income benefits).
The protective approach is useful when there is a desire to protect the inheritance from future threats (lawsuits, divorce, debt collectors).
I have found these teaching points to be very effective in explaining key concepts in estate planning.
Thomas J. Bouman