Summary: Increase in federal estate tax exemption affects testamentary powers of appointment.
If your estate plan includes an inheritance protection trust for a child or other beneficiary, the provision likely gives the beneficiary a testamentary power of appointment. This permits the beneficiary, effective upon the beneficiary’s death, to redirect any remaining trust assets among individuals or charities of the beneficiary’s choice. When avoiding estate tax is a major concern, it makes sense to limit the power of appointment in a manner that restricts the beneficiary from using trust assets to pay off personal debts. This allows trust assets to pass to the successor beneficiaries free of estate tax, which is important for large estates. But the limited power of appointment also prevents the successor beneficiary from getting a step-up in income tax basis, which can increase capital gains tax upon sale of trust assets.
The current estate tax exemption, now dramatically higher than it was in 2017, eliminates the estate tax as a planning issue for all but the very wealthy. This means it makes more sense to refrain from using limited powers of appointment in inheritance trusts. Why? The reason is because the value of potentially avoiding estate tax is outweighed by the more likely benefit of reducing income tax.
The default law in Arizona leaves inheritance outright and free of trust. However, if the beneficiary is incapacitated or under age 21, the Personal Representative or Trustee, as the case may be, will have discretion to distribute inheritance by any one or more of the following methods:
Option #1 Hold in temporary inheritance trust for beneficiary with all remaining assets distributed outright when beneficiary attains  years of age.
Option #2 Hold in temporary inheritance trust for beneficiary with assets distributed in stages by age. For example, 1/3 of trust assets at age , 1/2 of remaining assets at age , and all remaining assets at age .
Option #3 Hold in temporary inheritance trust for beneficiary with assets distributed in stages by time. For example, 1/3 of trust assets immediately, 1/2 of remaining assets  years later, and all remaining assets  years later.
Option #4 Hold in permanent inheritance trust for beneficiary with assets managed by an independent or professional trustee. For example, a trust for mentally-disabled adult beneficiary or beneficiary with substance abuse problems.
Option #5 Hold in permanent inheritance trust for beneficiary, but permit beneficiary to serve as trustee at any time after attaining age  or to name an independent trustee of the beneficiary’s choice.
For more information about inheritance protection trusts, check out this article.
The new tax law increases the estate tax exemption to $11,200,000 for 2018. Portability option and Credit Shelter trusts can protect up to $22,400,000 for married couples. This eliminates the estate tax as a concern for almost everyone (at least for now). The estate tax exemption will be inflation-adjusted for 8 years, then is scheduled to revert back to 2017 levels (adjusted for inflation) in 2026.
The major issues in estate planning will continue to be incapacity planning, mental health and end-of-life issues, inheritance protection, and determining the best way to leave tax-deferred retirement accounts to heirs and beneficiaries.
I'm currently working on the formatting for a new book, tentatively named Arizona Successor Trustee Answer Book. Hopefully to be released privately in January 2018. I think it's going to be an excellent resource.
New ownership of my office building complex just re-painted the exterior of my building from orange to white. I will update the office photos on this website ASAP.
My general advice is to sign new financial powers of attorney about every 5 to 10 years. Many financial institutions commonly reject older power of attorney documents as a matter of internal policy.
My general advice is to sign new health care powers of attorney at least every 10 years. The health care directive forms in Arizona regularly adapt to law changes, so regular updates are appropriate.
If a client begins to show signs of diminished mental capacity, then annual updates to the powers of attorney are appropriate.
Although many states permit self-settled asset protection trusts, Arizona law does not. But you can still establish an Arizona irrevocable trust with asset protection features:
You may contribute assets to an irrevocable trust for benefit of your children. The trust assets will be protected under Arizona law from the creditors of you and your children. Unless you need to exclude the assets from your taxable estate for estate tax purposes, you may serve as trustee and also retain a power to redirect the assets to different beneficiaries upon your death. This is called a testamentary limited power of appointment. The trust assets will be included in your taxable estate, but they will get a full step-up in income tax basis upon your death.
If you are married, you may include your spouse as a lifetime beneficiary of an individual irrevocable trust as long as contributions are separate property. This would permit your spouse to have continued access to the trust assets during your lifetime.
You can also give an independent trust protector the power to move the trust to a state that permits self-settled asset protection trusts, which would permit the trust protector to add you as a beneficiary.
Although I support the passage of Arizona Senate Bill 1439, which protects physicians, nurses, and other health care workers from employment discrimination if they choose not to participate in medical treatments or procedures that could end a patient's life, it is worth noting that this may make it more difficult in some cases for a health care agent to fulfill a patient's wishes as expressed in a living will declaration.
The definition of discrimination includes taking or threatening any adverse action including, but not limited to, termination of employment, transfer, or demotion, and adverse administrative action.
Sen. Katie Hobbs, D-Phoenix, who opposed the bill, told the Arizona Republic that, "A hospital could say it's the policy of this institution that we are not going to provide morphine doses to alleviate pain if the morphine dose could shorten the life of the individual in our care."
Senate Bill 1439 was passed and signed into law by Governor Doug Ducey in March 2017.
I am currently only accepting new estate settlement projects if I drafted the deceased person's will or living trust.
In 2016 the IRS released proposed regulations to the Section 2704 valuation rules, which would end the longtime practice of discounting the fair market value of closely-held business entities for gift and estate tax purposes. But President Trump's January 20 freeze on all pending regulations put a halt to that. While possible the Trump administration chooses to revise the regulations, I find it more likely that the administration will abandon the proposed regulations altogether. This would avoid the loss of a major benefit of using family limited liability companies for estate planning.
Thomas J. Bouman