Does my Revocable Trust Provide Creditor Protection?

Frequently I hear this question: “I am confused on whether or not my Revocable Family Trust that I set up with my wife provides any creditor protection. My neighbors tell me that it does but my CPA says it doesn’t – who is right?”

People must understand that there are numerous types of trusts that are used for different purposes. Some are designed to save taxes, some designed to give creditor protection and some are simply designed to designate who your heirs will be when you pass away. But, generally speaking you can divided trusts into two main categories, Revocable and Irrevocable. And from that, creditor protection is also dependent on whether or not the Grantor (the creator of the trust) is also a potential beneficiary. In most states, including Arizona, two factors must be present for the trust to provide creditor protection. First, the Trust must be irrevocable. And Second, the Grantor of the trust cannot be a potential beneficiary in any degree. So, with respect to the typical Revocable Family Trust, it does not offer any creditor protection. It fails both tests. On the other hand, if I set up an Irrevocable Trust for the benefit of my wife and my kids, that would satisfy both tests and would afford creditor protection. This is called a Spousal Gift Trust.

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Supreme Court Finds Inherited IRAs Are Not Protected In Bankruptcy

© 2014
Written by Arizona Bankruptcy Attorney Whitney Coats

There have been split decisions in bankruptcy courts across the country on whether an inherited Individual Retirement Account (“IRA”), a retirement account inherited by someone other than a surviving spouse, is protected from an individual’s creditors when filing bankruptcy. The Supreme Court has put its’ final say on the issue and determined that inherited IRAs will not be protected under Federal law if an individual files bankruptcy and therefore can be reached by creditors.
In Clark v. Rameker, Trustee, Petitioner Heffron-Clark, inherited an IRA worth about $300,000 in 2001 from her deceased mother. Heffron-Clark and her husband filed for Chapter 7 bankruptcy in 2010. They sought to exclude the inherited IRA funds from the bankruptcy estate using the “retirement funds” exemption under Section 522 of the Bankruptcy Code, which exempts tax-exempt retirement funds from a bankruptcy estate.

In a unanimous decision written by Justice Sotomayor, the Supreme Court opined that “‘retirement funds’ is … properly understood to mean sums of money set aside for the day an individual stops working.” The point of exempting retirement funds from bankruptcy, wrote Sotomayor, is to ensure that those who declare bankruptcy can still “meet their basic needs during their retirement years.” Indeed, an original IRA account holder may not withdraw funds before age 59 without paying a steep penalty. In contrast, an inherited IRA is treated in exactly the opposite way, with withdrawals mandated annually. The possibility that some investors may use their inherited IRAs for retirement purposes does not mean that inherited IRAs bear the defining legal characteristics of retirement funds. Were it any other way, money in an ordinary checking account (or, for that matter, an envelope of $20 bills) would also amount to ‘retirement funds,’ because it is possible for an owner to use those funds for retirement.”
This decision significantly affects anyone considering filing bankruptcy who owns an inherited IRA received from a deceased parent or relative and may certainly be a determining factor on whether bankruptcy is a viable option to pursue at all.

Whitney G. Coats, J.D., Of Counsel, is a bankruptcy attorney who works with Dana Law Firm’s Consumer Bankruptcy Department.

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© 2014

Written by Scottsdale Family Law Attorney Kyle Scoresby

Arizona child support is governed by a set of guidelines called the “Arizona Child Support Guidelines.”  These guidelines establish a formula which Arizona judges are required by statute to follow in calculating child support unless they make specific findings on approved criteria which support their deviating from the guideline child support amount.

Variables Affecting Child Support

There are several variables which affect the amount of child support under the Arizona Child Support Guidelines.  These variables include, among others, the parents’ gross monthly incomes, the cost of medical insurance for the child, the cost of child care for the child, and the parenting time schedule.  In cases where the parents’ gross monthly incomes are relatively high, the child support amount will also usually be higher than in a low-income case.  Where parents share equal time with their child, there may be little or no child support ordered because, in such a situation, each parent spends all or a significant portion of his proportionate share of the child support obligation directly on the child when the child is in his care.

Common Disputes

For divorce and family law attorneys, calculating child support under the Arizona Child Support Guidelines formula is fairly straightforward.  When disputes arise in child support cases, the disputes are rarely about the child support calculation formula itself.  Rather, the disputes center on the variables and figures which should be used in the formula to calculate support.

For example, when a parent is self-employed, that parent’s true income is often contested.  The self-employed parent may report a certain income from self-employment, but the other parent will often argue that the self-employed parent is under-reporting his income.  That parent may argue that the self-employed parent’s income is much higher than he is reporting due to cash revenue which never hits the books, trade or barter income, or running personal expenses through the business.

Relationship to Parenting Time

Another variable which significantly affects child support calculations is the parenting time schedule.  A parent who has the children in her care the majority of the time will likely receive child support from the other parent.  Similarly, the parent who owes child support will reduce his obligation by seeking and obtaining more parenting time.  Unfortunately, child support is sometimes the primary reason a parent seeks to maximize his or her parenting time with the children. 

Be Prepared

As with other issues, judges decide child support cases based on evidence.  It is critical that parents in child support litigation develop and properly present evidence on each variable they urge the Court to use in the calculation.  Evidence regarding incomes includes pay stubs, W-2’s, tax returns, profit and loss statements and other self-employments records.  With an unemployed or underemployed parent, sometimes a vocational evaluation by an expert witness is required.  As to the other variables, parents must show the Court documents to prove the cost of medical insurance for the children, the cost of child care expenses and the other variables affecting the child support calculation.  Before proceeding with a court hearing on child support, parents are well-advised to retain experienced and competent family law attorneys to represent them.

If you need assistance in a child support case, contact my office to schedule a consultation.

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Tax Issues To Look For in a Divorce

© 2014

Written by Phoenix Tax Attorney Shad Brown 

No one enters a marriage thinking that the marriage will not last. Unfortunately, however, a statistically significant number of marriages won’t. Often as couples grapple with the emotional fallout from the break-up of a marriage, they overlook several tax issues that often arise during a divorce. The following is a short list of the most common issues to look for. It is important to consult the trusted tax attorney’s of the Dana Law Firm to guide you through the numerous tax pitfalls that can occur in divorce.

Spousal Maintenance v. Child Support: Child support payments and spousal maintenance payments are not treated the same under the tax code. Child support payments are never taxable income for the payee and are not a deduction for the payer. However, spousal maintenance payments are deductible from income by the payer and are included in the income of the payee. A divorce decree or settlement agreement should specifically allocate what portions of payments are attributable to child support and spousal maintenance.

Tax Deductions for Children: The tax code allows several deductions and credits for children supported by a taxpayer. After a divorce, the custody of a child may be split between both parents. However, the IRS will only allow one parent to claim each child on their tax return. Divorce decrees and settlement agreements will often state which parent will be allowed to claim a child on their tax return. However, the IRS is not bound by these agreements. For an agreement to be binding on the IRS, the parties must execute IRS Form 8332. Absent the execution of this form, the IRS will default to the parent who has custody the majority of the days in a year.

Not All Assets Are Created Equal: Different assets will often have different tax treatment under the tax code. Some assets, such as capital assets are taxed at preferred rates. Other assets, such as retirement accounts, are taxed as ordinary income as they are withdrawn. When dividing property in a divorce it is important to take these different tax treatments into account.

Division of Assets Incident to Divorce: The division of assets is generally not a taxable event. See I.R.C. § 1041. However, any built in gains associated with the divided assets are preserved. Before agreeing to a property settlement agreement it is important to consider the future tax burden of each asset.

Recapture of Depreciation: Assets that are depreciable, i.e. rental property or property used in a trade or business, inherently have higher built in gains associated with the property. Each year property is depreciated, the adjusted basis of the assets is reduced proportionately, thereby increasing the eventual gain that when be realized when the property is sold.

Division of Retirement Accounts: There are two basic issues when dividing a retirement account. 1) Tax consequences of the initial division and, 2) tax consequences when assets are withdrawn from the accounts. To ensure that the proper tax consequences are achieved, a qualified domestic relations order or QDRO is necessary.

Allocated Gains/Losses Associated with a Partnership: Property with built in gains/losses that were contributed to a partnership may have created special allocations within those partnerships. Division of partnership interests may have unintended consequences if special tax allocations are not taken into account.

Filing Status While Going Through a Divorce: Parties who are in the process of divorce should never be required to file a joint income tax return. Joint returns make both parties jointly and severally liable for the tax consequences of the return. Both parties are also required to attest to the accuracy of the return under penalties of perjury.

Tax Trouble When Parties Divorce: Property settlements and divorce decrees do not only divide assets and other property. These agreements apply equally to debts of the marriage. How can parties deal with unresolved tax debts?

Unfiled Returns: If returns have not been filed by either spouse the potential liability associated with these tax years must be dealt with. Joint tax returns should be avoided. Separate tax returns create separate liability.

Innocent Spouse Relief: If tax debts are attributable to one spouse, the innocent spouse, or the spouse who did not give rise to the liability, may be eligible to be released from joint and severable liability for the tax debt.

Hidden Assets: Assets hidden from the IRS or other tax authorities are a ticking time bomb and should be dealt with in a divorce proceeding. Such assets can give rise to both civil and criminal liability.

Whistleblower Actions: Taxpayers who are aware of tax fraud being committed by someone else can notify the IRS and may receive a reward from the IRS for making the tip.

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© 2014

Written by Scottsdale Divorce Attorney Kyle Scoresby

The divorce process can seem complex and downright overwhelming.  Distilling the issues to divorce basics help individuals understand that they can and will get through the process.  There is hope, and there is life after divorce.

The Issues Simplified

Virtually all issues in Arizona divorce cases fall into one of the following five major categories:


1)      Dissolving the marriage relationship;

2)      Deciding child custody and parenting time;

3)      Determining whether spousal maintenance (alimony) should be paid and, if so, how much and for how long;

4)      Calculating child support; and

5)      Dividing up assets and debts.

1)  Dissolving the Marriage Relationship

Arizona is a “no fault” divorce state.  If one spouse believes the marriage is “irretrievably broken”, a divorce will be granted.  There is no need to prove grounds for a divorce, such as infidelity or abuse.

2)  Child Custody

In cases involving minor children, two issues must be addressed: 1) legal decision-making authority over the children; and 2) the parenting time schedule – when the children will be with their father and when they will be with their mother.  While there are many sub-issues to address here, the overarching consideration is always the best interests of the children.

3)  Spousal Maintenance

In certain cases, where one spouse is unable to support herself through appropriate employment, it may appropriate for one spouse to help contribute to the support of the other spouse by paying alimony (spousal maintenance).  In general, spousal maintenance, when it is appropriate, is paid in an amount and for a period of time to allow the spouse receiving it to become self-reliant.

4)  Calculating Child Support

Separate from spousal maintenance, in cases involving minor children one parent may be ordered to pay the other parent child support.  The Arizona Child Support Guidelines create a formula for calculating child support which is based on both parents’ incomes, the schedule of parenting time with the children, the cost of medical insurance for the children, and the cost of child care for the children.

5)  Dividing Assets and Debts

Absent a premarital agreement, most assets and debts acquired or incurred during marriage are “community” assets/debts, and they are divided roughly equally between husband and wife in a divorce.  Property owned before the marriage and certain property acquired during the marriage (e.g., gifts and inheritances) are the separate property of the person who owned the property before the marriage or acquired it during marriage, and the owner of the separate property does not have to share those separate assets with her spouse in the event of a divorce.

Agree or the Judge Decides

There are only two ways to address and resolve the issues that exist in Arizona divorce cases.  First, the husband and wife may agree on how to resolve the issues.  When husbands and wives agree, judges virtually always approve those agreements.  Agreeing on how to resolve the issues can greatly reduce the financial and emotional costs of divorce.

When husbands and wives are unable to reach agreements, judges will decide the issues for them.  Each party has a brief opportunity to present evidence on each issue to the judge in a courtroom trial, and after considering that evidence, the judge will decide each issue on which the parties were unable to agree on their own.

Litigating a contested divorce case without a lawyer is a bad idea.  Contact my office to find out how hiring an experienced divorce attorney can benefit you.

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Planning for Long Term Care in Arizona

© 2014

Written by ALTCS Attorney Scott Jensen

Long term care in Arizona is expensive.  The average cost per month in Maricopa County is $6,646.35.  Navigating the application process can be overwhelming.  Decisions include finding a place to live, how much will it cost and who will be the primary caregiver for a loved one.  When it comes to paying expenses many try to pay for care themselves or some may have some form of long term care insurance.  The discussion of long term care, unfortunately,  usually does not arise until a family member is facing the immediate need of long term care.

ALTCS (Arizona Long Term Care System) is Arizona’s Medicaid program to provide aid in meeting long term care costs for an individual.  Eligibility for ALTCS requires a share of the costs coming from the individual’s income to pay for long term care.  ALTCS provides assistance to Arizona residents who require a nursing home level of care, have assets of $2,000.00 or less and have no more than $2,130.00 per month in income.

ALTCS planning can be complicated based on family dynamics and financial situations.  For example, the well spouse of a married couple would able to keep a portion of the total assets based on the value of the assets at the time of the resource assessment.  In contrast, a single applicant might be required to spend down almost all of their assets before applying.   There are many strategies related to managing assets that may allow a person to become eligible for long term care assistance.

Family members can learn about exempt and non-exempt assets in making decisions related to when and how to apply for ALTCS.  When learning about asset requirements there are also considerations that need to be made regarding penalty periods from gifting.  Additionally Arizona has a look back period of 5 years relating to the transfer of assets from the applicant to another person.    Special trusts are also available to help a person meet the income requirement for ALTCS.  Every situation requires careful consideration considering ALTCS as a long term care option.  One should seek professional advice when navigating the decision to apply for ALTCS for help with long term care costs.

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© 2014

Written by Scottsdale Divorce Attorney Kyle Scoresby

What Family Law Is Not

When people hear the term “family law”, some think of a family doctor, who treats many different illnesses and injuries.  Some mistakenly think that a “family law” attorney handles all kinds of legal problems.  In fact, family law is a rather narrow specialty.

Family Law Deals With Family Relationships

Family law attorneys deal with cases that involve family relationships, and most commonly, family law attorneys represent people whose family relationships are ending or changing.  The most common type of family law case is a divorce.  In addition to dissolving a marriage, a divorce case may include determining child custody and parenting time, child support, spousal maintenance (alimony), and dividing up the couple’s assets and debts.

When children are born out of wedlock, the family law issues include establishing paternity, child custody, parenting time and child support.

In all family law cases, resolving the issues by agreement is preferred to having a judge decide the case at a court trial.  Mediation can sometimes be very helpful in reaching agreements.

Having a Lawyer on Your Side

Having an experienced and aggressive family law attorney is critical to achieving a fair outcome.  A family law attorney who has taken many cases to trial knows a good settlement from a bad one.  In fact, the lawyer’s trial experience and ability is often a key factor in reaching a favorable settlement.  Scottsdale divorce and family law attorney J. Kyle Scoresby has over 22 years of divorce and family law trial experience.  In many cases, Mr. Scoresby is able to negotiate favorable settlements for his clients, but when settlement fails, Mr. Scoresby has a long history of effectively and aggressively representing his clients in the courtroom.

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New Changes to Arizona’s Anti-Deficiency Statutes with Passing of HB 2018

Article By Arizona Bankruptcy Attorney Whitney G. Coats

On April 22, 2014, the Arizona legislature passed HB 2018, which created some significant changes to the Arizona anti-deficiency statutes outlined in Arizona Revised Statute (“A.R.S.”) §33-729, which pertains to purchase money mortgages and limitation of liability and A.R.S. §33-814, which pertains to actions to recover balance after foreclosure or sale of property under trust deed. Essentially the amendments to the above referenced statutes further expand and define which type of property owners are not protected under the Arizona anti-deficiency statutes for all loans that originate after December 31, 2014.

The amendment to A.R.S. §33-729 added Subsection C and Subsection D, which sets forth the following new guidelines:

C.  For mortgages that are originated after December 31, 2014, Subsection A of this Section does not apply to real property as follows:

1.  Real property owned by a person who is engaged in the business of constructing and selling dwellings that was acquired by the person in that course of that business and that is subject to a mortgage given to secure payment of a loan for construction of a dwelling on that property for sale to another person.

2.  Real property that contains a dwelling that was never substantially completed.

3.  Real property that contains a dwelling that is intended to be utilized as a dwelling but that is never actually utilized as a dwelling.   

D.  For the purpose of this Section, a dwelling is substantially completed if either of the following occurs:

1.  Final inspection is completed, if required by the government body that issued the building permit for the dwelling.  

2. If a final inspection is not required by the governmental body that issued the building permit, the dwelling has been completed in all material respects as prescribed in the applicable ordinances and regulations of the governmental body that issued the building permit for the dwelling.

The amendment to A.R.S. §33-814, added Subsection H which coincides with the newly added Subsection C and Subsection D in A.R.S. §33-729, further defining what type of property owners have no protection under the Arizona anti-deficiency statutes:

H. For the deeds of trust that originated after December 31, 2014, Subsection G of this Section does not apply to trust property as follows:

 1.      Trust property owned by a person who is engaged in the business of constructing and selling dwellings that was acquired by the person in the course of that business and that is subject to a deed of trust given to secure payment of a loan for construction of a dwelling on the property for sale to another person.

2.      Trust property that contains a dwelling that was never substantially completed.

3.      Trust property that contains a dwelling that is intended to be utilized as a dwelling but that is never actually utilized as a dwelling.

I.  For the purpose of this Section, a dwelling is substantially completed if either of the following occurs:

1.   Final inspection is completed, if required by the government body that issued the building permit for the dwelling.

2.   If a final inspection is not required by the governmental body that issued the building permit, the dwelling has been completed in all material respects as prescribed in the applicable ordinances and regulations of the governmental body that issued the building permit for the dwelling.

The full version of HB 2018 may be viewed at the following link:

Whitney G. Coats, J.D., Of Counsel, is a bankruptcy attorney who works with Dana Law Firm’s Consumer Bankruptcy Department.

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Responsibilities of a Fiduciary under Common Estate Planning Documents

 © 2014

Written by Scottsdale Elder Law Attorney Scott Jensen

Personal Representative under a Will:

 A Personal Representative has the responsibility to distribute the tangible personal property (furniture etc.) to beneficiaries after someone passes away.  Additionally they are to identify any assets (such as checking accounts or other types of accounts) that are in the decedent’s name and re-title them to the trust, where the trustee will then manage that account according to the trust.

Durable Power of Attorney:

 The Durable Power of attorney steps into another ‘s  shoes if they become incapacitated and use your individual assets to pay expenses, fees and costs such as a mortgage, car payment utilities etc.  until the person is capable of managing  their own financial affairs again.

Health care Power of Attorney:

If a person becomes incapacitated, the agent under this documents steps into another’s shoes related to health care decisions and will carry out that person’s health care wishes according to the instructions of the document.

Trustee under a Trust:

A trustee is given authority over assets that are owned by a trust to be used for the benefit of another.  For most revocable trusts, a successor trustee steps into this position upon the prior trustee becoming incapacitated, unable to perform such duties, or passes away.  The duties of a trustee are very important in the eyes of the law and there can be serious consequences if a trustee fails to perform their responsibilities properly.

A trustee has the responsibility to manage trust assets for the beneficiaries of that trust.  This can include overseeing the purchase and sale of real estate, managing retirement accounts, business interests, stocks, bonds, financial accounts, paying bills, filing taxes, and managing other titled assets and transactions.  In addition to managing such assets, the state laws of Arizona require trustees to invest and manage trust assets in a way that would not subject the assets to unnecessary risks.  Furthermore, trustees are required to report and give accountings of their management of such assets to the beneficiaries in regular intervals.   Throughout the process of managing such assets, the trustee must be in compliance with many other fiduciary requirements under the law.

In the event that a beneficiary of a trust was to pass away, a trustee may be required to liquidate such assets in preparation to distribute the assets to a different beneficiary.  Also, a trustee may be required to set up and fund a new trust for the use and enjoyment of another beneficiary.

If a trustee fails in their duty to meet the above requirements they may be surcharged for the amounts of money or assets that were mismanaged.  They also may be forced to return compensation that they incurred while carrying out their duties as a trustee.  In extreme cases a trustee may subject themselves to criminal liability as well.

Most well drafted trust documents give trustees instruction as to their powers and duties.  However, every trustee is responsible to know what the law requires and expects of a trustee regardless of whether the trust documents specifies responsibilities or not.

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Effective Method for Keeping the Family Together: Estate Planning

© 2014

Written by Scottsdale Estate Planning Attorney Todd Smith

The Dana Law Firm has long embraced an important slogan: “Family: work with ours to protect yours.”  I have become very close to the Dana family through my association with the Dana Law Firm.  It is truly a family business and the Dana family provides the firm with several key employees.  In fact, every one of Matt Dana’s children works for the firm in some capacity.

The family is a key concern when it comes to the law, but particularly with estate and trust law.  I recently read this article in the New York Times about ways to prevent money from causing a family to fall apart.  Clearly this is a concern of all families, wherever they are on the wealth spectrum.

I thought it was particularly interesting that the article suggests preparing an estate plan that ultimately divides the wealth equally among the children.  Many times I have had clients ask me to customize the final distribution so that one child gets more or less than the other children for whatever reason.  I always respond with the same advice given in this article.  In most cases, you are inviting resentment and quite possibly litigation whenever you stray from equal treatment of your kids.  This is true, as the article points out, even if one of your kids is a schoolteacher and the other is a hedge fund manager.  Whenever I have a client that insists on unequal distributions, I strongly advise them to at least have a family meeting and make sure everybody understands your method so that they know that you are not being arbitrary and giving them the opportunity to consent to your decision.

Another good suggestion in the article has to do with when your children receive their inheritance.  Some of our clients are in a position where they are getting older and their funds are clearly much greater than they will be able to spend in their remaining living years.  In that situation, what is wrong with making a lifetime gift, not just for estate tax planning, which is undoubtedly important, but also so that you can actually watch your children enjoy their inheritance before you die.  That may just be a better approach than having them wait until their sixties to inherit your wealth, possibly at a time when they don’t even need the money anymore.

Our experience with estate planning in Arizona has been that the family issues are much more important to our clients than the technical legal and tax problems that we get excited about as attorneys.  One of the great strengths of the Dana Law Firm is that we use our legal as well as personal experience to enhance the process of designing a proper estate plan for the unique family situation of each of our clients.

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