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Changes to the Arizona Trust Code and the Estate Tax in 2009

The year 2009 has brought several significant changes that may impact your current estate plan.  Some of the changes affect each of us automatically, but others require us to take affirmative action in changing our estate planning documents.  Some of the changes provide great benefits, but others could burden us if we don’t take the proper steps.  Below are some of the recent changes to the state and federal laws and their impact on everyone’s estate plans.

State Law Changes

Beginning on January 1, 2009, the State of Arizona adopted a new Trust Code, loosely based on the Uniform Trust Code adopted in other states.  While everyone with any type of trust should review the changes in the law, the new Trust Code has several provisions that will especially affect most married couples with a revocable living trust.

A typical trust for a married couple is designed to split into two trusts upon the death of the first spouse: the “A Trust” and the “B Trust.”  This split of the trust is done for several reasons, including to save on taxes and to protect the trust assets from creditors of the surviving spouse.  While the A Trust remains revocable (i.e. it can be changed and amended), the B Trust becomes irrevocable and is subject to certain provisions under the new Trust Code.  Here’s a review of two of those provisions:

Change – One of the new provisions requires all trustees of an irrevocable trust to provide notice to all qualified beneficiaries of certain aspects of the administration of the trust, their right to request a copy of part of the trust document, and their right to request an annual accounting of all trust assets.  These requirements can be onerous on a trustee, especially a surviving spouse who has been acting as trustee with the deceased spouse for several years and all of a sudden has to satisfy new legal requirements with respect to the B Trust.  In addition, many individuals won’t feel comfortable providing an annual report of their private information and activities relating to trust assets that would be required to be provided to all qualified beneficiaries.  Nobody needs another person looking over their shoulder as they manage their own assets.

What can be done? – The new Trust Code allows the trust document to waive the notice requirements placed on the trustee.  This change must be done, however, while both spouses are alive, before the B Trust has been created.  A proper amendment to the trust document can relieve the extra burden placed on the surviving spouse if it is taken care of in a timely manner.

Change – Another new provision doesn’t only apply to irrevocable trusts, but applies to any trustee who “invests and manages trust assets” (most trustees will meet that requirement, as that is a basic duty and responsibility of trustees).  The new Trust Code requires that these trustees comply with the “Prudent Investor Rule” while dealing with trust assets.  The Prudent Investor Rule requires the trustee to adhere to a specific standard of care in determining the appropriate trust portfolio strategy, the risk and return objectives, and the correct amount of diversification required for the trust assets.  This rule could seem tedious and burdensome for a trustee who has managed his own trust assets with great success over a long period of time by sticking to the types of investments with which he is familiar.

What can be done? – Again, a proper trust amendment can alleviate this problem.  A change to the trust document could allow the trustee to continue with his successful management of the assets in a manner which is consistent with the trustee’s personal investment strategies.

There are several other changes to the Arizona Trust Code, including provisions related to the rights of creditors of a trust, pet trusts, arbitration clauses to settle trust disputes, special needs trusts, and charitable trusts, that may affect your individual situation.  A qualified estate planning attorney can assist you in understanding the changes and their applicability to your estate plan.

Federal Law Changes

The main changes in the federal law affecting estate planning are the changes to the federal estate and gift taxes.  With the New Year, each individual is now able to transfer $3.5 million (up from $2 million in 2008) in wealth to her beneficiaries upon her death without paying any federal estate taxes.  In addition, an individual can now make a gift of $13,000 (up from $12,000 in 2008) without paying any federal gift taxes.

These changes, however, may or may not last beyond the end of this year.  As it stands now, the estate and gift tax law will change drastically over the next couple of years.  Proposed legislation in the United States House of Representatives attempts to get rid of these drastic changes.  This same legislation also proposes to do away with some very valuable estate planning techniques, including discounting the value of a Family Limited Partnership (“FLP”) for estate and gift tax purposes.  Another technique that may be on the chopping block is a tax-free Grantor Retained Annuity Trust (“GRAT”).  Both of these techniques are ways of transferring wealth during life, reducing or eliminating future estate taxes, with little or no gift tax.  Both the FLP and the GRAT are especially valuable in today’s market of depressed asset values and low interest rates.  Their possible elimination increases the urgency with which individuals should pursue these estate planning strategies.

Since no one can predict exactly what the estate and gift tax laws will look like at a specific point in the future, it is important to have sufficient flexibility built into any estate plan to make sure that your hard-earned wealth passes to your intended beneficiaries with the least amount of tax.

Conclusion

2009 has brought many significant changes to estate planning.  The above discussion is a very brief overview of the recent changes to the federal and state laws related to this area.  Each individual’s situation is different and can not be covered in this short article.  The attorneys at the DANA LAW FIRM specialize in estate planning and can assist you with understanding the recent changes in the law and how they affect your situation.  For a complimentary review of your existing estate plan, please contact the DANA LAW FIRM at 480-515-3716.