This article is intended to provide an overview of Arizona inheritance law. This is by no means an exhaustive resource, and you are advised to consult with an Arizona attorney regarding any specific questions you may have.
Common Myths About Inheritance
There are a lot of myths about wills and probates, but this is fueled by dramas that want to focus on the emotional drama caused by people fighting over their inheritance. Here are some of the most common myths about inheritance.
Most Millionaires Inherited Their Wealth
Chris Hogan did a massive study of millionaires around 2020. Most people think that millionaires inherited all of their money. In reality, only one in five millionaires inherited anything. Furthermore, only three percent of them inherited enough money to make them a millionaire. More than 80 percent of millionaires are first generation, a rate that’s been stable for roughly a hundred years. That’s why it is dishonest to say all millionaires are trust fund babies.
Most Inheritances Are Huge
Chris Hogan’s study found that 21 percent of millionaires inherited any money, though only 16 percent of them inherited more than 100,000 dollars. Yet that inheritance rate is in line with the general population. That’s because roughly 21 percent of the general population inherits anything from their parents beyond photo albums, memories and maybe a fine china set.
Only the Wealthy Have Trusts
While the wealthy are more likely to have trusts to simplify probate or minimize their personal liability if sued, trusts are not just for the wealth. For example, many Arizona residents use the Miller Trust and income only trusts to qualify for long-term care via Medicaid. The trust is used to hold income and assets above the Medicaid limits. It allows those who earn too much to qualify for Medicaid but can’t afford private care to take advantage of the program.
Another example would be special needs adults. A special needs adult may not have an income, but they may be the recipient of a trust. Special needs trusts are typically supplemental trusts. Medicaid pays for their institutional care, while the supplemental trust pays for things like clothes, toys, dental care and field trips.
The Wealthy Use Trusts To Avoid Taxes
If you have an income, the odds are that you’ll have to file an income tax return. If you own property, you have to pay property taxes. If your assets are held in a trust, the trustee will file a tax return on assets held in the trust. And they may have to pay the property taxes, if the trust holds the family home or rental real estate. In most cases, the trust only simplifies probate and doesn’t prevent a tax bill from coming due.
The only exception to this rule is when trusts are used to pass money to the charity of your choice upon your death. An irrevocable trust may be used to transfer a large sum of money to the charity, though you may be able to enjoy income from the assets during your life. The charitable gift could give you a significant tax write-off in the year the trust is created, and these assets reduce the size of your estate. Whether that’s enough to avoid estate taxes depends on your situation.
Overview Of Arizona Inheritance Law
Wills
Every adult over 18 should have a will, though half of them don’t. After all, you don’t know when you’re going to die. And you can’t draft a will if you’re left incapacitated by an accident. While you can download a will off the internet, this is not advisable. This is because generic wills may not be written to comply with Arizona state law. Your will should comply with Arizona state law if you want to minimize potential conflicts, and in a worst case scenario, it may invalidate the will. Then it is as if you died without a will or intestate.
Your will should name the people you want to inherit your property. It should identify at least one executor of the estate. That person will file your final individual and Arizona state income tax return. They will also file a federal estate tax return. They will sell assets to pay your creditors before dividing any remaining property among your heirs. You should name guardians for minor children, especially if you want to prevent them from being sent to live with relatives you don’t like.
If you die without a will, Arizona’s intestate succession laws take effect. Arizona is a community property state, so a surviving spouse will be the default heir unless there are surviving children. The next eligible relatives include the deceased’s parents and siblings and their children. The rules are spelled out in ARS 14-2106. These are the Arizona inheritance laws that apply if you don’t have a will.
However, the intestate rules only apply to the inheritance of property that doesn’t pass outside of probate.
Arizona Processes For Bypassing Probate
Trusts are one of the more common ways of bypassing probate, but it is far from the only one. The Arizona Department of Transportation allows you to name a beneficiary for vehicle title transfer upon death. This is done via form 96-0561 per Arizona Revised Statutes 28-2055(B).
This form can only be used if the vehicle is only owned by one person. If the car is jointly held, then you can’t transfer the car in this way. The transfer does not remove the obligation to pay any liens against the vehicle. For example, they may have to pay a mechanic’s lien against the vehicle to take legal possession of the car.
The form for naming the beneficiary requires information such as:
- The car’s VIN
- The year and make of the car
- The beneficiary’s full legal name
- The beneficiary’s date of birth
- The beneficiary’s legal status regarding the vehicle
The beneficiary’s legal status regarding the vehicle is a reference to whether they’ll receive full ownership of the car or whether you’re passing on fractional ownership of the vehicle. It is not advisable to split ownership of a car. If you want to leave it to a married couple, name one or the other as the heir. However, if you select joint tenants, either one can transfer the car. Tenancy in common will require both of them to sign off if they want to sell the car.
Beneficiary designations on many types of accounts will bypass probate. For example, the ownership of your 401K and 403B account will be distributed based on the beneficiaries on the account. This is independent of any division of property spelled out in your will. The beneficiaries named on insurance policies like life insurance policies and annuities receive that money outside of probate. Review these beneficiary designations when your family situation changes. Remove your ex upon your divorce, and add your new spouse unless you want the assets to just go to your children.
Any property under joint tenancy passes to the person who is named as a joint tenant. Most married couples have joint tenancy set up for bank accounts and their homes. Yet you can add your children to the property this way. You can tell which accounts have joint tenancy because they have an abbreviation like JTWROS on it; that stands for joint tenancy with rights of survivorship. The joint tenant has a very simple process of getting clear title. They fill out a form with the financial institution or Arizona land office and supply a copy of the death certificate. They’ll get a clear title and become the sole owner.
Payable on death accounts are similar. They avoid probate. They transfer directly to the named heirs. The payable on death or transfer on death account only requires a claim form and copy of the death certificate. Unlike joint tenancy property, the heirs have no rights to the property while the owner is alive. In contrast, a joint tenant of a home might put their stake in the property at risk if they are sued.
Trusts can be used to bypass probate, as well. That is perhaps the most common reason why trusts are set up. The property in the trust is managed according to the rules you spell out in the trust. This means that the money in the account could be held until someone is 30 or finishes high school rather than letting them automatically inherit it at 21.
However, there are many mistakes made when people try to set up a trust themselves. They may set up a trust but never fund it by moving assets into the name of the trust. They may set up a revocable trust, something that prevents the trust from protecting assets from creditors. Or they may set up an irrevocable trust without adequate planning and find themselves unable to change it. Always consult with an attorney and create the necessary documents in accordance with your estate plan.
If you die without a will, all property outside of these categories will be handled in accordance with Arizona intestacy laws. This property often includes furniture, cars, and “found” money. If the state can’t find heirs, then the state may take the property. That will only happen after a court-appointed executor tries to locate your property and heirs while paying your creditors.
The Streamlined Probate Process
The traditional probate process can take 12 to 24 months. Part of that is because the executor needs to wait until the end of the calendar year and until they have all of the necessary tax forms to file an estate tax return to “settle” the estate. They also need to identify your creditors and pay your debts. They may need to sell your house before they can distribute money to heirs. But what if there isn’t much of an inheritance? That’s why Arizona created a streamlined probate process for small estates.
Arizona allows for the streamlined probate process to be followed if there is less than 75,000 dollars in personal property in the estate. That amount includes everything that doesn’t pass to others outside of probate like life insurance payouts and property held in common. The small estate process can also be used if the value of real property including land and real estate are less than 100,000 dollars, assuming all debts and taxes have been paid. If there is a mortgage or liens against the home, that is offset by the value of the property. Thus a 150,000 dollar home with a 50,000 dollar mortgage could transfer to the heir via the small estate process if there is nothing else involved.
The streamlined process can only begin 30 days after someone has died. That waiting period allows creditors to come forward, even if it is only the hospital sending a bill for their services.
Trusts
Large and complex estates are arguably best managed using trusts. When you put property inside of a trust, it will pass to your heirs outside of probate. Irrevocable trusts can protect money from creditors, whether they are your creditors or those pursuing the potential heirs for payment. For example, you can put money in a trust for your teenaged grandchildren knowing that it can’t be taken to pay someone who sues them. Nor can the money be taken if you get sued. Irrevocable trusts often reduce the size of your taxable estate. Money put in an irrevocable charitable trust could result in a sizable charitable tax write off the year you fund it.
Revocable trusts don’t reduce your tax bill or the size of your estate. Yet it could result in your family business being property managed until your heirs are ready to take over its management. This type of trust will also allow for the business to be managed if you’re alive but incapacitated.
Summary
But don’t let the complex rules regarding trusts and JTWROS accounts put you off from the need to set up an estate plan. Surveys suggest that half of all Americans lack even a basic will. Consult with an Arizona estate planning attorney to draft the necessary documents. You can’t avoid death, but you can prevent your death from creating an unnecessary legal and financial mess for your family.