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“The Arizona Trust Code”

By Matthew S. Dana

The Arizona Trust Code (ATC) has been a work in progress for quite some time. For several years attorneys and lawmakers alike have been working on getting it passed here in Arizona. On January 1, 2004 a version of the Uniform Trust Code (UTC) that was already in place in many other states was passed by Arizona lawmakers and became law. However, this version of the UTC was largely disliked by Arizona attorneys and financial institutions alike and was therefore quickly repealed. After 2004 attorneys and lawmakers focused on specifically addressing the opposition’s misgivings regarding the original wording in the 2004 version. Once the problems with the original code were addressed the ATC was enacted into law and became effective on January 1, 2009.

The purpose of this article is to give a basic knowledge of the new ATC and to specifically hi-light areas that could affect a person’s own Trust documents. However, for personalized advice on specific documents or topics it is recommended that you seek out legal advice.

Notice Requirements

One of the most controversial parts of the 2004 version of the law that was later repealed was the new notice requirements for Trustees. The new law creates a duty for Trustees to report important Trust information to the named beneficiaries of a Trust. In order to protect a beneficiary’s interest in a Trust the Trustee holding the Trust property is required to provide portions of the trust document, inventories and trust accountings to all qualified beneficiaries of the Trust.

Part of the compromise that happened between the 2004 and 2009 versions of the rules were: 1) a trustor of a trust has the option to opt-out of these notice requirements under A.R.S. § 14-10105; and 2) a qualified beneficiary is required to be over 25 years of age to request such notice under A.R.S. § 14-10105(B)(8). When opting out of these notice requirements the trustor must specifically mention that the notice requirements are not meant to apply in the current document. There is however an exception in the rules where even if there is opt-out language in the Trust a beneficiary can still receive trust information but only in the event the trust is an irrevocable trust. Under the exception the qualified beneficiaries are still allowed notice of certain information upon the direct request of a qualified beneficiary. The age limit mentioned above came as a result of trying to protect younger beneficiaries from knowing about their expected inheritances to soon. There is always a fear of a child altering career and educational goals if they know of a large inheritance they are going to receive.

Creditor and Spendthrift Issues

There is a common misconception with the public that a revocable living trust offers the trustor’s estate creditor protection from their individual creditors while they are alive. While this type of trust contains provisions dealing with creditors, or so-called “spendthrift” provisions, these protections under a revocable living trust are solely for the trustor’s beneficiaries who would take the money after the trustor’s death. The previous rules were limited in that only in certain circumstances a trustee could protect a beneficiary’s inheritance from that beneficiary’s creditors. The ATC greatly expands the power of a trustor to protect his/her beneficiaries from their own creditors.

The ATC now provides under A.R.S. § 14-10501 that a trustee cannot be forced by a beneficiary’s creditors to pay out a portion of the beneficiary’s inheritance or be held liable for distributions made according to a discretionary distribution provision or spendthrift provision. In order to create a valid spendthrift provision under the ATC there is specific language that must be added to the trust. One other particularly helpful provision in A.R.S. § 14-10506 allows a trustee to delay even mandatory distributions to beneficiaries in order to protect their interests from creditors. This would allow a trustee to hold on to a beneficiary’s inheritance for an unspecified amount of time in order to avoid that beneficiary’s creditors. There are several other rules that expanded creditor protection to Special Needs Trusts, “Crummy” trusts, Irrevocable Life Insurance Trusts and trusts created for businesses.

Other topics

It is impossible to provide explanations of all changes brought about by the ATC. I have tried to limit my discussion to topics of interest to a person who is drafting a new trust or wanting to update their existing trust to take advantage of the new ATC. Below you will find some of the other topics that I wanted to mention in this article but not go into great detail.

  • The ATC allows a court to look deeper at the intent of a trust document which means that more elaborative descriptions of a trustor’s intentions now have a place in a person’s trust.
  • Alternative Dispute Resolution is now encouraged by the ATC so a trustor can require disputes to be handled by other means such as mediation or arbitration rather than having matters settled in court.
  • Certificates of Trust can now be used more frequently as an alternative to providing a full copy of the Trust to financial institutions. This serves to limit the amount of personal information given to financial institutions.
  • Unitrust provisions are now more acceptable under the ATC. These provisions allow a beneficiary receiving an income stream from a Trust to receive a fixed income from the trust instead of the much more common practice of receiving all income earned by the trust during the period.