The New Arizona Trust Code: Mandatory Requirements and Opportunities Under Arizona’s New Law
Trusts and Estates Update 01/04/09
Please be aware of new legislation that may affect your trust. The new Arizona Trust Code, effective January 1, 2009, contains widespread changes, and as a result your trust will likely need to be updated. This new law provides you with different choices, some of which are explained below.
Annual and Other Reporting Requirements
The new Arizona Trust Code requires the trustee to provide to the trust's beneficiaries an annual report of trust property, including trust liabilities, receipts, disbursements, a list of trust assets and, if feasible, the fair market value of the trust assets. In addition, the trustee is required to keep the "qualified beneficiaries" reasonably informed about the administration of the trust.
Beginning January 1, 2009, the new Arizona Trust Code requires the trustee of all irrevocable trusts to provide each beneficiary who is entitled or permitted to receive trust income or principal with annual reports unless that beneficiary waives his or her right to a report in writing about the administration of the trust. The trustee is also required to keep the qualified beneficiaries reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests. If the trust is still revocable, however, the trustee only has to account to the person who created the trust. The term "qualified beneficiaries" includes three types of beneficiaries:
Beneficiaries currently authorized to receive distributions of income and/or principal from the trust;
Beneficiaries who would be authorized to receive principal and/or income from the trust if the interests of the persons currently authorized to receive income and principal immediately ceased; and
Beneficiaries who would be authorized to receive principal and/or income from the trust if the trust immediately terminated.
The determination of who is a beneficiary entitled or permitted to receive income or principal, or a qualified beneficiary, is made at the time a report or other type of notice or action must be given or performed. For most existing irrevocable trusts, this expands the number of persons to whom the trustee must report. This requirement can be partially eliminated through a trust amendment to a revocable trust. However, an amendment cannot eliminate the trustee's duty to respond to the request of a qualified beneficiary of an irrevocable trust for trustee's reports and other information reasonably related to the administration of the trust. If the trust is irrevocable as of January 1, 2009, the trustee must comply with these reporting requirements.
For instance, suppose Harry established a trust for the benefit of his family upon his death. This trust provides that upon Harry's death, his wife Wilma shall receive all the income from the trust and principal distributions for her health and support. The trustee also has the discretion to distribute principal to Harry's two children Charlie and Chris. If either Charlie or Chris predecease Wilma, the trustee may make principal distributions to Harry's niece Nancy. Upon Wilma's death, the remaining trust assets are to be distributed equally among Harry's grandchildren Greg and George. If none of Harry's grandchildren are living upon Wilma's death, the remaining trust assets are to be distributed to Charity X.
Under this example, when the trust becomes irrevocable upon Harry's death, his wife Wilma, his children Charlie and Chris, his niece Nancy and his grandchildren Greg and George are all qualified beneficiaries. Charity X is not a qualified beneficiary. Wilma, Charlie and Chris are qualified beneficiaries because they have the current right to receive income and/or principal from the trust. Nancy is a qualified beneficiary because if either Charlie's or Chris's right to principal immediately ceases, she will have the right to receive principal distributions. Greg and George are qualified beneficiaries because if the entire trust immediately terminates, they would have the right to receive a distribution of the trust assets. Charity X, while a potential beneficiary of the trust, will not become a qualified beneficiary until after the death of both Greg and George, whereby it would then have a right to a distribution of the trust assets if the trust immediately terminated.
Under the new Arizona Trust Code, within 60 days after the date the trustee acquires knowledge of the creation of an irrevocable trust or that a revocable trust has become irrevocable, the trustee must notify the qualified beneficiaries of the trust's existence, of the identity of the settlor, of the trustee's name, address and telephone number, of the right to request a copy of relevant portions of the trust instrument and of the right to the report of trust property described above. This notice requirement only applies to a trustee who accepts a trusteeship on or after January 1, 2009, to an irrevocable trust created on or after January 1, 2009 and to a revocable trust that becomes irrevocable on or after January 1, 2009. The new Arizona Trust Code also provides that notice to qualified beneficiaries is required before a trustee may divide a trust into two or more trusts or combine two or more trusts into a single trust, unless the trust instrument provides that notice is not required. If a revocable trust for a married couple provides that one or more trusts, such as a Family Trust and Survivor's Trust, must be established and funded upon the death of the first person to die, notice must be given to qualified beneficiaries before the Family Trust and Survivor's Trust can be created. This notice requirement applies unless the trust agreement states that this notice is not required. These notice requirements may be restricted or removed by an amendment to a revocable trust. If the trust is irrevocable as of January 1, 2009, the trustee must comply with these notice requirements.
The new Arizona Trust Code makes it easier to modify a trust without any beneficiary ever having to go to court. Interested persons may enter into a binding nonjudicial settlement agreement with respect to any matter involving a trust, to the extent it does not violate a material purpose of the trust and includes terms and conditions that could be properly approved by the court. An interested person includes any trustee, heir, devisee, child, spouse, creditor, beneficiary and other person who has a property right in or claim against a trust estate. This provision applies to a trust that becomes irrevocable on or after January 1, 2009. Identifying the material purposes of the trust in the trust instrument may have a chilling effect on interested persons contemplating a nonjudicial settlement agreement that violates those purposes. Statements that certain provisions are material purposes of the trust may be added by an amendment to a revocable trust.
If you already have a trust in place or are a trustee of an irrevocable trust, you should review your trust provisions to determine to whom you will have a duty to report and provide notice, effective as of January 1, 2009.