The State of Arizona recently adopted most provisions of the Uniform Trust Code (UTC) adding several new requirements to both new and existing Trusts. The new law went into effect on January 1, 2009.
Arizona’s legislature made this law retroactive to ALL trusts created before this change in the law. This means, at the very least, most trusts should be reviewed within the next year or so, to make sure there are no unintended consequences from the existing trust language.
Some of the important new changes in the law include:
New rules for Irrevocable Trusts and Revocable Trust that become irrevocable (such as at the death of the Settlor(s), imposing a duty on the Trustee to keep beneficiaries “reasonably informed about the material facts of the trust”, in order to better protect their interests.
Defining the term “Qualified Beneficiaries” as those beneficiaries who have a specific right to be informed about the material facts of a trust. In the past the law was vague on who could request and receive information about the trust. Some interpretations said that no-one had the right to demand information while others interpreted then current law to include any “potential” beneficiary as having the right to demand information about the trust.
Stipulating that information required to be available to “qualified beneficiaries” could be limited to the material facts specifically pertaining to that beneficiary, and not necessarily include information specific to other beneficiaries.
“Special Needs” trusts will be better recognized under Arizona state law, and it will be more clear that a special needs beneficiary’s creditors can not attack even a self-settled special needs trust. This is important as all Revocable Living Trusts prepared by the Arizona Provider Attorneys for AmeriEstate Legal Plan contain provisions for a special needs beneficiary sub-trust.
New rules of perpetuity allowing Trusts to remain in force for up to 500 years, in case Settlors wish to have all their assets remain in trust for the use and enjoyment of their descendants, such as a family or vacation property, or to provide continuing income streams for multiple generations. The previous law limited a Trust’s existence to 90 years after the death of the Settlor.
Requiring the Trust to specifically state the “Material Purposes” of the Trust and allow for future Trustees to amend administrative provisions if circumstances or changes in the law make it difficult for the trust to complete its stated objectives.
New clarifications in the rules and legal authority to act in cases where there are multiple Successor Trustees acting as “Co-Trustees”.
Among the items included in the Arizona Trust Code:
Mandatory Rules
The Trust must now explicitly state the material purposes of the Trust such as:
1. The management by Trustee of Settlors’ assets during Settlors’ lifetime.
2. The payment of income and principal to Settlors.
3. The non-judicial administration and distribution of Settlors’ assets upon the death of Settlors in the manner set forth in the Trust.
4. Avoiding probate at a Settlor’s death.
5. Avoiding a conservatorship proceeding upon a Settlor’s incapacity.
6. The reduction or elimination/minimization of federal, state and local estate and gift taxes by use.
7. Spendthrift provisions protecting trust assets from the creditors of beneficiaries, except child support judgments against a beneficiary, and of course claims by the IRS or other government agency, provided a statute exists that allows it..
Other mandatory rules include:
1. The duty of a Trustee to notify “qualifying beneficiaries” within 60 days whenever a trust becomes irrevocable or there is a change in Trustee for an irrevocable trust. The Trustee will be required to provide all qualified beneficiaries notice of the existence of the trust, portions of the trust agreement relative to the beneficiary’s interest, and the right to receive financial statements annually. Remember that not all trusts for married couples become irrevocable (partially or fully) upon the death of the first spouse (eg. A-Marital Trusts). In those cases no notification is required.
2. The requirement that an odd number of Successor Trustees must act by majority consent and unanimous consent is not allowed when there are an odd number of Successor Trustees. e.g. 2 out of 3 co-trustees provides majority rule.
3. New Rule Against Perpetuities allows trusts to continue for up to 500 years before mandatory termination. Arizona's previous law extended the “rule against perpetuities” to 90 years; this change makes the creation of multi-generation trusts much easier.
Important Definitions:
A. A “qualified” beneficiary is any beneficiary who is eligible to receive either an income or principal distribution at the present, or who would be entitled to receive a distribution if all of the current beneficiaries died or if the trust terminated. This includes current discretionary beneficiaries, remainder beneficiaries, the takers in default under a testamentary power of appointment or an unexercised nontestamentary power of appointment, and the appointees under an exercised nontestamentary power of appointment.
B. A “nonqualified” beneficiary is any person or entity who has any interest in the trust, vested or contingent, who is not a qualified beneficiary. Nonqualified beneficiaries might include the Settlor's siblings who receive the remainder interest in a credit shelter trust if both the Settlor's widow and child died. Those siblings are not “qualified” beneficiaries because if the widow died or the trust terminated at the present time, the child, and not the siblings, would be entitled to the trust assets. Also, charities or the Settlor's intestate heirs named in the family disaster clause are nonqualified beneficiaries.