Fleming & Curti, P.L.C. - Arizona Legislature Rewrites Trust Law Effective in 2009

JULY 7, 2008 VOLUME 16, NUMBER 1

Arizona Legislature Rewrites Trust Law Effective in 2009

The Arizona legislature adjourned for 2008 on June 27 — but not before adopting a number of new laws that will have some effect on seniors and those with disabilities. One sweeping new enactment, the Arizona Trust Code, will not become effective until January 1, 2009 (most laws will take effect on September 26). That will give lawyers, accountants and their clients a few extra months to get used to the changes.

At first glance the Arizona Trust Code (based on but different from the Uniform Trust Code promulgated by the National Conference of Commissioners on Uniform State Laws) may look like it will mostly concern lawyers. Indeed, its low profile in the legislature indicates that most political observers viewed it as both arcane and technical. It does, however, make some significant changes for individuals who have created trusts, or who plan to do so in the future.

In the past four decades, the use of trusts in estate planning has grown dramatically. They are usually seen as a way to avoid the hassle, expense and lawyer involvement of the probate process, as well as a way to more tightly control how one’s funds are used after incapacity or death. The result: though the idea of creating a trust was limited to the very wealthy up through the middle of the last century, today thousands upon thousands of middle class individuals and couples, with ordinary kinds of assets and family situations, have created trusts as the central element of their estate plans.

The new law will potentially have an effect on every one of those trusts. Among the items included in the Arizona Trust Code:

The trustee of an irrevocable trust (including a “bypass” trust created on death of one spouse) must now affirmatively contact beneficiaries within sixty days of taking over. This provision will dramatically change existing practice, but can be planned around in drafting (or amending) the trust. If no changes are made to a trust drafted before the new law, it is likely that children, stepchildren and other beneficiaries will need to be kept very much apprised of the management of trust property — even though the primary purpose for making one trust irrevocable on the first spouse's death might have been estate tax planning, rather than control of the assets for the next generation's benefit.
Even though the trust may include a "spendthrift" provision making distributions to a beneficiary unreachable by creditors, some kinds of claimants will now be able to reach the beneficiary's distributions. Favored position is given to child support judgments and claims by those (presumably, but perhaps not always, lawyers) who have rendered assistance to the beneficiary in connection with the trust itself.
The new law 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.
The Attorney General must now be given notice any time a charitable trust is created. Unlike some other states, Arizona's Attorney General has not historically been involved in monitoring charitable trusts. That may now be changing.
A problem occasionally arises when one of several co-trustees acts unilaterally — especially if he or she acts improperly. The new law clearly specifies that trustees must act by majority rule (unless the trust document says otherwise), that a trustee who allows a co-trustee to misbehave may also be liable, and that a co-trustee who votes against the majority but is forced to go along is not individually liable. These provisions may make it less attractive to be a co-trustee, and therefore argue for individuals to name a single trustee in most cases.
Although the Public Fiduciary's offices across the state have mostly insisted that they have no authority to act as trustee (and therefore can avoid being involved in trust matters), the new law expressly exempts the Public Fiduciary from any requirement of posting bond as trustee. Does that implicitly recognize that Public Fiduciaries can serve as trustees? Perhaps.
The Arizona Trust Code specifically allows trusts for pets or other animals — but only for those alive during the lifetime of the trust creator. It also permits "noncharitable" trusts — those created for a general purpose, but without either an individual beneficiary or a charitable purpose. A typical noncharitable trust might, for example, direct perpetual care of a cemetery plot.
When a trustee moves to a new state, or changes the state of trust administration, beneficiaries must first be given sixty days notice and an opportunity to object.
If a trustee delegates duties (for instance, investment authority) to an appropriate professional, that professional implicitly accepts jurisdiction in Arizona courts by accepting the delegation. A question immediately comes to mind: does this provision override the standard clause in most stock brokerage contracts mandating arbitration of disputes, at least in cases where the trustee gives investment authority to the stock broker? Stay tuned as the legal system figures that one out.

There are of course innumerable other provisions in the sixty-page law. Some of them will have effects that only become apparent with the passage of time and the acquisition of experience.

One of the more arcane provisions of the Arizona Trust Code, but one with far-reaching effect: the new law specifically directs that interpretation of Arizona trust law should be in accordance with the Restatement (Second) of the Law of Trusts. What significance does that have? Potentially considerable significance. It reflects a storm of controversy ("storm" may be a bit of an overstatement, considering we are talking about legal interpretation of trusts) about changes in the national law of trusts. The American Law Institute, which has prepared comprehensive treatises on the state of the law in the United States for nearly a century, has been working on updating the law of trusts for two decades. The nearly-finished work is controversial, and is occasionally criticized as extending the rights of creditors and of remainder beneficiaries of trusts, to the detriment of current, income beneficiaries. Arizona has expressly repudiated that drift.

Does Arizona’s adoption of a new Trust Code mean every individual with a trust should rush in to make changes? No, but it does mean that most trusts should be reviewed within the next year or so, to make sure there are no unintended consequences from the existing trust language. Does the new law mean that trusts are more (or less) attractive as an estate planning device for the future? No, but it does mean that trusts drafted after adoption of the Arizona Trust Code should reflect the provisions of the new law.

We are happy to meet with our existing clients to discuss their estate plans. We will also hold seminars for clients and prospective clients to explain the law and the need (if any) for revisions. We anticipate that many trust purveyors will begin blanket mailings, news releases and advertisements alleging that document changes are critical and imperative; before those bulletins arrive, we urge our clients and readers to adopt a cautious and tentative response.