Can an Arizona trust be a secret trust? Is that something you should want? And what does it even mean? (And, we might add, what is an “Arizona trust,” anyway?)
First: some notes on Arizona law
Three weeks ago we wrote about a trustee’s duty to provide some kinds of information to trust beneficiaries. As we noted then, those duties arise when a trust is irrevocable. The duty is governed by Arizona law.
Arizona adopted a version of the Uniform Trust Code in 2008. Actually, that was our second pass at the UTC; we first adopted it in 2003 and then repealed it before it became effective. Why? Largely over the issue of accounting to trust beneficiaries — and the idea of a secret trust.
This raises the opportunity to talk about uniform laws. An organization called the Uniform Law Commission is the leading proponent of legal systems that are the same — or at least similar — among different states. They proposed a first version of the UTC in 2000, and periodically update their proposal. But that “uniform” law has no effect except when states adopt a version, and states are notorious for changing “uniform” laws. That results in a patchwork of different rules, though the basic framework may be somewhat standardized.
That’s just what has happened with the Uniform Trust Code. Some version has been adopted in 35 states. (The holdouts: Alaska, California, Delaware, Georgia, Idaho, Indiana, Iowa, Louisiana, Nevada, New York, Oklahoma, Rhode Island, South Dakota, Texas, and Washington.) But most of those states have tweaked the uniform law at least a little bit.
One illustration, specific to Arizona: the Uniform Trust Code says a trustee must furnish a beneficiary “a copy of the trust.” Arizona’s law says the trustee must provide “a copy of the portions of the trust instrument that are necessary to describe the beneficiary’s interest.” See the difference? A trustee of an Arizona trust can withhold some of the information, even on request. There are other changes in Arizona’s version of the law — this is just an easy and obvious one to point out.
So what is a secret trust?
Are you old enough to remember the television show “The Millionaire,” which ran from 1955 to 1960? It was a fun premise. A fabulously wealthy man (John Beresford Tipton) liked giving away a million dollars at a time to random people who had no idea who he was or why he gave them money. Wouldn’t that be cool?
From the beneficiary’s perspective, that’s what a secret trust looks like. Someone is holding money for your benefit, and they might distribute it to you in small or large installments. You might never know where the money came from, what you did to win favor (or lose favor), or how the money is invested, managed or divided.
From the donor’s perspective, the secret trust can be even more enticing. Perhaps you want to benefit a child, but you don’t want them to know how much money is available. Maybe you have good reasons. And you surely do not want them challenging the trustee, or demanding investment strategies or distributions.
But if the trustee has complete discretion and secrecy, is there a trust at all? Doesn’t the trustee then really “own” the money, since there is no accountability? That’s the logic of the Uniform Trust Code, which mandates disclosures. Arizona’s legislature decided to try to strike a balance — some obligations to provide information, but not as many duties as the uniform law would have imposed.
Do you even want your estate plan to include a secret trust?
After our newsletter article from last month, one commentor made the (perfectly reasonable) point that trustees need to follow the law no matter what the trust document tells them they can do. But if you were preparing a trust for your children (after your death, we can presume — for now), would you even want the trust or any subtrust to be a secret?
Of course, your family dynamics and asset types (and values) are unique. But we are inclined to think that the comment on our earlier newsletter is well-taken — a secret trust should probably be the exception rather than the rule. And as trustee, you might prefer to give full disclosure even if the trust document (and the law) permit you to be more restrictive in releasing information. Why? Because Arizona law also gives a trustee the ability to cut off future liability by making full, written disclosure.
But there is no doubt that there are unusual circumstances calling for withholding at least some information. It just shouldn’t be the default position of a trustee — even if the law and the trust document might let them maintain a secret (or maybe a semi-secret) trust.
How can I know what duties I (or my trustee) might have to disclose information?
This is a truly complex question, and will probably require good legal advice. Seek a competent attorney to help you with your particular facts and document.
How can this be too complex to generalize about? Well, there are a number of variables. Those include:
- What law applies? Is your trust even governed by Arizona law? Even if it says in the document that it is governed by Arizona law, that might not be the end of the inquiry. And what if it says that the law of another state applies, but the trustee lives in Arizona? Might it change the answer? The short legal answer: yup!
- What does the trust document say? And is that language permissible under the law of whichever state actually governs?
- Who is the actual beneficiary? It might, for example, be another trust — and the beneficiary of that trust might not have any rights to demand information about the first trust.
- What are the assets, and what kinds of problems might arise from disclosures?
- What are the practical realities of capacity, interests of beneficiaries and involvement of the various players?
- Is it possible for the trustee to discharge their obligation by giving information about the trust to someone other than the beneficiary who is demanding that information? Arizona law, at least, often makes it possible.
- Who is a “qualified” beneficiary? This is an important, and defined, term under Arizona law (and the Uniform Trust Code itself). It should be possible — and usually even easy — to figure out who would be entitled to information. But not always.
We love thoughtful commentary like that we received to our earlier newsletter. It often gives us a chance to review and expand on a recent article. Keep the questions and comments coming. In the meantime don’t assume that you can have (or even want) a secret trust.
One Response
A book titled The Paradox of Choice makes the case for “more is less.” In too many instances we suffer from having too many options. Visit a Levis store or try to select a phone plan. Not fun!
In the trusts arena, options might make sense when someone sits down to make an estate plan, but much can happen between then and irrevocability. Tailoring a plan very specifically likely makes it more complicated, which can create administration issues and present opportunities for conflict, neither of which say anything about a designated trustee’s ability to comply with the trust requirements. If a minimum of seven variables must be considered to determine disclosure responsibilities, maybe we’d all be better off with the UTC requirement for full disclosure.
One more thing. IMHO, variations to Uniform Laws ought to be rare. Experts spent lots of time putting together cohesive statutory schemes. Legislatures have less knowledge than the people who wrote the Uniform Laws, and likely don’t appreciate the implications of their changes. Uniformity has value for its own sake, too. (Of course, changes to Uniform Laws – and other laws, as well – often get driven by a group of lawyers with an agenda (which might not reflect broader interests.)