How can someone create a trust? It seems like a trick question. In Arizona, someone can create a trust by signing a trust document, transferring assets, or by making a will with trust provisions. Arizona even permits someone to just declare a trust exists.
But can an agent under a power of attorney create a trust for the principal? A recent Massachusetts case raised that question.
The lead-up to the court decision
Lubov Stempniewicz signed a will and a durable financial power of attorney in 2013, when she was 91. She named her brother Edward as agent in the power of attorney. The will replaced her earlier will, signed in 1999.
Four years later, Edward signed a trust for Lubov’s benefit. He signed it three times, actually: once on Lubov’s behalf as settlor, once on her behalf as trustee, and once on behalf of himself as co-trustee. Then he signed deeds transferring two pieces of real property to the trust’s name (again signing as Lubov’s agent). He also transferred her financial accounts — as well as some of his own, apparently — into the trust’s name.
The trust Edward signed left small amounts to each of Lubov’s children and grandchildren. It directed that the bulk of her estate would be held in continuing trust for the benefit of Edward’s own two children.
When Lubov died in 2018, her children and grandchildren sued Edward to recover her estate. They argued that he had no authority under the power of attorney to create the trust, and that it was therefore invalid. They sought a court order directing that Edward held the assets in trust for their benefit, and that he should divide Lubov’s $1.5 million estate among them.
The language of Lubov’s power of attorney actually mentioned trusts in at least two places. In one, it gave Edward the authority to “act for me in all matters that affect a trust….” In another, it authorized Edward to “transfer ownership of any property … to the trustee of a revocable trust I have created….”
Court rulings
The trial judge ruled that those provisions did not give Edward authority to create a trust. The trust he signed was invalid. Thus, he held all trust property for the benefit of Lubov and her estate. Edward appealed.
The Supreme Judicial Court of Massachusetts agreed with the trial judge, and affirmed its holding that the trust was invalid. But that did not mean that all trust assets automatically belonged to Lubov’s estate or children. The state high court remanded the case for the probate judge to determine whether the trust contained any of Edward’s own assets.
Key to the (thoughtfully reasoned) appellate decision was that Massachusetts law does not seem to permit an agent to create a trust for the principal. Or, at least, the law does not permit it in the absence of clear authority in the power of attorney document itself. And the two trust-related provisions in Lubov’s document could only be read to allow Edward to act with regard to existing trusts, not to create a completely new one. Barbetti v. Stempniewicz, June 28, 2022.
The appellate court noted, parenthetically, that Lubov did not consult with any lawyers before signing her new will and power of attorney. Likewise, Edward sought no legal consultation before he tried to create a trust (and transferred assets to it). Would the outcome have been different if a lawyer had been involved? Perhaps. Or perhaps a lawyer might have recognized that there might be concerns about Lubov’s abilities or intentions.
Does Arizona permit an agent to create a trust?
But what about Arizona law? Would the same thing happen if Lubov, Edward and all the property were in Arizona?
Though Arizona does not have a case on point (yet), it seems likely that the result would be pretty similar. Like Massachusetts, Arizona has adopted a version of the Uniform Trust Code. Arizona’s version says that a trust can be created only if “the settlor has capacity to create a trust.” Of course, it might be that Lubov had capacity and that Edward created the trust with her understanding and express approval. But if she lacked capacity, Arizona’s law seems to suggest that an agent could not create a trust.
But what if Arizona law applied and the power of attorney expressly and unequivocally authorized Edward to create (and fund) a trust? Might the trust have been valid then?
The answer is unsettled. Express language in a power of attorney would clearly be more helpful. But the Arizona version of the Uniform Trust Code seems to indicate that the only exception to the requirement that the settlor be competent is when a probate court approves the trust. Arizona does have a relatively simple and efficient mechanism for seeking court approval for such a single transaction. That process would have provided Lubov’s family with notice and an opportunity to weigh in on the trust’s terms, at least.
