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The Arizona Trust Code

The purpose of this article is to give a cursory knowledge of the 2009 changes to the law and to highlight areas that could affect a person’s trust documents.

For the past several years the Arizona Trust Code (ATC) has been a hot topic for estate planning attorneys. Back in 2004, Arizona lawmakers passed a version of the ATC and then quickly repealed it because of many problems that attorneys and lawmakers saw in the new code.

These problems have since been addressed, and the ATC in its current form was enacted into law and became effective on January 1, 2009.

The purpose of this article is to give a cursory knowledge of the 2009 changes to the law and to highlight areas that could affect a person’s trust documents. In the event you wish for your estate planning documents to be reviewed in regard to the new Trust Code, please contact our law firm and we will be happy to discuss the changes with you.

Giving Notice

The most talked-about change that the ATC brought about has to do with the new notice requirements of trustees. The new law requires a trustee of an irrevocable trust to provide certain information about the trust to the trust's beneficiaries. (The majority of all trusts created for estate planning purposes are revocable trusts that eventually become irrevocable upon the death of one or both of the trustors.) This change was brought about to help protect beneficiaries of a trust so that they can be kept informed of how trust assets are being used.

The point of contention with this change pertains to when the trust – commonly referred to as an "A/B trust" – splits into two separate trusts upon the death of one trustor. The "B" trust (or deceased person’s trust) becomes irrevocable at this time, thus triggering the new notice requirements. It is not just the surviving trustor who is entitled to notice under the new law; so are all of the eventual trust beneficiaries (generally the trustor’s children).

Many people do not want to force their spouse to be accountable and give notice to their children. Fortunately, despite this new law, the ATC allows a person to draft around these notice requirements specifically in their documents. At the same time, many people want to have the notice requirements in their trust, especially in the situation where there is a second marriage and each spouse has his or her own children from prior relationships.

Creditor Protection

Many people believe that a revocable trust offers protection from their individual creditors while they are alive. This is not the case.

It is very difficult to gain creditor protection for yourself during your lifetime. To do so generally requires that you give up benefit and control over your assets. However, you can protect your beneficiary’s inheritance from the beneficiary’s creditors through "spendthrift" provisions, which state that a trustee cannot be forced to pay a beneficiary’s creditors or be held liable for any distributions made.

Additional Changes

The ATC enacted many changes to the law that are not discussed here. Here are a few additional topics that may be of interest:

  • The ATC allows a court to focus more on your intent in setting up the trust. This means that you can put more descriptive provisions in your trust so that a court can more readily interpret your intent.

  • Under the "Prudent Investor Rule," a trustee is now held to a higher standard when it comes to investing and caring for trust assets. If you do not wish to burden the successor trustee by this rule, you can include language in your trust document that makes it inapplicable.

  • Alternative dispute resolution (i.e., arbitration or mediation) is encouraged by the ATC so that a trustor can require disputes to be handled out of court.

  • The ATC gives greater weight to Certificates of Trust, and financial institutions should accept this shorter document instead of a full copy of the trust.

If you have a question on this topic that can be answered in a brief conversation, call us (480-985-4445) for a free 5-minute phone call with a Taylor Skinner attorney.

Michael Kleinman