“The man who dies rich…dies disgraced.”
-Andrew Carnegie
The Arizona legislature has adopted an Arizona Trust Code (“ATC”), which is different in a number of ways from the prior Uniform Trust Code (“UTC”). Apparently, the Legislature disagreed with Andrew Carnegie’s dire warning about dying rich, since many provisions of the ATC were designed to expand the scope and flexibility of Arizona trusts, in some cases for the benefit of those dying very rich. The ATC took effect on January 1, 2009. It is not possible in this article to cover all the changes to the Arizona law; however, this article will attempt to provide some key highlights of the ATC.
First and foremost, revocable or irrevocable trusts in existence on January 1, 2009 are not invalidated by the ATC. That does not mean that they may not be affected in some way. One notable part of the ATC is that certain provisions of the ATC may not be drafted around by amendments to existing trusts. As to certain other provisions, the ATC will retroactively modify existing trusts as well as control the actions of the courts concerning trusts.
Examples of some of the things that the ATC changed in existing trusts:
- The court will have the power to modify a Trustee’s compensation, even if specified in a trust, if it is unreasonably high or low;
- The court will have the power to require, modify or dispense with a bond, despite the provisions of the trust;
- The court will have the power to modify or terminate a trust under certain circumstances, even irrevocable trusts; and,
- The court can compel a Trustee to act in good faith and in accordance with the purposes of the trust, despite discretionary exculpatory language to the contrary.
One innovative idea permitted in the ATC is the ability of the Grantor of a trust to name someone as a “Trust Protector.” The Trust Protector is a person who is neither the Trustee nor necessarily a fiduciary for the trust, but an individual who is granted certain powers to act for and on behalf of the beneficiaries.
In a Trust Instrument, a Trust Protector may be authorized to:
- Remove or appoint a Trustee;
- Modify or amend a trust should there be a later change in the law;
- Increase, decrease or change provisions pertaining to benefits to beneficiaries;
- Modify the terms of a “power of appointment” granted to a beneficiary;
- Change the principal place of trust administration of a trust.
The ATC also allows the Grantor of a trust to name others to perform certain specified duties for the trust, which may or may not result in that designated person becoming a fiduciary for the trust. For example: The Grantor can name a relative as the party responsible to direct the Trustee about the types of investments to be made, or the amounts to be distributed to some or all the beneficiaries where the amounts are discretionary, or what assets of the trust should be sold. The designated relative would then become a fiduciary to the trust. Under such circumstances, the Trustee is not liable for following the instructions of the designated relative, unless the Trustee knew or should have known that such instructions were a clear violation of the “purposes” of the trust.
The “purposes” of the trust receive additional emphasis under the ATC. The ATC now requires that a trust clearly spell out the purposes for which the trust is being formed by the Grantor(s). The ATC allows a court to modify a trust in order to carry out the purpose of the trust. Should a subsequent change in the law of the jurisdiction thwart the purposes for which the trust was created, one must look to what the grantor intended as the trust’s purposes in order to successfully apply to the court for relief. This is one area where current revocable trusts could be amended by a Grantor to clarify the Grantor’s original intent in the event the trust did not contain a discernible direction.
One part of the UTC which Arizona did not adopt was a provision that would allow all of the parties to an irrevocable trust, (e.g., Grantor, Trustee and the beneficiaries) to enter into a separate written agreement and modify the provisions of the irrevocable trust. Instead, the ATC excludes the Grantor from the mix; but, the Trustee and the beneficiaries can petition the court to modify the trust as long as the modification is consistent with the purposes of the trust. The court can also terminate the trust if continuance of the trust is not necessary to carry out the Grantor’s purposes. A basis for a petition to the court could be that the trust operation is uneconomic, or there are unanticipated circumstances that impede the ability of the trust to carry out the Grantor’s intent. The court may grant the petition, even if all of the beneficiaries are not represented, as long as it appears that the unrepresented parties’ interests are protected by the proposed changes.
In addition, the ATC provides that a Trustee can, upon notice to all “qualified” beneficiaries, terminate an irrevocable trust with a value of $100,000.00 or less, provided the assets are distributed in a manner consistent with the purposes of the trust. Also, the Trustee or another party can petition the court to distribute the assets of an irrevocable trust in a similar manner where the assets in the trust are not sufficient to allow the trust to continue in operation. A reminder is in order: Married persons who have revocable living trusts are reminded, on the death of the first spouse, that the interest of the deceased spouse becomes “irrevocable” under the vast majority of trusts. In other words, after the first spouse dies, the ATC will require notices to children and grandchildren. It should be noted that under the ATC there are some types of notices and disclosures which may not be overridden by the trust instrument. If the issue of notice to children or grandchildren is a concern, then one should carefully review the trust’s notice provisions with counsel.
There are many more changes to the ATC. Among those of greatest interest to lawyers and estate planners are:
- The lengthening of the time for the application of the “rule against perpetuities” to 500 years;
- Adding recognition of “unitrust” rules and modifying the “prudent investor” rules accordingly;
- Expanding the reach of “spendthrift trust” provisions;
- Allowing the insertion of Alternative Dispute Resolution provisions, requiring Trustees and beneficiaries to submit to mediation or arbitration;
- Defining and requiring “notice” to be given to certain beneficiaries under specific circumstances;
- Setting forth new rules for the preparation and use of “Certificates of Trust.”
Caveat: To determine whether the ATC changes impact one’s own trust or estate plans, we recommend a visit with counsel to review your trust provisions. In many cases there may be no changes needed and in others significant changes may be in order.
Final Caveat: Several of the changes in the ATC are not only new to Arizona, but in some cases, contrary to settled Arizona law. We do not know what the Arizona courts will do with any specific provision of the ATC. Even though the courts should give deference to the will of the Legislature, it is hard to know how much of the ATC will remain in its current format.
To paraphrase Andrew Carnegie:
The man who dies rich without a trust…dies disgraced.
