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Irrevocable Trusts in Arizona: Trustee Reporting, Notification Requirements

If you have an irrevocable trust, or if you are a beneficiary of someone else’s irrevocable trust, you should be aware of some important provisions contained in the Arizona Trust Code

When someone tells you they have a trust, they are almost always referring to a “living” or revocable trust. This type of trust can be changed or amended at any time and is usually controlled completely by the “trustmaker” (i.e., the person or couple who created the trust) during his or her lifetime.

There is also an irrevocable trust. A trustmaker can create an irrevocable trust during his or her lifetime, or a revocable trust can become irrevocable when the trustmaker dies or upon the death of the survivor of a husband and wife. An irrevocable trust cannot be changed or amended; however, an irrevocable trust created during life can be a valuable tool in achieving objectives in the areas of estate tax savings, creditor protection, gifting or life insurance ownership.

If you have an irrevocable trust, or if you are a beneficiary of someone else’s irrevocable trust, you should be aware of some important provisions contained in the Arizona Trust Code (“the Code”). While enactment of the Code is no longer breaking news – it went into effect January 1, 2009 – many people are still unaware of the significant changes the Code made to Arizona trust law and the requirements it imposes on irrevocable trusts.

In short, the Code imposes the following requirements regarding irrevocable trusts:

If you are the trustee of an irrevocable trust, you must notify the trust’s beneficiaries that the trust exists within 60 days after it is created, unless the trust agreement itself specifically provides otherwise.

After the beneficiaries become aware of the trust, they can request from the trustee, and trustee must give them, a copy of the portions of the trust agreement that pertain to each beneficiary.

Beneficiaries are then entitled to receive information about how the trust is being administered, including the right to receive annual reports of the trust’s assets, income, expenses, distributions, etc.

If you believe that these provisions apply to your situation, read on for more details.

Annual Reports

The trustee of an irrevocable trust must give each “qualified beneficiary” of the trust an annual report, unless a beneficiary states in writing that he or she does not wish to receive the report. If the trust is revocable, the trustee is obligated to give the annual report only to the trustmaker, i.e., the person who created the trust. In most cases, a revocable trust’s trustee and trustmaker are the same person or people.

The annual report to qualified beneficiaries must include a list of trust assets and summary information on trust liabilities, receipts, disbursements and, if practical, the fair market value of the trust assets. Determining who is a qualified beneficiary occurs when a report or other required notice is issued.

There are three types of “qualified beneficiaries”:

  • beneficiaries who are authorized to receive current distributions of income and/or principal from the trust;

  • beneficiaries who will receive principal and/or income from the trust after a certain event has occurred (e.g., the child or children who step into the shoes of a beneficiary who passes away, etc.); and

  • beneficiaries who would receive trust property and/or income if the trust terminated.

Avoiding the Reporting Requirement. The annual reporting requirement can be eliminated through a trust amendment to a revocable trust. However, that amendment does not relieve the trustee of his or her duty to respond to a qualified beneficiary’s request for reports and other information that are reasonably related to the trust’s administration.

Avoiding the reporting requirements is a two-step process. The first step is to determine whether the new law applies to your trust agreement. Your estate planning attorney can help determine that. If the law applies to your trust, your attorney can amend your trust agreement to dispose of the reporting requirement, but not to prevent the obligation of a trustee to provide reports to beneficiaries that are reasonably related to the trust’s administration. Remember, though, that it is too late to amend a trust that is already irrevocable. Careful review of a trust that is already irrevocable by your estate planning attorney is necessary to determine whether there is anything that can be done regarding the reporting requirements.

Notice Requirements

Within 60 days after (a) the trustmaker creates an irrevocable trust or (b) a revocable trust has become irrevocable, the trustee must notify the qualified beneficiaries of the following:

  • the trust’s existence;

  • the trustee’s name, address and telephone number;

  • the right of the beneficiary to request a copy of relevant portions of the trust instrument; and

  • the right of the beneficiary to receive the annual report of trust property described above.

This notice requirement applies only to a trustee who becomes a trustee on or after January 1, 2009, to an irrevocable trust created on or after January 1, 2009, and to a revocable trust that becomes irrevocable on or after January 1, 2009.

The trustee must comply with the notice requirements before he or she can split a trust into two or more trusts or combine two or more trusts into one trust, unless the trust agreement itself provides that the notice is not required. For example, if a revocable trust for a married couple provides that one or more trusts, such as a Family Trust and Survivor’s Trust, must be established and funded upon the death of the first spouse to die, qualified beneficiaries must be given notice when those new trusts are created.

Again, this notice requirement does not apply if the trust agreement itself provides otherwise. These notice requirements may be restricted or removed entirely by an amendment to a revocable trust. If the trust was already irrevocable as of January 1, 2009, the trustee must comply with these notice requirements, unless some other provision in the trust agreement provides a way around them. Again, your estate planning attorney’s careful review of a trust that is irrevocable as of January 1, 2009, is necessary to determine whether anything can be done to eliminate these notice requirements.

Non-Judicial Modification

The Code makes it easier to modify a trust without a beneficiary having to go to court. Any trustee, heir, devisee, child, spouse, creditor, beneficiary or other person who has an interest in (or a claim against) a trust estate may enter into a binding non-judicial settlement agreement with respect to any issue involving a trust, provided the settlement agreement (a) does not violate a “material purpose” of the trust and (b) includes terms and conditions that a court could properly approve.

This provision applies to a trust that became or will become irrevocable on or after January 1, 2009. (Identifying the “material purposes” of a trust after the fact can be tricky; statements in the trust itself that certain provisions are “material” may be added by an amendment to a revocable trust.)

Trust Protector

In recent years, a growing number of persons creating irrevocable trusts have included provisions that appoint an independent party (a friend, attorney, CPA, other professional, etc.) as a “trust protector,” to provide flexibility in exercising discretionary powers over the trust, such as amending the terms or removing and appointing successor trustees. In the past, the use of trust protectors has been limited due to uncertainty over whether, and to what extent, a trust protector has fiduciary duties to the beneficiaries of the trust, i.e., duties similar to those of a trustee of the trust. The Code eliminates this uncertainty in favor of saying a trust protector is not a fiduciary and, thus, makes it easier to appoint and use trust protectors.

Conclusion

If you have an irrevocable trust, or are a trustee of an irrevocable trust, you should review your trust provisions to determine whether, and to whom, you have a duty to report and provide notice. If you are a beneficiary of an irrevocable trust, you should consult your estate planning attorney to determine whether you are receiving the information to which you are entitled regarding that trust’s administration.

It goes without saying (but we’ll say it anyway) that, before you make any determinations or take any notification or reporting actions, you should consult with your estate planning attorney to determine whether any action is required, to properly take any required action, and to discuss your options regarding the modification of your trust in order to avoid the annual reporting and notice requirements.

 
 

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