Posts Tagged ‘Arizona Trust Code’

Accounting Requirements for Irrevocable Trusts in Arizona

FEBRUARY 4, 2013 VOLUME 20 NUMBER 5
Arizona adopted a version of the Uniform Trust Code in 2008, to be effective at the beginning of 2009. The UTC has been the subject of much discussion across the country — it has been adopted in about half the states, and soundly rejected in a few others. Despite all that discussion, however, there are relatively few court cases addressing what the UTC provisions actually mean.

One concern commonly raised about the UTC has been its requirement that trust accounting information must be given to beneficiaries, including those who receive no benefit until after the death of a current beneficiary. Take, for instance, a common situation: in a second marriage, a wife establishes a trust for the benefit of her husband for the rest of his life, with the remainder to be paid out to her children (from her first marriage) after the husband’s death. Then the wife dies, leaving her house and brokerage account to the trust. Her surviving husband is trustee. Under Arizona’s version of the UTC, her children are entitled to receive at least annual reports from the husband.

But what should those reports contain? The Trust Code is less than completely explanatory. It says that the wife’s children are entitled to “a report of the trust property, liabilities, receipts and disbursements, including the source and amount of the trustee’s compensation, a listing of the trust assets and, if feasible, their respective market values.”

In a recent Arizona Court of Appeals case, the meaning of that requirement was questioned. The history was slightly more convoluted than the scenario we describe above: the trust had been established by a husband and wife for the ultimate benefit of the husband’s two daughters. First the husband and then the wife died. The trust, by its terms, then divided into two shares — one share outright to  one daughter, and the other share to a local Certified Public Accountant as trustee for the benefit of the other daughter.

To try to make this convoluted story a little clearer, let’s identify the parties. In keeping with our usual attempt to avoid family names popping up in internet searches, and to make it easier to keep track, we’ll give everyone shortened names. We’ll call the combined trust — the original one set up by the husband and wife — the G Trust, and the trustee of that trust Geraldine. We’ll call the trust for the benefit of one daughter the S Trust, and the CPA/trustee of that trust Scott. The other daughter will be Doris.

Doris filed a court action asking for determination of the proper division of the G Trust. She noted that she had been named as beneficiary of an annuity and asked that it be determined that it was not part of the trust. Geraldine, the trustee of the G Trust, filed a proposed distribution schedule for the G Trust. Both Doris and Scott (the Trustee of the S Trust) objected, each arguing that their share should be increased. The probate court found that the annuity belonged to Doris, and that Geraldine should make her own calculation as to how to distribute the G Trust.

Months later, Scott filed a request that the court order Geraldine to file an “accounting” with the court. Geraldine objected that she had done everything the Arizona UTC required — and that all she was required to provide was a “report” under that statute. Scott argued that he was entitled to a more formal accounting. Ultimately the probate judge denied that request, finding that Geraldine’s reports (consisting of account statements and other documentation) were sufficient for Scott to protect his trust’s interest. Scott appealed.

With that background, the question before the Court of Appeals was straightforward: does the Arizona version of the Uniform Trust Code allow a beneficiary to make a demand for a formal, detailed accounting? No, ruled the appellate court. In fact, the UTC made the accounting requirements less onerous, rather than imposing more detail: the prior Arizona law had required “a statement of the accounts of the trust annually,” but that statute was repealed when the UTC was adopted.

According to the appellate decision, requiring an “accounting” would have included “establishing or settling financial accounts” and “extracting, sorting, and summarizing the recorded transactions to produce a set of financial records” (quoting from Black’s Law Dictionary 9th Ed.). The court also quoted from the commentary prepared by the UTC’s original, multi-state drafters: “The reporting requirement might even be satisfied by providing the beneficiaries with copies of the trust’s income tax returns and monthly brokerage account statements if the information on those returns and statements is complete and sufficiently clear.”

The bottom line: the main concern of the UTC is to assure that beneficiaries have the information they need to be able to protect their interests. Scott had sufficient detail that he could calculate whether Doris had received more than her share of the G Trust, and Geraldine was not required to prepare a more formal report. In the Matter of the Goar Trust, December 31, 2012.

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Estate Planning: It Shouldn’t Be About the Lawyers

AUGUST 22, 2011 VOLUME 18 NUMBER 30
Of course it usually makes sense to place your estate planning wishes in the hands of your lawyer to make sure documents are correctly drawn and your wishes carried out. Lawyers can be very protective of what they perceive as their clients’ wishes and best interests, and sometimes that can even get in the way. Take, for instance, the will and trust of Missouri resident William R. Knichel.

Mr. Knichel had two grown children. He also had a 20-year relationship with Anita Madsen. In 2002, shortly after he was diagnosed with brain cancer, he signed a new will and powers of attorney. He named his children as his agents and left his entire estate to the two of them.

At about the same time Ms. Madsen began living with — and taking care of — Mr. Knichel. Two years later, he decided that he wanted to put her in charge of his finances and leave a significant portion of his estate to her. He transferred his home and one bank account into joint tenancy with her, and named her as beneficiary on his life insurance policy.

In 2004, Mr. Knichel and Ms. Madsen made an appointment with St. Louis attorney Charles Amen, of the law firm Purcell & Amen. Mr. Amen prepared a new will and powers of attorney, and a living trust. These documents named Ms. Madsen as personal representative, agent and trustee. The trust was intended to hold Mr. Knichel’s retirement assets, and to distribute them in three equal shares to his two children and Ms. Madsen.

One unusual provision in the trust document: Mr. Amen himself was named as “special co-trustee” with some specific powers. He was to make final decisions about distributions among the beneficiaries, to decide whether any beneficiaries could challenge Ms. Madsen’s administration or distribution decisions, and act as arbitrator if any disputes did arise. Then Mr. Amen and Ms. Madsen began the process of transferring Mr. Knichel’s retirement assets into the trust.

Among the accounts they tried to transfer to the trust was an IRA held at UBS Financial. For reasons not spelled out in the reported court opinion, UBS declined to change the IRA — even though Mr. Amen and Ms. Madsen made several attempts. When Mr. Knichel died a few months later, his children were still named as beneficiaries, rather than the trust.

Mr. Amen continued to work with Ms. Madsen to try to get UBS to change the beneficiary designation, but unsuccessfully. Ultimately UBS distributed the IRA account to the two children. Mr. Amen advised Ms. Madsen to simply make an equivalent distribution from the other trust assets to herself. She did that, and also paid herself a $6,000 fee as trustee and Mr. Amen’s fees of $2,400 for his representation of her as trustee.

In the three years after Mr. Knichel’s death, his children regularly requested a full accounting from Ms. Madsen and Mr. Amen. They did not receive complete information and so, in 2007, they filed suit against Ms. Madsen and Mr. Amen. They specifically sought removal of Mr. Amen and his firm as special co-trustee, arguing that there were multiple conflicts of interest in acting in that capacity while also representing Ms. Madsen, and that Mr. Amen had breached a fiduciary duty to treat the trust’s beneficiaries impartially.

After the trial judge denied Mr. Amen’s motion to dismiss the lawsuit, he withdrew as attorney form Ms. Madsen individually and as trustee. As a result of the proceedings, the court ultimately removed Ms. Madsen as trustee and Mr. Amen and his firm as special co-trustee, froze the trust’s assets and ordered Ms. Madsen to return distributions she had made to herself, her fees and the fees she had paid Mr. Amen. The Judge specifically found that Mr. Amen had breached his fiduciary duties as special co-trustee, because he had not been impartial to the three beneficiaries in his advice and representation of Ms. Madsen.

Mr. Amen appealed the finding. The Missouri Court of Appeals summarily dismissed his appeal, finding that he was not an “interested person” within the meaning of Missouri’s version of the Uniform Trust Code. He did not have a property right in (or a claim against) the trust itself, according to the appellate judges. Consequently, he had no standing to claim that the trial judge had made a mistake.

The Court of Appeals noted that this was not the first case they had heard in which members of Mr. Amen’s firm had named the firm as “special co-trustee.” In an earlier case, Mr. Amen’s partner had named the firm as “special co-trustee” in a trust for a man who was at the time the subject of a guardianship proceeding. When that man’s children dismissed their guardianship petition, Mr. Amen’s partner attempted to appeal the dismissal; the appellate court ruled in that case that he lacked standing to bring the appeal.

Though the circumstances and the legal arguments were somewhat different, the result was the same — dismissal of the appeal. The appellate court was equally unimpressed, incidentally, by Mr. Amen’s other argument — that he would be required to report the finding of breach of fiduciary duty to professional licensing boards and might get in trouble with them, too. In Matter of Knichel, August 16, 2011.

The Knichel case raises a legal question separate from Mr. Amen’s standing to appeal the finding that he breached his fiduciary duty. What is a “special co-trustee,” and what are the duties and powers of such a position?

Under Arizona’s version of the Uniform Trust Code (which is not identical to Missouri’s), the position spelled out in Mr. Amen’s trust would probably be analogous to a “trust protector,” at least to the extent that Mr. Amen’s “special co-trustee” could change the respective shares of beneficiaries. Arizona’s legislative decision to expressly limit any fiduciary duty to beneficiaries might complicate that designation and the analysis of a similar case if one were to arise in the Arizona courts.

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What Is a Trust Protector? Do You Need One In Your Trust?

JUNE 27, 2011 VOLUME 18 NUMBER 23
We have written before about Arizona’s new Trust Code, and the Uniform Trust Code on which it is based. The “new” law (it became effective on January 1, 2009, so it’s not that new any more) included a number of changes to the way trusts have worked in Arizona for decades. One of the minor, but interesting, provisions is the formal creation of a position called “trust protector.”

To be clear, there was nothing prohibiting inclusion of a trust protector before the new law. So far there are no court cases to help flesh out the powers and duties a trust protector may be given. But we do now have a statute — Arizona Revised Statutes section 14-10818 — which gives clear authority for inclusion of this unusual beast.

So what is a trust protector? The person establishing a trust is permitted to include someone who would have the authority to make changes to the trust even after it becomes irrevocable — even, in fact, after the death of the original trust creator. That means you could name your sister (or your father, or your best friend from college, or your lawyer or accountant) to be the person who could make changes to the trust after your death, to protect the beneficiaries from unintended consequences — or from themselves.

There are no very serious limitations on the trust protector’s possible authority. The Arizona statute gives a handful of illustrations of the powers you might give the protector, but it doesn’t limit you to those ideas. Here are the powers the legislature thought you might want to consider:

  1. The power to remove the trustee and appoint a new one. Worried that the bank might become too bureaucratic, or too expensive? A trust protector can help take that worry off your plate. Worried that your son might not be equipped to really handle the trust after your death? Trust protector to the rescue.
  2. The power to change the applicable state law. Do you think Iowa, or Oregon, or Georgia might be a better state to allow your trust’s purposes to be carried out (or reduce state income taxes, or extend the time for the trust to continue after your death)? We suggest those states precisely because they are not now noted for especially trust-friendly rules — but who knows what might happen in the future? A trust protector could monitor those developments and make a change when it makes more sense.
  3. Ability to change the terms of distribution. What if your daughter is embroiled in a messy divorce just at the time your trust is scheduled to dissolve and pay out to her? Or if your son is just about to declare bankruptcy? Or your grandson has just been diagnosed as mentally ill, and really needs a special needs trust to handle the inheritance you have left him? A trust protector could be given the power to change the date of distribution, or to establish a special needs trust, or whatever needs to be done.
  4. Amend the trust itself. You can even give a trust protector the power to amend the trust’s terms. That might include taking advantage of future tax alternatives, or giving a larger share to a grandchild who really needs help, or reducing the inheritance of a child who doesn’t need a full share.

These powers are illustrative, not mandatory. In other words, you can tailor your trust protector’s powers and duties to your own situation and your personal comfort level.

A trust protector can be very powerful, very helpful and very dangerous. It should be obvious that not everyone will want to establish such a super-powerful position in their trust. For those concerned about the difficulty of planning for an uncertain future, however, the trust protector might just be a very comforting and useful tool.

That all begs the question asked in our headline. Do you need a trust protector? Perhaps. We think maybe the first question should be: is there someone (other than your trustee) whom you completely trust to “get” exactly what you want done with your estate after your incapacity or death? If not, your trust is probably not a good candidate for inclusion of a trust protector. But if you do have that person in mind, then let’s talk about how to use them.

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Decanting: It’s Not Just for Fine Wines Anymore

JUNE 20, 2011 VOLUME 18 NUMBER 22
Imagine this tragic scenario: your 33-year-old son has a serious illness, and requires extensive medical treatment. The good news is that the treatment may well effect a cure. The bad news is that it will be horribly expensive. Right now he qualifies for government assistance with that expense — after all, he hasn’t been able to work for several years. But that eligibility is about to change.

Your mother set up a trust for each of her grandchildren before her death five years ago. Each trust provided that the grandchild would receive his or her share outright at age 35. In two years, your son will be eligible to receive about $250,000 from his trust — and you think it will probably be spent immediately on medical care that otherwise would be provided at no cost to him.

Arizona (and a number of other states — but we’re not in the business of giving advice regarding state laws we don’t know about) now allows the trustee to do something about your son’s problem. It is possible to “decant” an irrevocable Arizona trust into a new trust, so long as a few basic principles are not violated. The new trust could, for example, be a “special needs” trust, allowing your son to still qualify for medical assistance.

The Arizona law is found at Arizona Revised Statutes section 14-10819. If you read it, you won’t find the word “decant” anywhere. That’s because the term is favored among trust lawyers, but not in the law itself. No matter — “decanting” is a pretty good description of what the trustee is doing. Basically, the trust’s assets are being poured from one bottle (the old trust) into a new, similar-but-different bottle (the new trust) and gaining new vigor and complexity in the process.

Your scenario might be different. It might be your daughter who is a chronic spendthrift. Perhaps one of your children married a spendthrift. You might even be the trust beneficiary interested in extending the period of the trust, perhaps for creditor protection purposes.

The amount of money might be more or less than the story we have sketched out here. You might be the trustee, or a bank or private fiduciary might have that position. None of that makes much difference — the trustee of an irrevocable Arizona trust can, unless the trust explicitly prohibits it, usually decant to solve real-world problems that have arisen since the trust was initially created.

The idea is not brand-new, nor unique to Arizona. New York adopted a similar law as early as 1992, and almost a dozen states now explicitly permit decanting. Arguably, the power to decant is not dependent on a state law — though trustees from states where there is no statute might be hesitant about testing that theory.

One requirement for Arizona’s decanting statute to be available: the trust must be an Arizona trust. That usually means that one trustee must be in Arizona, though even that might not be necessary in every case. Another requirement: the trustee must have the discretion to make a distribution to or for the benefit of the beneficiary. In other words, if Grandma’s trust required the distribution of all income directly to Junior but did not permit the trustee to ever reach the principal, decanting might not be an option.

Could you force an Arizona trustee to decant if you were the beneficiary’s concerned parent? Probably not. What if you were the beneficiary and desperately wanted the trustee to exercise its power to decant? Probably not again. Could you decant a trust if you were the trustee and the beneficiary? Oops — we’ve run out of space and time (that’s lawyer talk for “it depends”).

Decanting trusts is an interesting and useful idea. It can help “fix” problem trusts, especially where circumstances have changed since the trust was first established. If you know of a current or looming problem with distributions from an Arizona trust, you might want to talk to an experienced trust and estates lawyer about the options available.

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Arizona Legislature Adopts Probate Changes

APRIL 25, 2011 VOLUME 18 NUMBER 15
Last week the Arizona Legislature adjourned for the year. Just before closing down the session legislators adopted a number of new measures dealing with probate court, trusts and especially guardianship and conservatorship matters. Most of the bills passed by the legislature are still awaiting the Governor’s signature, but all are expected to be signed and to become law on July 20, 2011 (except that at least one of the new laws will be delayed until December 31, 2011). Among the ones affecting our clients:

House Bill 2211. This new law clarifies that some guardians have the power to admit their wards to inpatient mental health treatment. That authority has long existed, but has been difficult to actually implement. The new law aims to make it easier for guardians, and to clarify that the guardian also has the authority to consent to continuing medical treatment during and after admission. As was the case before the new law, this kind of authority requires a special court proceeding at the time of the guardianship hearing (or later, if mental health issues arise), and the mental health authority has to be renewed every year.

House Bill 2402. Two apparently unrelated issues are addressed in this new bill. First, the legislature has created a procedure for suspension of the driving privileges for someone who has had a guardian appointed. Second, this new law inserts a relatively simple way of appointing a guardian and/or conservator — at least initially — for the subject of a civil commitment proceeding. Under prior law both issues were unclear, leading to the oddity that the judge who heard extensive testimony about a patient’s mental illness and need for a guardian and/or conservator could do nothing about that need. Similarly, the ability of the court to suspend a ward’s right to drive had been uncertain, though prior law implied that the court might have that power.

House Bill 2403. Arizona’s legislature adopted the Arizona Trust Code (a version of the Uniform Trust Code), after a couple of false starts, three years ago. Each year since then the legislature has been asked to tinker with the provisions, and it has consistently agreed. This year’s technical corrections are mostly minor, and hard to work up much excitement about — but they are improvements.

House Bill 2424. Though this bill started life as a comprehensive revision of guardianship and conservatorship, it concluded its legislative odyssey as a stripped-down version. As adopted, it simply creates a Probate Advisory Panel to address needed improvements in the guardianship and conservatorship process. The Panel will include two guardians (of a child or sibling), two conservators (of a parent), one public fiduciary, one private fiduciary, one attorney, one judge and a clerk of court.

Senate Bill 1081. Arizona has long allowed you to name a guardian for your minor children in your will, and to let that person be appointed in a summary proceeding if no one objects. This new law permits a similar proceeding for your incapacitated spouse or adult child. The bill spells out a mechanism for lodging the nomination after your death, and requires notice to the allegedly incapacitated spouse or child. If they do not object, the guardianship can issue automatically.

Senate Bill 1499. This new legislation is the most far-reaching of the bills listed here. It was adopted in response to a series of articles in Phoenix-area newspapers about alleged abuses and huge fees in guardianship and conservatorship proceedings. Of the bills listed here, this is the only one which does not become effective on July 20 — it takes effect on December 31, 2011, to give practitioners some time to figure out what changes will need to be made. Among the provisions of Senate Bill 1499:

  • Several changes attempt to address abuse of the legal process. Arbitration is encouraged and can be required. Repetitive filings can be sanctioned. In general terms, the losing party in a contested proceeding can be assessed costs and attorneys fees to be paid to the ward or estate.
  • Any guardian, conservator, or attorney who intends to seek payment from the ward’s estate will need to provide a description of how the fee will be calculated. That information must be provided with the first filing in the proceeding. Any billing must be given to the conservator within four months of the work being done or the fees will be deemed waived.
  • Wards will now have the right to request a new guardian or conservator, and the court must approve the change if it is in the ward’s best interest. A change of guardian or conservator does not require a finding that the current fiduciary has done anything wrong — this provision permits the change based on the ward’s wishes rather than misbehavior of the fiduciary. Any other interested person (a family member, for instance) may also request the change, with the same result.
  • The ward’s right to name his or her own choice of guardian and/or conservator is strengthened. The person named in a power of attorney, for instance, should ordinarily be one of the highest-priority candidates for appointment, unless there is evidence that that person has acted inappropriately.
  • As before, a conservator must file an inventory of the protected person’s assets. Now the conservator must attach a consumer credit report to that inventory.
  • The subject of a conservatorship and other interested persons can now request that the conservator let them review financial and billing records as often as monthly.

In addition, Senate Bill 1499 makes a number of other, less significant, changes. Fiduciaries and their attorneys, and anyone involved in a contested guardianship or conservatorship proceeding, needs to review the new law to see how it will affect new and existing proceedings, and what changes need to be made in reporting and practices.

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