Arizona Successor Trustee Handbook

The purpose of this Successor Trustee Handbook is to help you carry out your fiduciary duties in the administration of an Arizona trust.

See also: Personal Representative Handbook and Probate and Trust Administration

INTRODUCTION

A trustee is what the law calls a fiduciary - a person who is responsible for taking care of something that belongs to someone else. Under the law, fiduciaries owe legally enforceable duties to the people on whose behalf they handle property. Any time you act in your capacity as trustee, your fiduciary duties come first..

What is "Property"?

We use the term property here in its broadest possible sense. Property includes land and buildings, which are called real property; physical objects such as household goods and personal effects, which are called tangible personal property; and things that you cannot really see or touch but nevertheless have value (such as contract rights), as well as things that represent something else that has value (such as stock certificates or cash or bank accounts), which are called intangible personal property.

What Is a Trust?

In order for you to have a good feel for your duties, you first need to understand what a trust is and how it works. 

A trust is a legal relationship that results when a person (often called a trustmaker, settlor, trustor or grantor) makes an agreement with a trustee to handle property for the benefit of the beneficiaries. (A common form of trust used in estate planning is a "revocable” or “living” trust, which means the trustmaker can amend or modify the trust in the future so long as he or she is competent to do so.) The agreement is normally set out in a written document that is called the "trust instrument" or the "trust agreement." Your first and foremost duty as a trustee is to read, understand and faithfully follow the terms of the trust instrument, which are in essence the “rules” laid out by the trustmaker.

Once the trust agreement is made, the trustmaker transfers property to the trustee. The trustee actually becomes the legal owner of the property. However, the “real” owners of the property are the beneficiaries, who are said to be the equitable or beneficial owners; they are the ones who are supposed to benefit from the property.

Co-Trustees

A trust can have more than one trustee at a time. Each co-trustee must decide for himself or herself how best to carry out his or her fiduciary duties. Beware that a co-trustee can be held responsible for another co-trustee’s breach of a fiduciary duty. Thus, it is important that all co-trustees pay close attention to everything that is done in the administration of the trust. If there is any question or problem, that issue should be communicated to the other co-trustee(s) immediately. 

As a general rule, where there are two co-trustees, both have to agree on all matters of trust administration, and where there are three or more co-trustees, the majority rules. In order to minimize the chances of being held responsible for someone else’s poor judgment or breach of duty, a co-trustee should be sure to make a written record of any points of disagreement about trust business. In extreme cases, a co-trustee may be required to “blow the whistle” on another co-trustee’s activities, either by notifying the trustmaker about the issue or by filing a complaint with a Court in the jurisdiction the trust is being administered. 

If you ever have questions about what to do as trustee, you should seek appropriate advice immediately. You should not hesitate to consult your lawyer, CPA or other advisors.

What Is a "Successor Trustee"?

A successor trustee is the institution or person who takes over the management of trust property when the original trustee has died or becomes incapacitated. 

The fact that you have been named as a successor trustee in someone’s trust instrument does not obligate you to accept that position. You should consider very carefully your decision to accept the job of trustee. Once you accept the position, you accept all that goes with it. It is a position of great honor and great responsibility.

Some Guidelines for You as Trustee 

The law does not demand absolute perfection from you. However, it does demand absolute loyalty, absolute honesty, and complete and accurate disclosure, even if that disclosure could cast you in an uncomfortably negative light. In the classic words of Judge Benjamin Cardozo (who went on to become a U.S. Supreme Court justice): 

“Many forms of conduct permissible in a workaday world for those acting at arm’s length are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the “disintegrating erosion” of particular exceptions. […] Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd[.] — Meinhard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545, 546 (1928). 

Section 1. Some Basic Rules 

How to Sign Documents

Arizona law (properly known as “Arizona Revised Statutes” or “A.R.S.”) states that “[e]xcept as otherwise provided in the contract, a trustee is not personally liable on contracts properly entered into in the trustee’s fiduciary capacity in the course of administering the trust if the trustee in the contract disclosed the fiduciary capacity.” See A.R.S. § 14-11010(A). In other words, unless you make sure to document that you are signing a contract in your capacity as trustee and not as an individual, you could be held person-ally liable for whatever the contract requires. Accordingly, whenever you sign any document on behalf of the trust, always sign as “Your Name, Trustee.” It must be absolutely clear that you are obligating the trust and not yourself. If you do this (assuming you were acting within the scope of your authority as trustee when you signed a document), you will not be personally liable for any obligation under that document. 

Sources of Your Authority as Trustee

Your authority comes first and foremost from the trust instrument, and your duties and powers as described there are your primary instructions. You should read the trust instrument with care, and from time to time read it again. The trust instrument may contain specific provisions that take precedence over the general rules that apply to trusts, including those mentioned in this handbook. However, note that there are certain basic rules relating to trusts that will apply no matter what the trust instrument says. (For example, a trust instrument cannot allow or encourage illegal activity on the part of the trustee or the beneficiaries.) 

The second source of your authority comes from the Arizona Revised Statutes. Various provisions of the A.R.S. cover things that are not specifically spelled out in the trust instrument. The Arizona Trust Code, The Uniform Trustees Powers Act, the Uniform Prudent Investor Act, the Uniform Principal and Income Act, and the Uniform Probate Code hold particular relevance to your role as a trustee. 

The third source of your authority is found in the court decisions relating to trusts. This is known as common law or case law. The common law of Arizona is found primarily in the opinions of the state Supreme Court and Court of Appeals; those courts may follow decisions from other jurisdictions as well. 

You need to keep all three of these sources of authority in mind as you carry out your duties as trustee. You also need to remember that Treasury Regulations, the Internal Revenue Code, and court decisions that interpret the Code will dictate what you can or should do in many circumstances. This should convince you that you will need to rely on the advice and guidance of your legal counsel, accountant and other advisors throughout your tenure as trustee.

Section 2. Your Fundamental Duties as Trustee

Trustees are subject to a variety of duties, some of which are summarized below. Please bear in mind that the penalty for your breaching any of these duties is that you will have to pay for any resulting damage to the trust, out of your own pocket. Personal liability – even if you are not paid for your efforts – is one of the things that go along with being a fiduciary. 

Duty of General Prudence

You, as trustee, are duty bound to deal with the trust property as a “prudent person” would deal with the property of another. Note that this is a standard of conduct rather than of performance. Your actions (or times of inaction) will be judged against what a reasonable person would have done in the same circumstances, given the same limitations to which you were subject, and armed with the same information that was either at your disposal, or to which you were duty bound to investigate. If you conduct yourself properly, you will not be faulted if something bad happens, such as a decline in the value of trust assets. Acting reasonably in the circumstances is your basic job description; if you do that, you generally need not worry about being judged in the light of hindsight. Note that if you have or claim to have special expertise in connection with any facet of trust administration, you will be duty-bound to exercise that expertise. Thus, the standard for judging your job performance will take into account your special abilities (whether actual or claimed). 

Duty to Carry Out the Terms of the Trust

One noted authority states that “the first and most important duty of the trustee is to study and become thoroughly familiar with the provisions of the trust instrument, and thereafter to follow them out implicitly.” (Loring, A Trustee’s Handbook [Rounds 2002 ed.] at 12.) It will be difficult for anyone to find fault with your performance of your fiduciary duties if everything you do is in accordance with the terms of the trust instrument. If at any time you are reasonably in doubt as to the correct interpretation of the trust instrument, you can always petition a court for instructions. 

Duty of Loyalty

As a trustee, you must always act to further the interests of the trust and the beneficiaries. You are serving as trustee for the benefit of someone other than yourself. You should not enter a transaction that gives you an opportunity to benefit your-self at all, much less at the expense of the trust. If any situation should arise in which there is a conflict between your personal interests and the trust or between the trust and the interests of third parties, you as trustee should put the interests of the trust first. For example, you should not sell trust property to yourself or sell your property to the trust because this creates the appearance that you may have taken advantage of the trust. Similarly, you should never loan trust funds to yourself. The rules set forth in this paragraph are strictly applied not only to transactions in which you deal directly with yourself, but also to transac-tions in which you deal with entities (such as partnerships or corporations) in which you or family members are personally interested. These rules apply even though a particular transaction may be scrupulously fair, and even if it is advantageous to the trust. 

Note that Arizona law allows you to obtain a court’s permission to enter into a transaction between yourself and the trust. This will require notifying all of the beneficiaries of the proposed transaction and giving them the opportunity take positions before the court as to why the transaction should or should not be allowed to go forward. The fact that the law gives you this opportunity means that you will be judged very harshly if you ever do enter into a transaction involving a conflict of interest without prior court permission. 

Duty Not to Delegate

Once you have accepted the position of trustee, you are responsible for the administration of the trust, and you should not turn over the complete administration of the trust to others. This does not mean that you must actually perform all of the administrative work yourself. You can delegate certain administrative details to persons qualified to handle them. For example, you can employ an agent to collect rents. However, the responsibility for the administration of the trust always remains with you as trustee. 

If you are one of two or more trustees, you cannot rely on the other trustee(s) to administer the trust. You must participate in the administration. If another trustee acts improperly with respect to trust matters, you have the obligation to correct the situation. You have an obligation to be aware of what other trustees are doing on behalf of the trust. Each trustee is responsible to the beneficiaries for the misconduct and breaches of duty of the other trustees. Consider an important part of your job as being the watchman for the beneficiaries. If something goes wrong, don’t let it go wrong on your watch! 

Duty to Report

Under the Arizona Trust Code, adopted in Arizona in 2009, the trustee of an irrevocable trust (a trust that cannot be modified or amended, which most all living or revocable trusts become upon the death of the trustmaker), has several important, affirmative, notification and reporting requirements. 

Unless the trust expressly states otherwise, a trustee of an irrevocable trust must keep all “qualified beneficiaries” reasonable informed about the administration of the trust and of material facts necessary for such qualified beneficiaries to protect their interests in the trust. A trustee also has an affirmative obligation to respond to a beneficiary’s request for information related to that administration. A “qualified beneficiary” is a person to whom distributions of income or principal may be made from the trust and a person who would receive distributions of income and principal from the trust if the primary beneficiary or beneficiaries die(s), i.e., a remainder beneficiary or beneficiaries. 

Moreover, a trustee of an irrevocable trust must:

• promptly furnish a beneficiary with a copy of the portions of the trust relevant to that beneficiary upon request; 
• within 60 days of acceptance of the position, notify all qualified beneficiaries of a trustee’s name, address and telephone number; and 
• within 60 days of learning of an irrevocable trust’s existence, notify each qualified beneficiary of the identity of the trustee, of the identity of the trustmaker and of the beneficiary’s right to request a copy of the portions of the trust relevant to that beneficiary and of the right to receive a trustee’s report.

Finally, a trustee must, upon request at least annually, provide to each beneficiary a report containing a description of the trust’s assets, liabilities, income and expenses, including the source and amount of a trustee’s compensation. This report must also, if feasible, provide an estimate of the fair market value of the trust’s assets.

Duty to Account

As mentioned above, one of your basic duties, which will be discussed more fully below, is your duty to account or provide “reports” to the beneficiaries. Beneficiaries are entitled to be kept reasonably informed about their interests in the trust. Note that different beneficiaries may have different interests in the trust, and you are duty-bound to account to each beneficiary only with respect to that beneficiary’s interest.

Duty to Segregate Trust Assets

You must keep the trust property separate and distinct from your own property. In other words, you should have a separate bank account or accounts for the trust, and you must not put either trust principal or income into your personal accounts. Trust assets must always be readily identifiable as such and must be segregated from your other property.

Duty to Get Help If You Need It

Should any questions arise as to the proper interpretation of the terms of the trust, you should consult the lawyer for the trust. “Flying by the seat of your pants” is dangerous because it can expose you to personal liability if something goes wrong. On the other hand, your reliance on the advice of a competent and qualified professional can be a defense to a claim that you breached a fiduciary duty.

Duty to Protect and Preserve Trust Assets

You have the duty to protect and preserve the trust assets, and to insure them whenever practicable. Be sure to consult a competent insurance agent regarding proper coverage for the trust assets. Few things are worse than having a trust asset destroyed through no fault of yours and then discovering that the asset was not insured. In that case, your own personal bank account becomes the insurance company.

Avoiding the Appearance of Impropriety

You will find very little sympathy with a judge or jury if you do something that looks like it may be improper, whether or not it really is. If someone questions your activities as trustee, you may find yourself having the burden of proving that you acted properly. You do not have the advantage of being presumed innocent until you are proven guilty. Most of the time, you will find the contrary presumption working against you. Wise trustees do their best to be completely above reproach.

Section 3. Accounting and Reporting

You must set up and keep an accurate set of books. You do not need to be a CPA to do this, but you might want to engage a CPA or a professional bookkeeper to assist you. Your records should show all assets you receive, hold and disburse, with the date, amount and explanation of each. Arizona Revised Statutes require you to keep the beneficiaries reasonably informed about the trust and its administration, although no beneficiary of a revocable living trust, other than the trustmaker, has the right to information about the trust during trustmaker’s lifetime.

If the persons who receive trust income (also known as "current income beneficiaries") are different from those who will receive the principal when the trust terminates (also known as "remaindermen"), your records should classify all receipts and disbursements as income or principal. In most cases, there will be no difficulty about this. Things like rent, interest and ordinary dividends are clearly income. However, although proceeds from the sale of an asset (i.e., a house or stocks and bonds) may cause taxable income, the sale proceeds are generally principal.

Many trust instruments contain instructions to guide the trustee in resolving these and other accounting problems, and you may find all of the guidance you need from this source. If you do not, you (with the assistance of your lawyer or CPA) will need to consult the Uniform Principal and Income Act.

If you keep your accounts carefully, it will be a simple matter for your CPA to find all of the information necessary to prepare trust tax returns, reports to the beneficiaries or reports to the court, if that becomes necessary.

Remember that the trust you are administering is a separate “person” in the eyes of the law, and, although it has no physical body, a clear set of books creates a record of its healthy and independent life.

You are entitled to reimbursement of your reasonable expenses incurred in the administration of the trust. You are also entitled to a reasonable fee for services rendered, but you are not required to take a fee. If you do, it should be added to your other income and reported on your personal income tax return.

As mentioned above, you must be prepared to render a trustee’s report or an accounting at least once a year. Any beneficiary may demand such an accounting, and, even if none does, your annual accounting or report should be a permanent part of your records of your administration of the trust.

The trust beneficiaries are generally entitled to copies of the trust instrument (at least the portions of the trust instrument that relate to their specific beneficial interests), and they may also be entitled to examine the books and records of the trust. This is another good reason for you to maintain your books in a scrupulous manner.

Your annual accounting should include the following elements:

• an inventory of all trust assets, any changes in the status of the assets, and the approximate fair market value of each asset; 
• detailed information regarding all trust bank accounts, including bank statements; and 
• the nature of all investments, together with proper backup information; 
• any and all insurance, of all types, in force for the trust assets or for a beneficiary, and the dates and amounts of all premium payments; 
• all debts of the trust and pertinent information about each debt, including the nature of the debt and the identity of the creditor; 
• a list of all known claims presented to the trustee and pertinent information about each claim, such as the identity of the claimant, the nature of the claim, and what action the trustee took regarding that claim; 
• all receipts that have come into the trust and how those receipts were derived; 
• all disbursements made from the trust, to whom each disbursement was made, the purpose of the disbursement, and whether the disbursement came out of principal or income; 
• a statement that all tax returns have been filed; 
• a statement that all taxes and bond premiums (if any) have been paid; and 
• a statement specifying the trustee’s compensation and how that compensation was calculated.

You would be wise to have the beneficiaries sign (a) written receipts for all distributions and (b) written approvals of your annual accountings as they are rendered. If any beneficiary does not approve them, you have the option of asking a court to review and approve your accountings.

Section 4. Investment

You must keep the trust assets invested appropriately. It is important for you to remember that if you are serving as a trustee for someone other than yourself, you will be held to a higher standard of care than you would be if you were simply investing your own funds. 

Arizona has adopted the Uniform Prudent Investor Act (UPIA). A summary of your responsibilities under the UPIA follows.