Irrevocable trusts in Arizona: Trustee reporting and notification requirements

If you are the successor trustee or a beneficiary of an irrevocable trust, you should be aware of some important reporting provisions contained in the Arizona Trust Code.

The most common type of trust in a typical estate plan is a “living” or revocable trust, which is usually controlled by the grantor or “trustmaker” (i.e., the person or couple who created the trust) and can be changed at any time during their lifetime.

Less common is an irrevocable trust, and that is the focus of this article.

A trust becomes irrevocable in two basic ways:

• It is made irrevocable from its inception in order to achieve certain planning objectives, such as estate tax savings, creditor protection, gifting, or life insurance ownership.
• It starts out as a revocable trust and becomes irrevocable upon the death of the trustmaker or their surviving spouse.

If you are the successor trustee or a beneficiary of an irrevocable trust, you should be aware of certain notification requirements and rights that the Arizona Trust Code provides, including the following:

• The trustee must notify the trust’s beneficiaries that the trust exists, or has become irrevocable, within 60 days after the trust’s creation date or the date on which it became irrevocable (see “Notice Requirements” below).
• After a beneficiary becomes 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 them.
• 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.

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. This requirement becomes a factor if the trustmaker resigns as trustee and, while they are still living, a successor trustee manages their trust.

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.

The three types of “qualified beneficiaries” consist of beneficiaries who:

• are authorized to receive current distributions of income and/or principal from the trust;
• 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
• would receive trust property and/or income if the trust terminated.

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) a trustee who becomes a trustee on or after January 1, 2009; (b) an irrevocable trust created on or after January 1, 2009; and (c) a revocable trust that becomes irrevocable on or after January 1, 2009.

The trustee must comply with the notice requirements before the trustee 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 Arizona Trust 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. (See related article, “Should You Name a Trust Protector?”)

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 are a beneficiary of an irrevocable trust and are unclear as to whether you are receiving the information to which you are entitled, you should consult your estate planning attorney.

If you are the trustee of an irrevocable trust, you or your trust attorney should review the provisions of the trust to determine whether, and to whom, you have a duty to report and provide notice. Failure to properly carry out the reporting requirements imposed by the Arizona Trust Code can subject the trust to needless expenditures and, in some cases, subject you to personal liability.

In either case, the prudent use of an experienced trust attorney can help ensure that the provisions of the trust are honored and that all statutory rights and requirements are observed.

See also: Arizona Successor Trustee Handbook and our archive of probate and trust administration articles