The Arizona Trust Code (ATC) requires trustees of irrevocable trusts to furnish a great deal of information to trust beneficiaries for all trusts in existence on January 1, 2009, and for all trusts created after that date.
These requirements are intertwined with the ATC’s definitions of a “Beneficiary” and a “Qualified Beneficiary.” While the ATC’s definition of “beneficiary” is very broad, its definition of a”qualified beneficiary” (QB) is more limited. The distinction between these two classes of beneficiaries is vitally important insofar as the ATC’s notice and reporting provisions are concerned. These two classes of beneficiaries are defined in subsections 2 and 14 of Section 14-10103 of the Arizona Revised Code.
The ATC defines a “beneficiary” as a person who has a present or future beneficial interest in a trust (whether that interest is a vested interest or a contingent interest) or who (in a capacity other than that of a trustee) holds a power of appointment over trust property.
The ATC defines a “qualified beneficiary” as:
1. Someone who is distributee or permissible distributee of trust income or principal, or
2. Someone who would be a distributee or permissible distributee of trust income or principal when when the interests of the distributees described in the foregoing sentence come to an end, or
3. Someone who would be a distributee or permissible distributee of trust income or principal when the trust itself comes to an end.
Examples of the Two Beneficiary Classes:
Even though a trust created by a married couple may begin life as a revocable trust, following the first death an irrevocable trust is typically created as a result of that death. Consider the following example of a married couple who create a revocable trust for themselves, their son, and their granddaughter. If the husband dies first, an irrevocable trust comes into existence with the following conditions:
1) The surviving wife receives all of the trust income and perhaps discretionary distributions of trust principal.
2) When the wife dies the remaining trust assets are to be distributed outright to the couple’s son. However, if the son is not living at that time, his share is to go to his daughter (the granddaughter of the couple who created the original trust).
During the wife’s lifetime, she is considered a “qualified beneficiary” of the now irrevocable trust because she is currently entitled to receive trust income and principal. The son is also a “qualified beneficiary” because he would be entitled to receive the trust assets upon his mother’s death. However, the granddaughter is not a “qualified beneficiary” because she only has a future contingent interest in the trust. Her interest is contingent because she would only be entitled to receive assets from the trust if her father is not living at the time of her grandmother’s death.
Default Notice Requirements vs. Mandatory Notice Requirements for Irrevocable Trusts:
The two sections of the ATC dealing with notice requirements for irrevocable trusts are §14-10105 Default and Mandatory Rules and §14-10813 Duty to Inform and Report. Taken together these two sections spell out what the trustee is required to do if the trust document is “silent” regarding the trustee’s informational and reporting duties. They also specify which duties can be eliminated by “opt out” language in the trust document. Reproduced below are the relevant portions of both ATC sections with some portions italicized for emphasis.
§14-10813 Duty to Inform and Report
A. Unless the trust instrument provides otherwise, a trustee shall keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests. Unless the trustee determines that it is unreasonable under the circumstances to do so, a trustee shall promptly respond to a beneficiary’s request for information related to the administration of the trust.
B. A trustee:
1. On request of a beneficiary, shall promptly furnish to the beneficiary a copy of the portions of the trust instrument that are necessary to describe the beneficiary’s interest.
2. Within sixty days after accepting a trusteeship, shall notify the qualified beneficiaries of the acceptance and of the trustee’s name, address and telephone number.
3. Within sixty days after the date the trustee acquires knowledge of the creation of an irrevocable trust or the date the trustee acquires knowledge that a formerly revocable trust has become irrevocable, whether by the death of the settlor or otherwise, shall notify the qualified beneficiaries of the trust’s existence, of the identity of the settlor or settlors, of the trustee’s name, address and telephone number, of the right to request a copy of the relevant portions of the trust instrument and of the right to a trustee’s report as provided in subsection C.
4. Shall notify the qualified beneficiaries at least thirty days in advance of any change in the method or rate of the trustee’s compensation.
C. A trustee shall send to the distributees or permissible distributees of trust income or principal and to other beneficiaries who request it, at least annually and at the termination of the trust, 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. On a vacancy in a trusteeship, unless a cotrustee remains in office, a report must be sent to the qualified beneficiaries by the former trustee. A personal representative, conservator or guardian may send the qualified beneficiaries a report on behalf of a deceased or incapacitated trustee.
§14-10105 Default and Mandatory Rules
B. The terms of a trust prevail over any provision of this chapter except:
8. The duty to respond to the request of a qualified beneficiary of an irrevocable trust for trustee’s reports and other information reasonably related to the administration of a trust.
Duties of a Trustee of a Revocable Trust to Inform and Report:
When a revocable trust created, the trustee’s duties to inform and report are owed only to the individuals who created the trust and not to any other beneficiaries of the trust. Of course, if individuals who created the trust are also acting as trustees, these notice and reporting requirements are meaningless. However, if an independent trustee is serving, that independent trustee would be required to provide the notices and reports to the individuals who created the trust but not to any other trust beneficiaries. Of course, when a revocable trust becomes irrevocable because of a death or otherwise, it becomes subject to all the Arizona Trust Code’s notice and reporting requirements.