(Photo courtesy of The Guardian)

A typical Thursday night finds me meeting with other lawyers and discussing ideas useful in our respective practices.  Although always trying to find new ideas to help clients, these meetings, reminiscent of old style writer’s salons, are particularly useful because of the opportunity to exchange views in an open setting.  No idea is too simple or outlandish and all opinions are welcome.  It is a refreshing opportunity to be the one asking the stupid question and being amply rewarded with a wealth of knowledge and experience.  The food and drink is usually good, but no match for the companionship.

Recently we were discussing provisions for naming and removing successor trustees and the differences between granting the right to trustees, protectors, and beneficiaries.  I was particularly interested in what powers could be used in what situations with or without running afoul of grantor trust rules that cause assets in an irrevocable trust to be included in the taxable estate of the grantor or beneficiary.

These are important discussions, but often buried in the “black box” of our trusts because the clients lose interest after answering the questions of control, use, and taxes.  My role is to understand the client’s intentions and providing the most flexible rules that still meet the client’s objectives.

Our discussions frequently involve the relatively new “decanting” power under Arizona law, which allows a trustee of an irrevocable trust to make a new trust and add or exclude beneficiaries under certain circumstances.

This evening the point was made that for asset protection purposes attorneys should ensure that there is a power to exclude beneficiaries, and the discussion then quickly turned to whether that was a power best granted to a trustee or a protector in the context of which office could best wield the power in conjunction with a beneficiary’s right to remove and replace the trustee or protector without inadvertently creating a general power of appointment—which would cause estate tax inclusion in the estate of the person wielding the power.

The flash of knowledge that struck me was that although the power to exclude beneficiaries was crucial to a thoughtful asset protection trust, it would almost certainly not sit well with most of my clients that their successor trustee could exclude their chosen beneficiaries, except under very limited circumstances.

That in turn led to the idea of how to design a trust which would grant the power, but include adequate guidelines as to when the power could be exercised, so as to enhance the protection beneficiaries will have from their creditors yet reassure the grantor that the power will not be used to subvert the client’s intentions.

The trusts I create contain many instances of this type of analysis to ensure that my clients are always on the leading edge of what is possible.

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If you are currently or soon may be serving as the trustee of an irrevocable trust you should be aware that the Arizona Trust Code (ATC), which became effective January 1, 2009, imposes certain new obligations on trustees of irrevocable trusts.

Prior to January 1, 2009, ARS §14-7303 required the trustee to provide beneficiaries reports of the trust activity only upon request of a beneficiary.  Who qualified as a beneficiary entitled to request information was ambiguous, but current income beneficiaries were clearly within the class of beneficiaries entitled to information.

Now the ATC defines both qualified and permissible beneficiaries to distinguish who must receive information and who may receive information.  Generally qualified beneficiaries are current income beneficiaries and those who become entitled to principal or income upon the death of the current income beneficiary.

Unless the trust agreement provides otherwise, the trustee of an irrevocable trust must provide a report to the qualified beneficiaries, permissible beneficiaries, and other beneficiaries who request it.

The report must be provided at least annually.  The first reporting period ends December 31, 2009.

The report must contain the following information:

1. A list of the trust property and the market value of such property, if feasible.
2. Liabilities
3. Receipts and disbursements.

The report need not be prepared according to generally accepted accounting principles (GAAP).  There are no guidelines on what form the report must take, but a modified form loosely based on the form used to file a judicial accounting will probably be sufficient.  The outline for such a report is as follows:

Schedule A = Opening inventory.  A listing of the assets and their respective values.
Schedule B = List of outstanding debts.
Schedule C = List of all receipts
Schedule D = List of all expenditures
Schedule E = Summary of all other schedules ending with an ending balance.

An alternate format could be as simple as providing copies of account statements for the year (raw data).

If assets are held other than insured brokerage or bank accounts, a short narrative report describing the assets and their characteristics is probably appropriate.