An Arizona trust is an effective way for a person to provide for others in a manner consistent with his/her wishes long after that person has passed away or even while he/she is still alive.
Types of Trusts
The following are some of the types of trusts commonly used to achieve these and other objectives.
1) Living Trusts
A living trust is created during the life of the person who makes the trust (settlor). The settlor appoints a person to administer the trust (trustee) and person(s) who will receive the trust principal or income (beneficiaries). A living trust is revocable, meaning it can be changed during the life of the trust settlor, however, at death a living trust becomes irrevocable.
2) Testamentary Trusts
Unlike a living trust, a testamentary trust does not exist during the lifetime of the settlor; rather, it springs into existence upon the death of the settlor. A testamentary trust is by its very nature irrevocable because it is created after the death of the settlor.
3) Totten Trusts (Payable on Death Accounts)
Commonly known as a payable on death account, a Totten trust is simply a bank account for which the settlor has specified a beneficiary who will receive the proceeds of the account upon the settlor’s death. Although Totten trusts generally avoid probate, they do not provide the asset protection that other irrevocable trusts can provide, e.g. testamentary trusts. A Totten trust is revocable up until the death of the settlor and, in Arizona, cannot be revoked by the settlor’s will.
4) Special Needs Trusts
For some people, the purpose for creating a trust is to provide for the welfare of loved-ones with special needs. However, one of the central concerns in creating such a trust is to provide for such a person while not disqualifying that person from eligibility for services provided by the government, e.g. Medicaid or Supplemental Security Income.
In general, a special needs trust can provide education, travel, furniture, furnishings, and even pay some utilities for the trust beneficiary, the person for whom the trust was created. However, a special needs trust may not provide food or housing for the beneficiary, but there are a number of complicated exceptions that can allow housing payments in certain circumstances.
5) Honorary Trusts
In addition to benefiting humans and entities, trusts can also benefit animals and some inanimate object, e.g. graves. For example, a settlor can create a trust to benefit his/her pet to help ensure that the pet will be taken care of if the settlor becomes incapacitated or dies during the life of the pet. Moreover, upon the death of the pet, any assets or funds held in trust will be distributed per instructions in the trust.
In addition to allowing trust settlors to specify how trust assets should be used to benefit trust beneficiaries, trusts also protect trust assets from the creditors of trust beneficiaries. However, trusts can provide one further level of creditor protection, i.e. protecting a beneficiary’s interest in a trust from creditors via a spendthrift trust provision. However, these protections are not absolute and claims for necessaries, alimony/child support, services or materials that preserve or benefit the beneficiary, or by the United States or any state can be satisfied via trusts with spendthrift provisions.
General Requirements & Limitations
Arizona trust law requires that a trustee take legal title to property to benefit others for a valid purpose. Although the first two parts of the preceding statement are obvious to many, the valid purpose requirement may come as a bit of a surprise. For example, trusts may not have purposes that are contrary to public policy, i.e. they can’t frustrate the goals or norms that society typically tries to facilitate, e.g. domestic tranquility.
Purpose Requirements & Limitations
The two authorized purposes, i.e. private or charitable, for which trusts can exist impose specific requirements about those parties who may be trust beneficiaries.
1) Private Trusts
In most states, trusts for the benefit of non-charitable entities must have an identifiable group of beneficiaries. In Arizona, however, non-charitable trusts without identifiable beneficiaries are valid and the trustee is considered to have a special power of appointment allowing the trustee to specify beneficiaries, as long as the trustee is not a beneficiary.
2) Charitable Trusts
In contrast to private trusts, charitable trusts must not have an identifiable group of beneficiaries; rather, the beneficiaries need be an unidentifiable segment of the public. In addition, the purpose of the trust must be charitable, e.g. science, medicine, or religion.
This brief overview of some important considerations associated with Arizona trusts is by no means comprehensive. Always seek the advice of a competent professional when making important legal decisions.
Douglas K. Cook is an Arizona trust attorney with over 40 years of experience as a practicing attorney. Although Cook & Cook's office is located in Mesa, Arizona, the attorneys at Cook & Cook represent clients throughout the Phoenix, Arizona Metropolitan area including the following east valley cities: Scottsdale, Paradise Valley, Tempe, Chandler, & Gilbert.