The legislative committee of the Arizona Probate and Trust section of the Arizona State Bar spent two years drafting the text of a law that would allow people to create an Arizona domestic asset protection trust.  The members of the committee are David Case, John Fitzpatrick, Robin Miskell, Brent Nelson and Prescott Pohl.  The committee calls its proposed statute the “Proposed Statute for Arizona Self-Settled Spendthrift Trusts.”

The committee said:

“What is a Self-Settled Spendthrift Trust?  To summarize:

  • An irrevocable trust;
  • Created by a person (“settlor”) who is also a beneficiary of the trust;
  • With an independent trustee that has discretion to distribute trust assets to the settlor/beneficiary;
  • Which trust includes spendthrift protection;
  • To the effect that the trust’s assets are protected from claims under certain circumstances.
  • Arizona currently does not allow self-settled spendthrift trusts.”

Text of the Proposed Arizona Self-Settled Spendthrift Trust as of October 10, 2020

A.R.S. §14-10821 Qualified Spendthrift Trusts

A. Definitions. As used in this § 14-10821, unless indicated otherwise, all terms shall have the meaning as set forth in § 14-10103 and as specified in this subsection A.:

1. “Advisor” means any person, including, without limitation, an accountant, attorney and financial or investment advisor, who gives advice concerning, or was involved in the drafting or creation of, transfer of property to, or administration of the trust or who participated in the preparation of accountings, tax returns or other reports related to the trust, and a person who is given authority by the terms of a trust instrument to remove, appoint, or both, one or more trustees or to direct, consent to, approve, or veto a trustee’s actual or proposed investment or distribution decisions. A person is considered an advisor even if the person is denominated by another title, such as trust protector. Any person may serve as an advisor.

2. “Creditor” means any person holding or having rights in or to a claim against the settlor, or some other right to payment from the settlor, whether or not the claim or indebtedness is: (i) founded on contract, tort or other legal basis, or in law or in equity; (ii) reduced to judgment or other court or adjudicative order, awarded or confirmed; (iii) liquidated or unliquidated, fixed, contingent, matured, unmatured, disputed or undisputed; and (iv) secured or unsecured, and includes:

(a) any person whose claim or rights against the settlor arose or existed, in whole or in part, prior to the transfer of the assets to a qualified spendthrift trust to or against which a claim is made; or

(b) any person whose claim or rights against the settlor arose concurrent with or subsequent to such transfer.

3. “Insolvent” means:

(a) having generally ceased to pay debts in the ordinary course of business other than as a result of a bona fide dispute;

(b) being unable to pay debts as they become due; or

(c) being insolvent within the meaning of federal bankruptcy law.

4. “Qualified spendthrift trust” means a trust that satisfies the requirements of subsection E. under this § 14-10821.

5. “Qualified trustee” means a person, other than the settlor, who meets all of the following conditions:

(a) For an individual, the individual is a resident of this state or, in all other cases, is authorized by the law of this state to act as a trustee pursuant to § 6-851.A.2., § 14-5651.K.2., or a private fiduciary licensed by the supreme court as provided in § 14-5651.A.;

(b) The person maintains or arranges for custody in this state of some or all of the property that is the subject of the qualified disposition and administers all or part of the qualified spendthrift trust in this state;

(c) The person’s usual place of business where some or all of the records pertaining to the qualified spendthrift trust are kept is located in this state, or if the person does not have such a place of business, the person’s residence is in this state. For a corporate trustee, the usual place of business is the business location of the trust officer with primary responsibility for administration of such trust.

  1. “Specified domestic obligation” means:

(a) a child support judgment or order; or

(b) an unsatisfied claim arising from a property division in a divorce proceeding, including legal separations and annulments, if the ex-spouse was married to the settlor before or on date of transfer of assets to the qualified spendthrift trust.

7. “Transfer” means any form of transfer of property, including gratuitous transfers, whether by deed, conveyance, or assignment.

B. “Paid and delivered” to the settlor, as beneficiary, does not include the settlor’s use or occupancy of real property or personal property owned by the qualified spendthrift trust if the use or occupancy is in accordance with the trustee’s discretionary authority under the trust instrument, and does not include payment for the benefit of the settlor to third parties where authorized by the trust instrument.

C. A creditor of the settlor of a qualified spendthrift trust may not:

1. satisfy a claim or liability of the settlor in either law or equity out of the settlor’s transfer to such trust or the settlor’s beneficial interest in such trust;

2. force or require the trustee to make a distribution to the settlor, as beneficiary; or

3. require the trustee to pay any distribution directly to the creditor, or otherwise attach the distribution before it has been paid or delivered by the trustee to the settlor, as beneficiary.

D. Notwithstanding subsection C., nothing in this section:

1. prohibits a creditor from satisfying a claim or liability from the distribution once it has been paid or delivered by the trustee to the settlor, as beneficiary; or

2. nullifies or impairs a security interest that was granted by a settlor or a trustee with respect to property that is transferred to the qualified spendthrift trust.

E. In order for subsection C. to apply, the conditions in this subsection E. shall be satisfied. Where this subsection E. requires that a provision be included in the trust instrument of a qualified spendthrift trust, no particular language need be used in the trust instrument if the meaning of the trust provision otherwise complies with this subsection E.

1. The trust instrument shall provide that the trust is governed by Arizona law and is established pursuant to this section.

2. The trust instrument shall require that at all times at least one trustee shall be a qualified trustee.

3. The trust instrument shall provide that neither the interest of the settlor, as beneficiary, nor the income or principal of the trust may be voluntarily or involuntarily transferred by the settlor, as beneficiary. Such provision shall be considered to be a restriction on the transfer of the settlor’s beneficial interest in the trust that is enforceable under applicable non-bankruptcy law within the meaning of 11 U.S.C. Sec. 541(c)(2).

4. The settlor may not have the ability under the trust instrument, without the express written consent of a person who has a substantial beneficial interest in the trust, which interest would be adversely affected by the exercise of the power held by the settlor:

(a) to revoke, amend, or terminate all or any part of the trust, other than to amend the trust to comply with the requirements of this subsection E.; or

(b) to withdraw any property from the trust; provided however that the trust instrument may provide that the settlor, without the approval or consent of any person, may substitute assets of substantially equivalent value pursuant to internal revenue code section 675(4)(C) or any successor provision thereto.

5. The trust instrument may not provide for any mandatory distributions of either income or principal to the settlor, as beneficiary, except as provided in subsection G.4.

6. Notice of Distributions.

(a) The trust instrument shall require that, at least 30 days before paying and delivering any distribution to the settlor, as beneficiary, the trustee notify in writing every person who has a specified domestic obligation against the settlor.

(b) The trust instrument shall require that the notice state the earliest date the distribution will be paid and delivered and the amount of the distribution.

7. At the time that the settlor transfers any assets to the trust, the settlor may not be in default of making a payment due under a specified domestic obligation, provided, however, this paragraph shall not apply if the payment is made within thirty (30) days of receipt of written notice by the settlor that the payment is past due and the third party payee is brought current, including any applicable interest or related charges.

8. A transfer of assets to the trust may not render the settlor insolvent.

9. At the time the settlor transfers any assets to the trust, the settlor may not intend to hinder, delay, or defraud a known creditor by transferring the assets to the trust. A settlor’s expressed or unexpressed intention to protect trust assets from the settlor’s potential future creditors is not evidence of an intent to hinder, delay, or defraud a known creditor.

10. Assets transferred to the trust may not be derived from unlawful activities.

11. With respect to each transfer of assets to the trust, the settlor shall sign a substantially contemporaneous sworn and acknowledged affidavit stating that at the time of the transfer of the assets to the trust:

(a) the settlor has full right, title, and authority to transfer the assets to the trust;

(b) the transfer of the assets to the trust will not render the settlor insolvent;

(c) the settlor does not intend to hinder, delay, or defraud a known current creditor by transferring the assets to the trust;

(d) there is no pending or threatened arbitration proceeding or court action against the settlor, except for pending or threatened court actions and proceedings identified by the settlor on an attachment to the affidavit;

(e) the settlor is not involved in an administrative proceeding that is reasonably expected to have a material adverse effect on the financial condition of the settlor, except an administrative proceeding identified on an attachment to the affidavit;

(f) at the time of the transfer of the assets to the trust, the settlor is not in default of a specified domestic obligation;

(g) the settlor is not currently contemplating filing for relief as a debtor under the provisions of United States Code, Title 11, Bankruptcy; and

(h) the assets being transferred to the trust were not derived from unlawful activities.

F. Failure to satisfy the requirements of subsection E. shall result in the consequences described in this subsection F.

1. If any requirement of subsections E.1. through E.6. is not satisfied, none of the property held in the qualified spendthrift trust will at any time have the benefit of the protections described in subsection C., provided, however, if the failure to comply with one of such provisions is remedied by the settlor or a trust protector (appointed pursuant to § 14-10818) within a reasonable time after discovery and the claimant was not harmed by such failure after the remedy, then this paragraph F.1. shall not apply.

2. If the trustee does not send the notice required under subsection E.6., the court may authorize any person with a specified domestic obligation against the settlor to whom notice was not sent to attach the distribution or future distributions, but such person may not:

(a) satisfy the specified domestic obligation out of the settlor’s transfer to the qualified spendthrift trust or the settlor’s beneficial interest in such trust; or

(b) force or require the trustee to make a distribution to the settlor, as beneficiary.

3. If the requirement described in subsection E.7. is not satisfied, the property transferred to the qualified spendthrift trust that does not satisfy the requirement does not have the benefit of the protections described in subsection C. with respect to any person with a specified domestic obligation.

4. If any requirement described in subsections E.8. through E.11. is not satisfied, the property transferred to the qualified spendthrift trust that does not satisfy the requirement shall not have the benefit of the protections described in subsection C., provided however, with respect to E.11.(f) if the default in such obligation is cured pursuant to subsection E.7., the requirement is satisfied;

5. A creditor of the settlor has the burden of proving that the requirement in subsection E.8. or E.9. is not satisfied by clear and convincing evidence.

G. The provisions of subsection C. may apply to a qualified spendthrift trust even if:

1. The settlor of such trust holds other powers under such trust, whether or not the settlor is a co-trustee, including, without limitation, the power to remove and replace a trustee or trust protector, remove and replace an advisor, direct trust investments and execute other management powers;

2. The trust instrument gives the settlor the power to consent to or veto a distribution from such trust;

3. The trust instrument gives the settlor a special lifetime or testamentary power of appointment that cannot be exercised in favor of the settlor, the settlor’s estate, a creditor of the settlor or a creditor of the settlor’s estate as defined in section 2041 of the internal revenue code;

4. The trust instrument gives the settlor the potential or actual right to receive the following types of distributions:

(a) income or principal from such trust, but only subject to the discretion of another person;

(b) income or principal from a charitable remainder unitrust or charitable remainder annuity trust as those terms are defined in section 664 of the internal revenue code; and the settlor’s right, at any time by written instrument delivered to the trustee, to release the settlor’s interest in such trust, in whole or in part, in favor of a charitable organization that has or charitable organizations that have a succeeding remainder beneficial interest in such trust;

(c) income or principal from a grantor retained annuity trust or grantor retained unitrust as those terms are described in section 2702 of the internal revenue code or the settlor’s receipt each year of a percentage, as provided in the trust instrument of the initial value of the trust property which value may be described either as a percentage or a fixed amount or determined from time to time under the trust instrument;

(d) settlor’s potential or actual use of real property held under a qualified personal residence trust within the meaning of that term as described in section 2702(c) of the internal revenue code and regulations promulgated thereunder, or the settlor’s possession and enjoyment of a “qualified annuity interest” as defined in the internal revenue code or the treasury regulations promulgated thereunder;

(e) income or principal to pay, in whole or in part, income taxes due on income of such trust if the potential or actual receipt of income or principal is under a provision in the trust instrument that expressly provides for the payment of those taxes and if the potential or actual receipt of income or principal would be the result of a qualified trustee’s or qualified trustees’ acting in any of the following ways:

(i) In the qualified trustee’s or qualified trustees’ discretion or under a mandatory direction in the trust instrument;

(ii) At the direction of an advisor who is acting in the advisor’s discretion.

(f) after the settlor’s death, without regard to the source of payment, the payment of the settlor’s debts, the expenses of administering the settlor’s estate, or any estate or inheritance tax imposed on or with respect to the settlor’s estate, pursuant to the power of a qualified trustee; and

(g) minimum required distribution as defined in section 4974(b) of the internal revenue code with respect to a retirement benefit.

5. The trust instrument authorizes the settlor to use real or personal property owned by such trust; or

6. With respect to the property held in such trust, the settlor may:

(a) give a personal guarantee on a debt or obligation secured by such property;

(b) make payments, directly or indirectly, on a debt or obligation secured by such property;

(c) pay property taxes, casualty and liability insurance premiums, homeowner association dues, maintenance expenses, or other similar expenses on such property; or

(d) pay income tax on income attributable to the portion of such property held in such trust, of which the settlor is considered to be the owner under section 671 through 678 of the internal revenue code, which payments will not be considered additional transfers to such trust for purposes of this section.

H. If a trust instrument contains the provisions described in subsections E.1. through E.6., a creditor or other person may assert a cause of action against and have recourse from only: (1) the trustee of such trust for purposes of binding the trust and the assets thereof; and (2) the settlor, to the extent otherwise allowed in this section. Such creditor or other person shall have no cause of action or claim for relief against a trustee personally or against an advisor for the settlor, including but not limited to, others involved in the counseling, drafting, preparation, execution or funding of such trust for, among other things, conspiracy to commit fraudulent conveyance or any other voidable transfer, aiding and abetting a fraudulent conveyance or any other voidable transfer, participation in such trust transaction, or any other similar cause of action or claim for relief. For purposes of this subsection H., counseling, drafting, preparation, execution, or funding of such trust includes the preparation and funding of a limited partnership, a limited liability company, or other entity if interests in the entity are subsequently transferred to such trust. The creditor and other person prevented from asserting a cause of action or claim for relief as a result of this subsection H., including a claim against an advisor, may assert a cause of action against, and are limited to recourse against, only:

1. such trust and such trust assets; and

2. the settlor, to the extent otherwise allowed in this section.

I. Rules Regarding Certain Causes of Action.

1. A cause of action or claim for relief under subsection E.8. or E.9. is a cause of action or claim for relief under §§ 44-1004 or 44-1005.

2. Except as provided in subsection I.1., a cause of action or claim for relief under this section is not a cause of action or claim for relief under §§ 44-1001 through 44-1010.

3. Notwithstanding § 44-1009, in addition to meeting the requirements of subsection I.4., a creditor’s cause of action or claim for relief regarding a fraudulent conveyance or other voidable transfer of a settlor’s assets under this section, if not barred earlier by any other statute of limitations or nonclaim statute, is barred against the settlor and the qualified spendthrift trust unless the creditor’s cause of action or claim for relief is brought within the earliest of the applicable time periods set forth in (a), (b), (c) or (d):

(a) In the case of a creditor whose cause of action or claim for relief arose before the transfer, the later of four years after the date of the transfer, and one year after the transfer is or reasonably could have been discovered through the exercise of reasonable diligence by the creditor.

(b) In the case of a creditor whose cause of action or claim for relief arose concurrent with or after the transfer, the later of two years after the transfer is made, and six months after the transfer is or reasonably could have been discovered through the exercise of reasonable diligence by the creditor.

(c) In the case of a creditor known to the settlor who is given actual notice as provided in subsection I.5.(a), within six months from the mailing of the notice or be forever barred.

(d) In the case of any creditor, four years after the date of the first publication of the notice provided in subsection I.5.(b).

4. A creditor must prove by clear and convincing evidence:

(a) The creditor’s cause of action or claim for relief under this subsection.

(b) For purposes of determining the applicable period of limitations under this subsection, whether the cause of action or claim for relief arose: (i) before, or (ii) concurrent with or after the transfer.

5. Additional Notice Rules.

(a) A settlor may give written notice by mail or other reasonable manner of delivery to a creditor known to the settlor, which notice shall state the name and address of the settlor or the settlor’s representative, the name and address of the trustee or the trustee’s representative, and also describe the assets that were transferred, the value of cash, cash equivalent and readily marketable securities, and which shall inform the creditor that the creditor is required to bring the creditor’s cause of action or claim for relief against the settlor, the qualified spendthrift trust and/or the trustee of such trust within six months from the mailing of the notice or be forever barred.

(b) A settlor may publish notice in a newspaper of general circulation in the county in which the settlor then resides, or Maricopa County or Pima County for a non-resident of Arizona, which notice shall state the name and address of the settlor or the settlor’s representative, the name and address of the trustee or the trustee’s representative, and also describe the assets that were transferred, the value of cash, cash equivalent and readily marketable securities, and which shall inform the creditor whose claim arises before the date of the first publication that the creditor is required to bring the creditor’s cause of action or claim for relief against the settlor, the qualified spendthrift trust and/or the trustee of such trust within four years after the date of the first publication of the notice or be forever barred. Notice under this subsection may be published more than once, and the publication of a subsequent notice does not extend the period of time provided in this subsection with respect to creditors whose claims arose before the date of the first publication of any prior notice.

(c) The notice provided in subsection I.5.(b) shall be published once a week for three consecutive weeks.

(d) Failure to give the notice provided in subsection I.5.(a) or I.5.(b) to a creditor does not prevent the shortening of the limitations period under this subsection with respect to another creditor who properly received notice under subsection I.5.(a) or I.5.(b).

(e) A creditor is deemed to have discovered a transfer beginning on the date of the first publication of notice as provided in subsection I.5.(b) that occurs after the date on which such creditor’s claim arises.

6. If more than one transfer is made to the same qualified spendthrift trust:

(a) The making of a subsequent transfer to such trust is disregarded when determining the creditor’s rights with respect to a prior transfer.

(b) Any distribution to a beneficiary is considered to have been made from the latest transfer to such trust.

J. Jurisdiction and Applicable Law.

1. A trust is subject to this section if it is governed by Arizona law, as provided in § 14-10107, and if it otherwise meets the requirements of this section.

2. A court of this state has exclusive jurisdiction over an action or claim for relief that is based on a transfer of property to a trust that is the subject of this section.

K. Creditors of Beneficiaries.

1. With respect to a trust that is subject to this section, a claim brought by a creditor of a beneficiary who is not the settlor is subject to Article 5 of Chapter 11 of Title 14.

2. With respect to an irrevocable trust that is not subject to this section, a claim brought by a creditor of a beneficiary who is the settlor is subject to the provisions of Article 5 of Chapter 11 of Title 14.

L. If a provision in this section conflicts with a provision in §§ 44-1001 through 44-1010, the provision of this section shall supersede the conflicting provision in §§ 44-1001 through 44-1010.

M. An agreement or understanding, express or implied, between the settlor and the trustee that attempts to grant or permit the retention by the settlor of greater rights or authority than is stated in the trust instrument is void.

N. Nothing in this section alters rights vested or created before the effective date of this section.

O. Any provision in this section to the contrary notwithstanding, this section does not create, impose or increase any liability or duty of (i) a trust, (ii) a settlor, trustee or beneficiary of a trust, or (iii) any person to any other person that would not arise in absence of this section, unless specifically provided for or intended by this section.

14-10505. Creditor’s claim against settlor

A. Whether or not the terms of a trust contain a spendthrift provision, the following rules apply:

1. During the lifetime of the settlor, the property of a revocable trust is subject to claims of the settlor’s creditors. If a trust has more than one settlor or contributor, the amount the creditor or assignee of a particular settlor may reach may not exceed the settlor’s interest in the portion of the trust attributable to that settlor’s contribution. This paragraph does not abrogate otherwise applicable laws relating to community property.

2. Subject to the requirements of this section, with respect to an irrevocable trust, other than an irrevocable trust that meets the requirements of § 14-10821, a creditor or assignee of the settlor may reach the maximum amount that can be distributed to or for the settlor’s benefit. If a trust has more than one settlor, the amount the creditor or assignee of a particular settlor may reach may not exceed the settlor’s interest in the portion of the trust attributable to that settlor’s contribution. This paragraph does not apply to any trust from which any distribution to the settlor can be made pursuant to the exercise of a power of appointment held by a third party or abrogate otherwise applicable laws relating to community property. A creditor of a settlor:

(a) Shall not reach any trust property based on a trustee’s, trust protector’s or third party’s power, whether or not discretionary, to pay or reimburse the settlor for any income tax on trust income or trust principal that is payable by the settlor under the law imposing the tax or to pay the tax directly to any taxing authority.

(b) Is not entitled to any payment or reimbursement that is to be made directly to any taxing authority.

(c) Shall not reach or compel distributions to or for the benefit of the beneficiary of a special needs trust.

3. After the death of a settlor, and subject to the settlor’s right to direct the source from which liabilities will be paid, the property of a trust that was revocable at the settlor’s death is subject to claims of the settlor’s creditors, costs of administration of the settlor’s estate, the expenses of the settlor’s funeral and disposal of remains and statutory allowances to a surviving spouse and children to the extent the settlor’s probate estate is inadequate to satisfy those claims, costs, expenses and allowances, except to the extent that state or federal law exempts any property of the trust from these claims, costs, expenses or allowances. If a trust has more than one settlor or contributor, the amount the creditor or assignee of a particular settlor may reach may not exceed the settlor’s interest in the portion of the trust attributable to that settlor’s contribution. This paragraph does not abrogate otherwise applicable laws relating to community property.

B. For the purposes of this section:

1. During the period the power may be exercised, the holder of a power of withdrawal is treated in the same manner as the settlor of a revocable trust to the extent of the property subject to the power.

2. On the lapse, release or waiver of a power of withdrawal, the holder is not, by reason of any such power of withdrawal, treated as the settlor of the trust.

C. For the purposes of this section, a trust settled or established by a corporation, professional corporation, partnership, limited liability company, governmental entity, trust, foundation or other entity is not deemed to be settled or established by its directors, officers, shareholders, partners, members, managers, employees, beneficiaries or agents.

D. For the purposes of this section, amounts contributed to a trust by a corporation, professional corporation, partnership, limited liability company, governmental entity, trust, foundation or other entity are not deemed to have been contributed by its directors, officers, shareholders, partners, employees, beneficiaries or agents. Powers, duties or responsibilities granted to or reserved by the settlor pursuant to the trust and any actions or omissions taken pursuant to the trust are deemed to be the powers, responsibilities, duties, actions or omissions of the settlor and not those of its directors, officers, shareholders, partners, members, managers, employees, beneficiaries or agents.

E. For the purposes of this section, amounts and property contributed to the following trusts are not deemed to have been contributed by the settlor, and a person who would otherwise be treated as a settlor or a deemed settlor of the following trusts shall not be treated as a settlor:

1. An irrevocable inter vivos marital trust that is treated as qualified terminable interest property under section 2523(f) of the internal revenue code if the settlor is a beneficiary of the trust after the death of the settlor’s spouse.

2. An irrevocable inter vivos marital trust that is treated as a general power of appointment trust under section 2523(e) of the internal revenue code if the settlor is a beneficiary of the trust after the death of the settlor’s spouse.

3. An irrevocable inter vivos trust for the settlor’s spouse if the settlor is a beneficiary of the trust after the death of the settlor’s spouse.

4. An irrevocable trust for the benefit of a person, the settlor of which is the person’s spouse, regardless of whether or when the person was the settlor of an irrevocable trust for the benefit of that spouse.

5. An irrevocable trust for the benefit of a person to the extent that the property of the trust was subject to a general power of appointment in another person.

F. For the purposes of subsection E, a person is a beneficiary whether so named under the initial trust instrument or through the exercise by that person’s spouse or by another person of a limited or general power of appointment.

G. Subsections C and D do not apply to:

1. A trust that has no valid business purpose and that has as its principal purpose the evasion of the claims of the creditors of the persons or entities listed in those subsections.

2. A trust that would be treated as a grantor trust pursuant to sections 671 through 679 of the internal revenue code. This paragraph does not apply to a qualified subchapter S trust that is treated as a grantor trust solely by application of section 1361(d) of the internal revenue code.