Family members or other individuals are often nominated as personal representatives of estates or appointed as trustees of trusts without any understanding of what that means. They also often lack any real knowledge of their duties under Arizona probate and trust law. That can lead to confusion, disagreement, other problems and, of course, litigation and unnecessary expense.
For example, a personal representative in Arizona is subject to many of the same duties as trustees in Arizona, in addition to the other specific duties imposed upon personal representatives. Pursuant to A.R.S. § 14-3703(A), “except as provided in the will of the decedent, a personal representative is a fiduciary who shall observe the standards of care applicable to trustees as described by §§ 14-10804 and 14-10806 and the duties of accounting applicable to trustees as provided in § 14-10813, subsection C.”
A trustee’s or personal representative’s failure to properly administer the trust or estate or comply with applicable duties could expose him or her to a claim for breach of trust or an action for removal as trustee or personal representative, among other claims. So, it is crucial for Arizona personal representatives and trustees to have a strong understanding of their fiduciary and other duties and their powers.
In fulfilling their duties and exercising their powers, trustees and personal representatives are permitted to hire attorneys to guide them through the process. If you have any questions or need any assistance, Berk Law Group, PC is here to help.
Some of the powers and duties of a trustee administering a trust in Arizona include the following. Some of these also apply to personal representatives. Many of these rules may be altered or extinguished by the terms of a trust. Except in limited circumstances, the trust may also expand the powers of the trustee.
1. Duty to Administer Trust (A.R.S. 14-10801)
A trustee must administer the trust:
- In good faith;
- In accordance with its terms and purposes; and
- In accordance with the interests of the beneficiaries.
2. Duty of Loyalty (A.R.S. 14-10802)
A trustee must administer the trust solely in the interests of the beneficiaries.
3. Duty of Impartiality (A.R.S. 14-10803)
A trustee must act impartially in investing, managing, and distributing the trust property with due regard to the beneficiaries’ respective interests.
4. Duty of Prudent Administration (A.R.S. 14-10804)
A trustee must administer the trust as a prudent person would, using reasonable care, skill, and caution. This duty also applies to personal representatives (executors) administering estates in Arizona.
5. Duty to Comply with the Prudent Investor Rule
A trustee who invests and manages trust assets must comply with the prudent investor rule requirements of these statutes:
- The prudent investor rule is a default rule and may be expanded, restricted, eliminated or altered by the provisions of a trust. A trustee is not liable to a beneficiary to the extent that the trustee acted in reasonable reliance on the provisions of the trust. (A.R.S. 14-10901)
- A trustee must invest and manage trust assets as a prudent investor would by considering the purposes, terms, distribution requirements, and other circumstances of the trust. (A.R.S. 14-10902)
- A trustee must diversify the investments of the trust unless the trustee reasonably determines that, due to special circumstances, the purposes of the trust are better served without diversifying. (A.R.S. 14-10903)
- A trustee must review the trust assets and make and implement decisions concerning the retention and disposition of assets in order to bring the trust portfolio into compliance with the purposes, terms, distribution requirements, and other circumstances of the trust (A.R.S. 14-10904).
- Hindsight Rule. Whether a trustee complied with the prudent investor rule is determined by looking at the facts and circumstances existing at the time of a trustee’s decision or action and not by hindsight. (A.R.S. 14-10905)
- Magic words. Any of the following language in a trust authorizes any investment or strategy under the rule: (A.R.S. 14-10906)
- “Investments permissible by law for investment of trust funds.”
- “Legal investments.”
- “Authorized investments.”
- “Using the judgment and care under the circumstances then prevailing that persons of prudence, discretion and intelligence exercise in the management of their own affairs, not in regard to speculation but in regard to the permanent disposition of their funds, considering the probable income as well as the probable safety of their capital.”
- “Prudent man rule.”
- “Prudent trustee rule.”
- “Prudent person rule.”
- “Prudent investor rule.”
- Prudent Delegation. A fiduciary may delegate investment and management functions that a prudent investor of comparable skills might delegate under the circumstances. A fiduciary is not responsible for the investment decisions or actions of the agent if the fiduciary exercised reasonable care in selecting the agent, in establishing the scope and specific terms of the delegation, and in periodically reviewing the agent’s performance and compliance with the scope of the delegation. (A.R.S. 14-10907)
- Agent’s Duties. The agent must use reasonable care to comply with the scope and terms of the delegation, and in performance of the delegated function, and is liable to the trust if the agent fails to do so. A cofiduciary may delegate investment and management to another cofiduciary if the delegating cofiduciary reasonably believes that the other has greater investment skills.
- Mutual Funds. Investment in a mutual fund is not a delegation of investment function and neither the mutual fund nor its advisor is an investment agent.
- Life Insurance on Settlor. A trustee may acquire or retain a contract of life insurance on the life of the settlor or the settlor’s spouse, or both, without liability for a loss arising from the trustee’s failure to: (A.R.S. 14-10908)
- Determine whether the contract is or remains a proper investment;
- Investigate the financial strength of the life insurance company;
- Exercise nonforfeiture provisions available under the contract; or
- Diversify the contract.
6. Duty to Incur Only Reasonable Costs (A.R.S. 14-10805)
A trustee may only incur costs that are reasonable in relation to the trust property, the purposes of the trust, and the skills of the trustee.
7. Duty to Use Special Skills (A.R.S. 14-10806)
If the trustee has special skills or expertise, he or she must use those special skills or expertise in the administration of the trust. This duty also applies to personal representatives (executors) administering estates in Arizona.
8. Duty to Control and Protect Trust Property (A.R.S. 14-10809)
A trustee must take reasonable steps to take control of and to protect trust property.
9. Duty to Keep Records and Identify Trust Property (A.R.S. 14-10810)
- A trustee must keep adequate records of the administration of the trust.
- A trustee must keep trust property separate from the trustee’s own property and distinguishable from property from other trusts.
10. Duty to Enforce and Defend Claims (A.R.S. 14-10811)
A trustee must take reasonable steps to enforce claims of the trust and to defend claims against the trust.
11. Duty to Collect Trust Property (A.R.S. 14-10812)
A trustee must take reasonable steps to compel delivery of trust property and to redress a breach of trust known to the trustee to have been committed by a former trustee.
12. Duty to Inform and Report (A.R.S. 14-10813)
- Unless the trust provides otherwise, a trustee shall keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust.
- On request of a beneficiary, a trustee must promptly give the beneficiary a copy of the portions of the trust necessary to describe the beneficiary’s interest.
- When a trustee accepts a trusteeship, the trustee must notify the beneficiaries within 60 days of the acceptance and the trustee’s name, address, and phone number.
- When a trustee discovers that a revocable trust has become irrevocable, the trustee must notify the beneficiaries within 60 days of
- the trust’s existence;
- the identity of the settlor(s);
- the trustee’s name, address, and phone number;
- of the right to request a copy of the relevant portions of the trust; and
- of the right to a trustee’s report.
- If a trustee intends to change the method or rate of his compensation, he must notify the beneficiaries at least 30 days in advance of the change.
- Annual Report. A trustee must provide an annual report to distributees of trust income or principal, and also to any beneficiaries who request the report. The report must contain 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. A beneficiary may waive the right to a report, and also may withdraw a waiver previously given (with respect to future reports).
- Arizona personal representatives also owe a duty to inventory and account for the estate property.
13. General Powers of a Trustee (A.R.S. 14-10815)
Subject to the trustee’s fiduciary duties, a trustee may freely exercise the same power over trust property as a competent owner has over his own property, except as limited by the trust.
14. Specific Powers of a Trustee (A.R.S. 14-10816)
Without limiting a trustee’s general powers, a trustee may:
- Collect trust property and accept or reject additions to trust property from a settlor or any other person;
- Acquire or sell property for cash or on credit at public or private sale;
- Exchange, partition or otherwise change the character of trust property;
- Deposit trust money in an account in a regulated financial service institution;
- Borrow money and mortgage or pledge trust property for a period within or extending beyond the duration of the trust;
- Continue a business or other enterprise and take any action, including merging, dissolving, or otherwise changing the form of business organization or contributing additional capital, that may be taken by shareholders, members, or property owners;
- Regarding stocks or other securities, exercise the rights of an absolute owner, including the right to vote, give proxies, or enter into or continue a voting trust agreement;
- Construct, demolish, make repairs, alter, improve, lease, insure, and convey interests in real property;
- Pay taxes, assessments, compensation of the trustee and of employees and agents of the trust, and other expenses incurred in the administration of the trust;
- Exercise elections with respect to federal, state, and local taxes;
- Pay or contest any claim, settle a claim by or against the trust, and release in whole or in part a claim belonging to the trust;
- Make loans out of trust property, including loans to a beneficiary on terms and conditions the trustee considers to be fair and reasonable under the circumstances, and the trustee has a lien of future distributions for repayment of those loans;
- Pledge trust property to guarantee loans made by others to the beneficiary;
- Appoint a trustee to act in another jurisdiction for trust property located in the other jurisdiction, and require that the appointed trustee furnish security and remove any trustee so appointed;
- Resolve a dispute concerning the interpretation of the trust or its administration by arbitration, mediation, or other procedure for alternative dispute resolution;
- Prosecute or defend an action, claim or judicial proceeding in any jurisdiction to protect trust property and the trustee in the performance of the trustee’s duties;
- Sign and deliver contracts and other instruments that are useful to achieve or facilitate the exercise of the trustee’s powers; and
- Upon termination of the trust, exercise the powers appropriate to wind up the trust administration and distribute the trust property to the entitled persons.
15. Power to Delegate (A.R.S. 14-10807)
- A trustee may delegate duties and powers under some circumstances.
- A trustee must use reasonable care in selecting an agent, establishing the scope of the delegation, and reviewing the agent’s actions and performance.
- An agent must use reasonable care to comply with the terms of the delegation.
16. Power to Make a Proposed Distribution (A.R.S. 14-10817)
When a trust terminates or partially terminates, the trustee may send a proposed distribution to the beneficiaries. If the beneficiary fails to notify the trustee of an objection within 30 days, then the beneficiary’s right to object terminates, but only if the proposed distribution also informed the beneficiary of the right to object and the time allowed for objection.
17. Power to Appoint to Other Trust (A.R.S. 14-10819)
- Unless the trust provides otherwise, a trustee may appoint part or all of the trust to another trust if the appointment:
- Does not reduce a beneficiary’s fixed nondiscretionary income;
- Does not alter a beneficiary’s nondiscretionary annuity payments;
- Is in favor of the beneficiaries of the trust;
- Results in an ascertainable standard of distribution from the trust, or a more restrictive standard of distribution when the trustee is a possible beneficiary under the new standard;
- Does not adversely affect the trust, trustee, the settlor, or the beneficiaries; and
- Does not violate the rule against perpetuities.
- The trustee may request the court to approve the exercise of the trustee’s discretion.
- The trustee may exercise the discretion to appoint all of the trust estate by restating the trust.
18. Power to Act at the Settlor’s Direction (A.R.S. 14-10808)
- A trustee may follow a direction of the settlor that is contrary to the terms of a revocable trust.
- A trustee has no duty to review the directions it is directed to make or notify the beneficiaries regarding any investment action pursuant to the direction if the trust provides that the assets in the trust are subject to the direction of the settlor, co-trustee, beneficiary or third party.
- A trustee is not subject to liability if they acted pursuant to the direction of the settlor unless the trustee acts in bad faith or with reckless indifference.
- Trust terms may confer on a trustee or other person the power to direct the modification or termination of the trust.
19. Powers of a Trust Protector (A.R.S. 14-10818)
A trust protector appointed by the trust instrument has the powers, delegations, and functions conferred by the trust instrument. Also, a trust protector may:
- Remove and appoint a trustee;
- Modify or amend the trust instrument for any valid reason;
- Increase, decrease, modify or restrict the interests of any beneficiary of the trust; and
- Change the applicable law governing the trust.
20. Power to Accept or Decline Trusteeship (A.R.S. 14-10701)
A person may accept or decline a nomination to serve as trustee. A person nominated as trustee accepts trusteeship either by:
- Complying with a method provided by the trust;
- Accepting delivery of trust property;
- Exercising powers or performing duties as trustee; or
- Otherwise indicating acceptance.
A person who has not yet accepted the trusteeship may reject the trusteeship by:
- Rejecting the trusteeship; or
- Not accepting the trusteeship within a reasonable time.
Without accepting the trusteeship, a person designated as trustee may act to preserve the trust property by:
- Sending a rejection of the trusteeship to the settlor within a reasonable time after acting; or
- If the settlor is dead or lacks capacity, by sending a rejection of the trusteeship to a qualified beneficiary within a reasonable time.
Other Requirements and Notes
- A trustee must secure bond if the court or the trust requires it. (A.R.S. 14-10702)
- Generally, cotustees must perform their functions under the trust. Cotrustees may delegate their functions to other cotrustees unless the trust provides otherwise. Cotrustees may act for each other and for the trust if a vacancy occurs. Cotrustees must exercise reasonable care to prevent cotrustees from committing a material breach of trust, and to compel cotrustees to redress a material breach of trust. A dissenting trustee who joins in an action at the direction of the majority of the trustees and who notified any cotrustee of the dissent at or before the time of the action is not liable for the action unless the action is a material breach of trust. (A.R.S. 14-10703)
Vacancy in trusteeship
A vacancy in trusteeship can occur for many reasons, including when a designated trustee: rejects the trusteeship, is missing, does not exist, resigns, dies, or is under a guardianship or conservatorship. The vacancy does not need to be filled as long as there is an acting trustee. Otherwise, the court can appoint a trustee. (A.R.S. 14-10704)
Removal of Trustee
The settlor, beneficiary, or a cotrustee may request that the court remove a trustee, or the court can choose to remove a trustee on its own initiative. Some reasons the court may remove a trustee include:
- A trustee has committed a material breach of trust;
- A lack of cooperation among cotrustees that substantially impairs the administration of the trust;
- A trustee is unfit, unwilling, or persistently failing to administer the trust for the benefit of the beneficiaries;
- A substantial change of circumstances or removal is requested by all of the qualified beneficiaries;
- The court finds that removal of the trustee best serves the interests of all of the beneficiaries and is not inconsistent with a material purpose of the trust and a suitable cotrustee or successor trustee is available; or
- On petition of a beneficiary who is also a settlor of a trust, the court shall substitute a trustee and appoint a successor if the substitution is in the best interest of the beneficiary. (A.R.S. 14-10706)
Former Trustee’s Duty to Deliver Trust Property
A trustee that has resigned or been removed has the duties of a trustee and the powers necessary to protect the trust property until the trust property is delivered to a successor trustee or other person entitled to it. A trustee who has resigned or been removed must expeditiously deliver the trust property in the trustee’s possession to the cotrustee, successor trustee or other person entitled to it. (A.R.S. 14-10707)
- A trustee is entitled to a compensation that is reasonable under the circumstances, or as specified by the trust, or as directed by the court. (A.R.S. 14-10708)
- Reimbursement for Expenses. A trustee is also entitled to be reimbursed out of the trust property, with reasonable interest, for expenses that were properly incurred in the administration of the trust and to the extent necessary to prevent unjust enrichment of the trust. An advance by the trustee of money for the protection of the trust gives rise to a lien against trust property to secure reimbursement with reasonable interest. (A.R.S. 14-10709)
The duties of a trustee can be reviewed in their complete form under the Arizona Revised Statutes, Section 14, Article 8 through Article 11. But, beware, these duties and powers may be altered by the terms of the trust or last will and testament or for other reasons.
The foregoing summary of the duties and powers of trustee can seem overwhelming and complicated. If you have any questions regarding the duties and/or powers of a trustee or personal representative in Arizona, please contact us. Our skilled attorneys would be happy to answer your questions.