Revocable Trusts and Creditor Access
A revocable living trust is one of the most common estate planning tools. However, it does not shield assets from the settlor's creditors. Because the settlor of the trust retains the power to revoke or amend it, Arizona treats the trust property as still belonging to the settlor for creditor purposes.
During the lifetime of the settlor, the property of a revocable trust is subject to claims of the settlor's creditors.
A.R.S. § 14-10505(A)(1)This applies whether or not the trust contains a spendthrift provision. After the settlor's death, the trust property remains available for creditor claims, estate administration costs, funeral expenses, and statutory allowances to a surviving spouse and children. This applies only to the extent the settlor's probate estate is not enough to cover those obligations.
Irrevocable Trusts Offer More Protection
Irrevocable trusts receive different treatment. A creditor of the settlor can reach only the maximum amount that can be distributed to or for the settlor's benefit under the trust terms. If the trust does not allow any distributions to the settlor, creditors have no access to those assets. The creditor cannot reimburse the maximum amount that can be distributed beyond what the trust terms allow.
Arizona also provides important carve-outs. A creditor cannot reach trust property based solely on a trustee's power to reimburse the settlor for income taxes on trust assets. This protects a common planning technique. The settlor pays taxes on trust income to allow the trust to grow without tax drag. That arrangement does not create an opening for creditors.
The statute also addresses powers of withdrawal. During the period a withdrawal power can be used, the holder is treated like the settlor of a revocable trust. Once that power lapses, the holder is no longer treated as the settlor, and creditor access ends.