Discretion Does Not Mean Unlimited Power
Many trust documents use broad language like "absolute" or "sole" discretion for a trustee's authority. That does not give the trustee a blank check.
Arizona law requires the trustee to act in good faith. The trustee must follow the trust's stated purposes and act only for the benefit of beneficiaries.
Notwithstanding the breadth of discretion granted to a trustee in the terms of the trust, including the use of terms such as absolute, sole or uncontrolled, the trustee shall exercise a discretionary power in good faith as to only beneficiaries of the trust and creditors of the trust and no other persons.
A.R.S. § 14-10814(A)This matters because a trustee who makes payments outside the trust's terms could face liability. The same is true for a trustee who favors one beneficiary without reason.
When the Trustee Is Also a Beneficiary
Federal tax law creates a trap when the same person is both trustee and beneficiary. If that person can give trust assets to themselves freely, the IRS may count those assets in their taxable estate.
Arizona addresses this by limiting what a beneficiary-trustee can do. They may only make distributions for health, education, support, or upkeep. The IRS calls this an "ascertainable standard."
A person other than a settlor who is a beneficiary and trustee of a trust that confers on the trustee a power to make discretionary distributions to or for the trustee's personal benefit may exercise the power only in accordance with an ascertainable standard relating to the trustee's individual health, education, support or maintenance.
A.R.S. § 14-10814(B)(1)If every trustee's power is limited by these rules, the court can appoint a special fiduciary to use that power. These limits do not apply while a trust stays revocable. They also do not apply to a marital trust that qualified for the estate tax marital deduction.