How Trust Decanting Works in Arizona
Sometimes a trust needs to be updated, but the terms do not allow simple amendments. This statute gives a trustee a practical alternative. If the trustee has discretion over distributions, the trustee can appoint part or all of the trust property into a new trust, provided the move meets several conditions designed to protect everyone involved.
A trustee who has the discretion under the terms of a testamentary instrument or irrevocable inter vivos agreement to make distributions, regardless of whether a standard is provided in the trust instrument to or for the benefit of a beneficiary of the trust, may exercise without prior court approval the trustee's discretion by appointing part or all of the trust property in favor of a trustee of another trust.
A.R.S. § 14-10819(A)The statute applies to both testamentary trusts (created through a will) and irrevocable trusts created during the settlor's lifetime. It does not require the trustee to go to court first, though the trustee may request court approval before or after the transfer if desired.
Conditions That Protect Beneficiaries
This power is not unlimited. The transfer cannot reduce any fixed income payment to a beneficiary or alter any annuity or unitrust payment. The receiving trust must benefit the same beneficiaries. If the trustee exercising this power is also a beneficiary, any distribution standard in the new trust must be at least as restrictive as the original. The transfer also cannot create adverse tax consequences or violate Arizona's rules on trust duration.
The exercise of the trustee's power to appoint trust property under subsection A of this section is considered to be the exercise of a special power of appointment.
A.R.S. § 14-10819(C)By treating the transfer as a special power of appointment rather than a general one, the statute helps preserve favorable tax treatment for the trust and its beneficiaries.
