14-10814. Discretionary powers; tax savings

480 words·~2 min read·/az/title-14/14-10814

A research copy — for the controlling text, always check the official state or federal source. Not legal advice.

A. 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, including creditors of the beneficiaries, except only to the extent that creditors of beneficiaries are expressly entitled to attachment pursuant to section 14-10504, subsection B and in accordance with the terms and purposes of the trust and the interests of the beneficiaries.

B. Subject to subsection D of this section, and unless the terms of the trust expressly indicate that a rule in this subsection does not apply:

1. 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 within the meaning of section 2041(b)(1)(A) or 2514(c)(1) of the internal revenue code. This paragraph does not expand the power or duty of a trustee to make distributions and does not apply to a power held in an individual capacity.

2. A trustee may not exercise a power to make discretionary distributions to satisfy a legal obligation of support that the trustee personally owes another person.

3. Except in the case of a special needs trust, a settlor who is a trustee of a trust that confers on the trustee a power to make discretionary distributions to or for a beneficiary may exercise the power only in accordance with an ascertainable standard relating to the beneficiary's health, education, support or maintenance within the meaning of section 2041(b)(1)(A) or 2514(c)(1) of the internal revenue code. This paragraph does not expand the power or duty of a trustee to make distributions and does not apply to a power held in an individual capacity.

C. A power whose exercise is limited or prohibited by subsection B of this section may be exercised by a majority of the remaining trustees whose exercise of the power is not so limited or prohibited. If the power of all trustees is so limited or prohibited, the court may appoint a special fiduciary with authority to exercise the power.

D. Subsection B of this section does not apply to:

1. A power held by the settlor's spouse who is the trustee of a trust for which a marital deduction, as defined in section 2056(b)(5) or 2523(e) of the internal revenue code, was previously allowed.

2. Any trust during any period that the trust may be revoked or amended by its settlor.

3. A trust if contributions to the trust qualify for the annual exclusion under section 2503(c) of the internal revenue code.