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What are my duties as a Trustee in Arizona?

PHoto of person holding nest with money as representation of trustee duties.

As a fiduciary, you are held to the highest standard of care in dealing with the Trust assets. This means you have a legal duty of undivided loyalty to the primary beneficiary of the Trust. You must be cautious and prudent in dealing with Trust assets. As a fiduciary, you must remember, Trust assets do not belong to you and must never be used for your benefit or mixed with your assets or anyone else’s assets. You may be held personally liable and responsible for any damage or loss to Trust beneficiaries resulting from a violation of your trustee duties as a fiduciary (Trustee). More to the point, you have the following trustee duties and more:

  1. You must administer the trust according to its terms.
  2. You are required to act with undivided loyalty to the beneficiaries of the Trust. As trustee can breach the duty of loyalty by acting for personal gain;
  3. You are obligated to eliminate and exclude all selfish interest and to act solely for the highest and best benefit of the beneficiaries of the Trust;
  4. You are not permitted to obtain any economic advantage and may not profit from your relationship from the Trust;
  5. You cannot engage in “self-dealing” regarding the Trust assets. “Self-dealing” means that a trustee (such as you) used the advantage of his or her (your) position to gain an economic benefit for the trustee, other than reasonable compensation. The Trust, as drafted, permits you to “receive reimbursement, for all reasonable expenses incurred in the management and protection of the Trust Estate.”

“Self-dealing” occurs when a fiduciary (you) has a personal interest in a transaction of such a substantial nature that it might have affect his or her (your) judgment in a material regard. “Self-dealing” can occur when a trustee, acting for himself and also as trustee, seeks to consummate a deal in which self-interest is opposed to duty. A trustee who engages in “self-dealing” violates his or her duty of loyalty.

  1. You owe a special duty to Trust beneficiaries in your transactions relating to them, which is called a fiduciary duty. This fiduciary duty, among other things, requires you to conduct your transactions for the benefit of all beneficiaries and the trust with scrupulous integrity, honesty, good faith, loyalty, care and diligence;
  2. You cannot place yourself in a position in which your self-interest would or possibly could conflict with your trustee duties to act for the benefit of Trust beneficiaries;
  3. You cannot use trust assets for personal benefit except as approved by a court of competent jurisdiction;
  4. You are obligated in dealing with trust assets to act as a prudent person dealing with the property of another would act, including exercising the care and skill that a person of ordinary prudence would exercise in dealing with the property of another;
  5. You are obligated to be vigilant in protecting Trust assets.

The following is an outline of some of your trustee duties. It does not describe all of your trustee duties under the Trust and is not a substitute for seeking professional legal advice. If you have any questions, you should retain your own separate attorney.

  1. Immediately locate, identify, and inventory all of the assets of the Trust and make proper arrangements for their protection, such as changing the locks on the house, renting a safe deposit box for important documents, etc.
  2. Immediately take title to all the Trust’s property. The property should be titled in the name of the Trust. Do not put trust funds or assets into joint accounts, trust accounts (“in trust for”) or payable on death (POD) accounts. Do not list yourself as beneficiary on any bank accounts or other assets belonging to the Trust.
  3. Keep detailed records of all receipts and expenditures you make on behalf of the Trust, including bills, receipts, bank statements, tax returns, bills of sale, promissory notes, etc. Include date, check numbers, payees and purpose for all expenditures. Avoid dealing in cash!
  4. Establish a budget, pay Trust debts when they become due, and properly invest Trust assets. You may hire accountants, attorneys, and other advisors to help you carry out your trustee duties. You are also responsible for collecting information regarding taxes, and for preparing or filing any required tax returns. Please create an inventory of assets (both personal property and financial accounts). This will serve as the opening balance for the accounting that you are required to maintain.
  5. Keep detailed records of the time you are spending in identifying, managing and protecting Trust assets in case you later decide to ask to be paid for your time in managing Trust affairs. If you do not maintain these records now, it will be impossible to re-create them at a later date in the event you decide to seek this compensation.
  6. Generally, you must account to the beneficiary on an annual basis. This includes information recording all sums and property received since your appointment itemized by date, source, purpose and account; and all expenditures made since your appointment, itemized by date, payee, purpose and amount; and the balance on hand at the end of the accounting period. The trust document may provide more detailed information about this duty. Sometimes this duty to provide an accounting is waived. However, in our opinion it is usually best to provide the accounting anyway.

I advise making and maintaining copies of all the statements each year, as well as a written statement that you have delivered such statements to the beneficiaries (or counsel for the beneficiaries) each year. It is a better practice to account more frequently, however.

  1. NEVER use any Trust money or property for any reason other than Trust expenses. You may not profit in any way from access to the Trust assets. You have a legal duty of undivided loyalty to the beneficiaries. Neither you, your friends, nor other family members may profit by dealing in or with Trust assets. For example, you may not invest assets in family businesses or the like. You must be cautious and prudent in investing the Trust’s assets. A copy of the Prudent Investor Act is enclosed for your review. This is a general guideline under Arizona law for a fiduciary’s management of assets belonging to another. The Act may be altered by specific provision of the Trust; more specifically, the Trust may allow investments and transactions not allowed under the Act. Please seek the advice of the relevant professional (namely, financial advisor or CPA) in regard to management of the specific assets belonging to the Trust, whether held in the Trust or otherwise. Please note as well that the Trust is governed by Arizona law.

Advise all financial advisors in writing that the account is a fiduciary account and keep a copy of your written communication to them telling them of the fiduciary nature of the account.

  1. You must not make speculative investments. Do not purchase merchandise or services that would be objectively considered extravagant or inappropriate for a prudent investor as set out in the enclosed statute.

The applicable statutes are located at A.R.S. 14-10801 through -10813.

If you have questions regarding your trustee duties, contact us. The information set forth in this letter is intended to be of a general nature. However, we are happy to guide you regarding your particular situation. We just need to meet first and have you sign a fee agreement.

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Own an Arizona Business? You Need to Know This …

Photo of sign in business window that reads, "Sorry We're Closed."

Does your family depend on your company’s income? Are you hoping to pass your business on to a loved one?

If so, read on. Here are common scenarios, and the solution.

You have a serious illness, and have no Durable General Power of Attorney that specifically provides for management of your business. In this case, someone will need to go to court and get appointed as a Temporary Conservator. Sounds easy enough. But what if your family gets into a dispute over who should be appointed?  That could delay the process by months. And meanwhile, your business has no one to manage it. Once a Conservator is appointed, that person has authority to continue to run things under A.R.S. 14-5424 (C)(3). BUT the status is less than clear on whether the Conservator can turn around the business if it suffered during your illness or during the court proceeding. The statute allows the Conservator to “continue” the business. But I’ve seen that be interpreted as not requiring the Conservator to take proactive steps to help fix or correct problems as needed.

You have a serious illness, and you DO have a Durable General Power of Attorney. In this case, you probably think you’re in the clear. But … most Power of Attorney documents that I’ve seen do NOT include language specifically allowing the agent (aka “power of attorney” holder) to continue to operate a business. If businesses have any sort of license, this can also be catastrophic.

Your business is in a Living Trust. You might be slightly better off with this situation. But, two common problems are (a) having a business license in your personal name and (b) the trust document not specifically permitting the continuation of the business by a successor trustee. Again, your business could suffer while you try to fix this problem somehow. In most instances, the only solution is to go to court and ask for permission for the trustee to continue the business. Meanwhile, the business flounders.

You die, and the business is not owned by a Trust. The Arizona Probate code merely requires the Personal Representative (aka executor) to administer your estate expeditiously in the best interest of the estate. That is interpreted to mean basically that the Personal Representative just needs to list it for sale. If your enterprise lost clients during your illness, the PR need not do anything to try to turn the business around. (For the record, I disagree with this interpretation of the statute, but I’m sharing how the Arizona courts treat this situation.)

Bottom line: Talk to your estate attorney and come up with a continuation plan in case you are out of the picture. Have someone picked to take over the business who actually knows how to run the business. Then make sure that somehow that person will have authority to do what is required. If your venture is licensed, the license should be held in an LLC or corporation if that is allowed. Then make sure there is a clearly documented transition plan in place for that entity.

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Duties of a Guardianship with Mental Health Powers

Photo of scrabble letters spelling "Mental Health"

If your loved one needs to be committed for inpatient mental health treatment in a locked facility, then you are looking at what’s called a “Guardian with Mental Health Powers”. This is a complicated process, and I strongly encourage you to get the help of an attorney. You will need to prove that your loved one is incapacitated as a result of a mental disorder and is likely to be in need of inpatient mental health care and treatment within the next 12 months. See A.R.S. Section 14-5312.01. This authority would allow the guardian to place the person to a “level one behavioral health facility” (aka, a locked mental health facility).

If the subject of mental health is new to you, please read up on it. It isn’t always easy to tell if someone has a mental health issue, or a physical one. (Here is an article about that subject.)  In this country, we joke about people being “crazy” and are baffled by the number of homeless people. In truth, many people with mental illness want help. It isn’t fun to be seriously depressed or confused or addicted. And sometimes a family member or friend needs to step up to the plate and go to court to get permission to provide the help that is needed. This also isn’t fun. First, you will need to get a health care professional’s report stating the need for a guardianship with mental health powers. Then you will involve going to court. If you are the one trying to get appointed as guardian, a court investigator will call you or meet with you to make sure you are a responsible person. There will be a court appointed attorney whose job it is to protect his client (your loved one) and push back on your efforts. This is all part of the process. The purpose is to make it difficult to take someone’s legal rights away.

If you are appointed as a guardian with mental health powers, you are required to report annually, in writing, with respect to your ward’s residence, physical and mental health, whether there still is a need for a guardian, and your ward’s financial situation. Your report is due each year on the anniversary date of the Letters of Appointment.
You must be conscious at all times of the needs and best interests of your ward. If the circumstances that made a guardianship necessary should end, you are responsible for petitioning to terminate the guardianship and obtaining your discharge as guardian. Even if the guardianship should terminate by operation of law, you will not be discharged from your responsibilities until you have obtained an order from this Court discharging you.

If you have any questions, call us at 602-443-4888.

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How to Create a Family Dynasty

I’ve been studying how to create a family dynasty for the last 10 years. It turns out that there are 8 Keys to a family’s long term success. I’ll explain the importance of these 8 Keys by telling this story. In 2012, I was fortunate to spend a couple of days with the adventure photographer, writer, filmmaker and wilderness guide Michael Powers in Half Moon Bay, California – about 40 miles south of San Francisco. Michael is an avid ocean kayaker, and prefers riding the big waves at Half Moon Bay on his kayak—what’s called kayak surfing.

Michael took me kayak surfing at Mavericks where the waves routinely crest at 25 feet but can get to 60 feet! I had never before been kayaking, and I had never been kayaking on the ocean, let alone a destination for extreme surfers. What I learned is that you need to have balance, momentum and persistence to get past the initial waves, which are called “breakers.”

The breakers treated me like a homeless person at a country club brunch. At least once I remember tipping over with my legs still stuck in the kayak and—being the beginner I was—trying to figure out how to extract myself while holding my breath and trying to avoid leaving parts of my face among the submerged sand and rocks.

About 50 feet from shore, the waves turned into giant swells. If you timed it just right, and had your kayak angled just right, you could glide down these swells like you were sledding. If not, well you would be trying to get back on a kayak while the giant waves kept coming at you, without being able to touch the ground.

Here’s what I found most interesting. There is a distinct difference between the area close to shore, where the breakers keep trying to push you back, and the open water. Sure there are dangers in the open water as well. But the rules are different. In the open water, you can focus on having fun. But close to shore, you just keep getting pushed back.

This reminds me of how most families are in terms of being able to preserve and grow their wealth from generation to generation. From a long-term (multi-generational) wealth enhancement standpoint, most families never get past the breakers. That’s why having a family dynasty is so rare. Until fairly recently, it has required a minimum of roughly $50 million for a family to be able to implement all of the systems necessary for a family to prosper indefinitely (especially the family office component). But things have now changed. With the help of new options—multi-family offices, outsourcing companies, and new technologies—families no longer need to hire full time staff to ensure their long-term success.

Most families prosper for a lifetime, and then leave some measure of wealth to their kids. If the family is somewhat sophisticated or owns a profitable business, the second generation may be able to hold onto that wealth for their lifetimes. But the initial wealth rarely survives to the end of the third generation.

At Half Moon Bay, I was able to get past the breakers when I was kayaking for the first time, largely because I had a good coach. And I believe that families can get past the financial breakers and create long-term wealth that will survive more than 100 years—even with less than $50 million in net worth—if they follow the steps of other families that have made it.

In the coming blog posts, I will introduce the 8 Keys to a family’s long term success (i.e., how to create a family dynasty). For more information, go to EachGenerationStronger.com.

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Trump cannot avoid conflict with “Blind Trust”

There is been a lot of discussion in the news lately about Donald Trump needing to transfer his investments to a blind trust. For example, the Wall Street Journal suggested in a November 17, 2016 editorial that Donald Trump transfer his real estate holdings so he does not have a conflict of interest in serving as President of the U.S. The conflict of interest concern is that Mr. Trump could push for legislation that will benefit his businesses, thus making his family money, whether or not it is good for the U.S.

So, what is a blind trust anyway? A “blind trust” is a common name for a variety of irrevocable trust in which a person names an independent person to manage the person’s assets. Let me start from the basics and explain so you understand.

A trust is a type of legal vehicle roughly similar to a corporation. You can’t feel or touch a trust. But it exists from a legal standpoint. A trust can own buildings and property. It can sue people in court. It can buy and sell things. It can hire and fire people.

You may have heard of a “living trust.” That’s a colloquial name for a trust that is commonly created by people who own a house and investments and want to avoid probate when they die. It is “revocable” because if you create one, you want to be able to make changes. Maybe you want to add a beneficiary. Or maybe you no longer like the trustee you named to take over when you die, so you insert a new person.

A blind trust is a type of irrevocable trust, meaning that (officially) it cannot be changed by the person who created it. I put the word “officially” in parentheses because there are indirect loopholes. With a blind trust, you create the irrevocable trust, but you remain the beneficiary. Here’s how a blind trust basically works:

  • You go to a lawyer (don’t try doing this on your own) to write the trust document.
  • You are the “grantor” or “trustor” or “creator”, which are all words that mean the same thing. They mean that you are creating the trust.
  • You choose a trustee who is a person other than yourself. The best bet is usually to name a trust company.
  • For a blind trust, you would name yourself as the beneficiary. An asset protection trust is a type of blind trust. Otherwise, you could name your children or other people as the beneficiaries; but then it wouldn’t be a blind trust.

All the news media is going crazy over talk about a “blind trust” as a way of eliminating the potential conflict of interest for Donald Trump. I agree that Mr. Trump can’t transfer his assets to a trust naming his children as beneficiaries. That would trigger a gift tax of roughly 50%.

But if Mr. Trump transfers his holdings to a “blind trust”, he is a smart person and will have checks and balances. He’s not going to risk having some independent company in control and making bad decisions. He will name a Trust Protector, which is an (officially) independent person with the power to make changes to the trust, add/remove beneficiaries, add/remove trustees, and so on. This independent Trust Protector will be someone loyal to Mr. Trump. And Mr. Trump will have the ability to replace the Trust Protector. So even if Mr. Trump is (officially) not managing his properties and businesses, he will have indirect control over them. And he will still be the beneficiary.

Again, the only other way for Mr. Trump to completely divest himself of his businesses is to pay a 50% gift tax and transfer everything to a trust for his kids. But a real estate investor has most of his wealth tied up in real estate. He can’t write a check for 50% of his wealth. So Mr. Trump is stuck. He MUST remain at least someone in control of all of his wealth.

He can do the best he can to transfer his investments to a blind trust. But he will still have some sort of control.

Mr. Trump will probably transfer his investments to a blind trust, and everyone will breathe a sigh of relief. He will have (officially) set things aside so he is no longer in control. But he will still have indirect control, such as being able to ask the Trust Protector to ask the trustee to do things he wants. There is no other way.

That being said, keep in mind that what is good for Mr. Trump as a real estate investor is going to be good for other real estate investors as well. Maybe the lesson out of all of this is to start investing in real estate.