Arizona Laws 14-10505. Creditor’s claim against settlor
A. Whether or not the terms of a trust contain a spendthrift provision, the following rules apply:
Terms Used In Arizona Laws 14-10505
- Application: means a written request to the registrar for an order of informal probate or appointment under chapter 3, article 3 of this title. See Arizona Laws 14-1201
- Beneficiary: A person who is entitled to receive the benefits or proceeds of a will, trust, insurance policy, retirement plan, annuity, or other contract. Source: OCC
- Beneficiary: means a person who either:
(a) Has a present or future beneficial interest in a trust, vested or contingent. See Arizona Laws 14-10103
- Community property: means that property of a husband and wife that is acquired during the marriage and that is community property as prescribed in section 25-211. See Arizona Laws 14-1201
- Corporation: A legal entity owned by the holders of shares of stock that have been issued, and that can own, receive, and transfer property, and carry on business in its own name.
- Estate: includes the property of the decedent, trust or other person whose affairs are subject to this title as originally constituted and as it exists from time to time during administration. See Arizona Laws 14-1201
- Grantor: The person who establishes a trust and places property into it.
- Grantor: includes every person from or by whom an estate or interest in real property passes, in or by a deed. See Arizona Laws 1-215
- Inter vivos: Transfer of property from one living person to another living person.
- Irrevocable trust: A trust arrangement that cannot be revoked, rescinded, or repealed by the grantor.
- Liabilities: The aggregate of all debts and other legal obligations of a particular person or legal entity.
- Partnership: A voluntary contract between two or more persons to pool some or all of their assets into a business, with the agreement that there will be a proportional sharing of profits and losses.
- Person: means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision, agency or instrumentality, public corporation or any other legal or commercial entity. See Arizona Laws 14-10103
- Power of withdrawal: means a presently exercisable general power of appointment other than a power exercisable either:
(a) By a trustee and limited by an ascertainable standard. See Arizona Laws 14-10103
- Probate: Proving a will
- Property: means anything that may be the subject of ownership, whether real or personal, legal or equitable, or any interest in anything that may be the subject of ownership. See Arizona Laws 14-10103
- Revocable trust: A trust agreement that can be canceled, rescinded, revoked, or repealed by the grantor (person who establishes the trust).
- Settlor: means a person, including a testator, who creates or contributes property to a trust. See Arizona Laws 14-10103
- Special needs trust: means a trust established for the benefit of one or more persons with disabilities if one of the purposes of the trust, expressed in the trust instrument or implied from the trust instrument, is to allow the person with a disability to qualify or continue to qualify for public, charitable or private benefits that might otherwise be available to the person with a disability. See Arizona Laws 14-10103
- Spendthrift provision: means a term of a trust that restrains either voluntary or involuntary transfer of a beneficiary's interest. See Arizona Laws 14-10103
- State: means a state of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands or any territory or insular possession subject to the jurisdiction of the United States. See Arizona Laws 14-10103
- Trust: includes an express trust, private or charitable, with any additions, wherever and however created. See Arizona Laws 14-1201
- Trust instrument: means an instrument executed by the settlor that contains terms of the trust, including any amendments to that trust. See Arizona Laws 14-10103
1. During the lifetime of the settlor, the property of a revocable trust is subject to claims of the settlor’s creditors. If a trust has more than one settlor or contributor, the amount the creditor or assignee of a particular settlor may reach may not exceed the settlor’s interest in the portion of the trust attributable to that settlor’s contribution. This paragraph does not abrogate otherwise applicable laws relating to community property.
2. Subject to the requirements of this section, with respect to an irrevocable trust, a creditor or assignee of the settlor may reach the maximum amount that can be distributed to or for the settlor’s benefit. If a trust has more than one settlor, the amount the creditor or assignee of a particular settlor may reach may not exceed the settlor’s interest in the portion of the trust attributable to that settlor’s contribution. This paragraph does not apply to any trust from which any distribution to the settlor can be made pursuant to the exercise of a power of appointment held by a third party or abrogate otherwise applicable laws relating to community property. A creditor of a settlor:
(a) Shall not reach any trust property based on a trustee‘s, trust protector’s or third party’s power, whether or not discretionary, to pay or reimburse the settlor for any income tax on trust income or trust principal that is payable by the settlor under the law imposing the tax or to pay the tax directly to any taxing authority.
(b) Is not entitled to any payment or reimbursement that is to be made directly to any taxing authority.
(c) Shall not reach or compel distributions to or for the benefit of the beneficiary of a special needs trust.
3. After the death of a settlor, and subject to the settlor’s right to direct the source from which liabilities will be paid, the property of a trust that was revocable at the settlor’s death is subject to claims of the settlor’s creditors, costs of administration of the settlor’s estate, the expenses of the settlor’s funeral and disposal of remains and statutory allowances to a surviving spouse and children to the extent the settlor’s probate estate is inadequate to satisfy those claims, costs, expenses and allowances, except to the extent that state or federal law exempts any property of the trust from these claims, costs, expenses or allowances. If a trust has more than one settlor or contributor, the amount the creditor or assignee of a particular settlor may reach may not exceed the settlor’s interest in the portion of the trust attributable to that settlor’s contribution. This paragraph does not abrogate otherwise applicable laws relating to community property.
B. For the purposes of this section:
1. During the period the power may be exercised, the holder of a power of withdrawal is treated in the same manner as the settlor of a revocable trust to the extent of the property subject to the power.
2. On the lapse, release or waiver of a power of withdrawal, the holder is not, by reason of any such power of withdrawal, treated as the settlor of the trust.
C. For the purposes of this section, a trust settled or established by a corporation, professional corporation, partnership, limited liability company, governmental entity, trust, foundation or other entity is not deemed to be settled or established by its directors, officers, shareholders, partners, members, managers, employees, beneficiaries or agents.
D. For the purposes of this section, amounts contributed to a trust by a corporation, professional corporation, partnership, limited liability company, governmental entity, trust, foundation or other entity are not deemed to have been contributed by its directors, officers, shareholders, partners, employees, beneficiaries or agents. Powers, duties or responsibilities granted to or reserved by the settlor pursuant to the trust and any actions or omissions taken pursuant to the trust are deemed to be the powers, responsibilities, duties, actions or omissions of the settlor and not those of its directors, officers, shareholders, partners, members, managers, employees, beneficiaries or agents.
E. For the purposes of this section, amounts and property contributed to the following trusts are not deemed to have been contributed by the settlor, and a person who would otherwise be treated as a settlor or a deemed settlor of the following trusts shall not be treated as a settlor:
1. An irrevocable inter vivos marital trust that is treated as qualified terminable interest property under section 2523(f) of the internal revenue code if the settlor is a beneficiary of the trust after the death of the settlor’s spouse.
2. An irrevocable inter vivos marital trust that is treated as a general power of appointment trust under section 2523(e) of the internal revenue code if the settlor is a beneficiary of the trust after the death of the settlor’s spouse.
3. An irrevocable inter vivos trust for the settlor’s spouse if the settlor is a beneficiary of the trust after the death of the settlor’s spouse.
4. An irrevocable trust for the benefit of a person, the settlor of which is the person’s spouse, regardless of whether or when the person was the settlor of an irrevocable trust for the benefit of that spouse.
5. An irrevocable trust for the benefit of a person to the extent that the property of the trust was subject to a general power of appointment in another person.
F. For the purposes of subsection E, a person is a beneficiary whether so named under the initial trust instrument or through the exercise by that person’s spouse or by another person of a limited or general power of appointment.
G. Subsections C and D do not apply to:
1. A trust that has no valid business purpose and that has as its principal purpose the evasion of the claims of the creditors of the persons or entities listed in those subsections.
2. A trust that would be treated as a grantor trust pursuant to sections 671 through 679 of the internal revenue code. This paragraph does not apply to a qualified subchapter S trust that is treated as a grantor trust solely by application of section 1361(d) of the internal revenue code.