In 2008 Arizona adopted a version of the Uniform Trust Code. That law introduced the legal concept of a “qualified beneficiary” into Arizona trust law. It clarified who is entitled to information, but it introduced new confusion. Who is a qualified beneficiary, and how do you know? And can some people named in a trust not actually be included in the definition?
What makes someone a qualified beneficiary?
The definition in Arizona’s Trust code is straightforward. It even appears in the section called “definitions“:
14. “Qualified beneficiary” means a beneficiary who, on the date the beneficiary’s qualification is determined:
(a) Is a distributee or permissible distributee of trust income or principal.
(b) Would be a distributee or permissible distributee of trust income or principal if the interests of the distributees described in subdivision (a) of this paragraph terminated on that date.
(c) Would be a distributee or permissible distributee of trust income or principal if the trust terminated on that date.
The problem, of course, is that the definition presumes a general understanding of trust law. So let us break it down into something approximating normal English.
First, an observation about the use of the term
Generally, the concept of a qualified beneficiary only applies to irrevocable trusts. So your revocable living trust might have remainder beneficiaries, but they are not generally entitled to any information about the trust. At least, not until it becomes irrevocable. Which, of course, usually means “upon your death.”
But if the trust is (or becomes) irrevocable, then the terms of the trust identify who is to receive trust principal, and/or income. And sometimes, a trust might identify people who could receive principal or income from the trust, depending on the trustee’s discretion.
Suppose, then, that your mother’s trust says that, upon her death, the trust becomes irrevocable. Of course it pretty much has to be irrevocable — the only person who had the power to revoke it was your mother, and she’s not able to do that any more. So we look to the distributive provisions of the trust to see who might be a beneficiary, and whether they might be “qualified.”
Your mother’s trust says that one share is to be distributed to you outright. If you don’t survive her by at least sixty days, your share goes to your children.
Another share of your mother’s trust is to do to your sister. If she doesn’t outlive your mother, her share comes to you.
Finally, the third share of your mother’s trust is to stay in trust for your brother, with you as trustee. As trustee of that new sub-trust, you can distributed to your brother, his wife or their children.
Who are the qualified beneficiaries?
Clearly ,you are a qualified beneficiary. So is your sister, and so is the trustee of the trust for your brother (oh! that’s you!). Your brother and his wife and children are not. But hold that thought.
Your children are also qualified beneficiaries, because they receive your share if you don’t outlive your mother by sixty days. But sixty-one days after your mother’s death they lose their status as a qualified beneficiary. That’s true even though your own estate plan might be to leave everything to them. They receive that inheritance, if it comes, from your estate, not your mother’s trust.
If your sister fails to survive for those same sixty days, her share comes to you. So you are a qualified beneficiary three times: in your own right, as your sister’s successor (at least for the first sixty days), and as trustee of your brother’s sub-trust.
So your brother gets no information?
No, you still have to give information to your brother. But he gets his information as beneficiary of the sub-trust your mother established in her trust. And technically, he is not entitled to information about your mother’s entire trust.
And, of course, the trust law sets the minimum standard for trustees. Usually that means that you can give your brother information — and it might be wise to do so. But you’re not legally required to tell him about the remaining terms of your mother’s trust.
What information does a qualified beneficiary get?
Good question. In Arizona, a trustee must inform a qualified beneficiary about the existence of the trust, the identity and address for the trustee, and their right to ask for more information. Arizona does not allow a “secret trust“, unknown to the beneficiaries.
A qualified beneficiary is also entitled to a list of trust assets, and an annual accounting. At least, they are entitled to those things on their request. But there are good reasons for a trustee to provide at least annual accountings even if not requested. That’s how a trustee can limit their liability for actions taken during the trust administration.
This is all much more complicated than it sounds in this overview. And you will really benefit from consulting with a qualified attorney. But we don’t want the term “qualified beneficiary” to cause you too much anxiety — there are enough anxiety-producing issues in administering a trust.