Non-Judicial Settlement Agreements provide an opportunity for Arizona trust beneficiaries to resolve disputes — sometimes even before they become disputes. The NJSA is a relatively new idea, introduced in Arizona’s version of the Uniform Trust Code. We first adopted the Trust Code in 2003, repealed it the next year, and adopted it again in 2008. Both version included a provision for this new creature: the Non-Judicial Settlement Agreement.
It’s not that there was no way to modify trusts before we adopted our new Trust Code. But the new law made it much easier to satisfy legal requirements. And it recognizes that, well, things change.
When might one use non-judicial settlement agreements?
Imagine that your grandmother created a trust for your father’s benefit, to be held in trust after his death until you reach age 65. Your father, sadly, died last year — and you are in your 50s. Meanwhile, the trust shrank during your father’s life and is now worth about $125,000. Do you have to keep the trust going for another decade?
The Arizona version of the Uniform Trust Code actually created several ways that this trust could be modified — or even terminated. One would allow the trustee to decide to simply terminate the trust and distribute the balance of trust assets. Depending on the terms of the trust, that distribution would probably be to you.
But that’s something the trustee would have to initiate. And the trustee might be reluctant to suggest such a thing — or even to act on it. Even if all the beneficiaries are in general agreement.
Enter non-judicial settlement agreements. You and your own children could negotiate a resolution and present it to the trustee. The trustee might still be hesitant, but the fact that all the beneficiaries are in agreement makes it much more likely that the trust could be terminated.
But my grandfather wasn’t that wealthy
Most of our grandfathers didn’t leave trusts for our parents (or for us). But one very common situation we see is a married couple with a trust from the 1980s or 1990s that never got updated. When tax laws changed drastically, starting in 1998 and picking up speed over the next two decades, many people failed to update their estate plans.
That means that there are lots (a technical term if ever there was one) of married couples who had trusts that became wholly or partially irrevocable on the first spouse’s death. And most of those trust provisions were based solely on estate tax concerns that ended before the first spouse’s death. Now we regularly see surviving spouses with irrevocable trust provisions that aren’t necessary and might actually cost more in taxes — now and at the surviving spouse’s death.
Here’s another opportunity for non-judicial settlement agreements. If everyone agrees, modification of the trust by agreement might solve the problems. And the surviving spouse could avoid the burden of managing a separate trust with its own accounting and tax requirements.
To be sure, the NJSA is not the only way to alleviate this too-common problem. But it’s often the best way — since it gets buy-in from all the beneficiaries early in the process.
What about other changed circumstances?
Here’s another common situation in our practice: we often see trustees (or surviving spouses, or current beneficiaries) with children who have special needs. Maybe no one knew about their condition years ago when the trust was first established. Now they wish they could modify an irrevocable trust to include special needs language.
Non-judicial settlement agreements might be one way to address the concern. Again, that’s often not the only option — but it sometimes is a great choice offering wonderful flexibility.
Or maybe there are trust assets that are difficult to value, or substantial debt owed by a future beneficiary, or an unpleasant divorce. Any of those kinds of things might provide an opening for an NJSA to reset the table now. It makes sense to act while everyone sees the same set of problems and all want to get changes made.
Maybe there is a charitable beneficiary that makes administration or taxation of the trust more difficult. It might be possible to agree on an amount to distribute to the charity to release any liability to the non-family member. Maybe, in fact, there are individual beneficiaries who could get removed from notice and other requirements by an agreement about how to remove them from further trust involvement.
Do you think that you have an Arizona trust that needs consideration of an NJSA? Talk to a qualified trust and estate attorney about the wonderful flexibility of Arizona’s non-judicial settlement agreements.