by Richard Keyt, Arizona NFA gun trust lawyer®
An NFA gun trust is a special type of revocable living trust that is created for the purpose of owning National Firearms Act Title II firearms. To learn more about gun trusts, read my article called “NFA Gun Trusts.” People create gun trust one of three ways:
1. They purchase software created to create generic revocable living trusts.
2. They copy a trust agreement obtained from another person or the internet.
3. They hire an attorney who creates generic revocable living trusts, but who is not an expert on the NFA or gun laws and at best has created a small number of NFA gun trusts.
4. They hire an experienced estate planning attorney who has studied and understands the NFA and gun laws and has substantial experience creating many NFA gun trusts.
People who use methods 1, 2 or 3 rather than method 4 may be putting themselves and their loved ones at risk of being arrested and charged with illegal possession of Title II firearms because of one or more defects in an NFA deficient trust agreement. Nobody should possess or use a Title II firearm unless he or she has a federal license to do so. Violators of the NFA may be fined not more than $250,000, and imprisoned not more than 10 years, or both.
Mistake #1: The Gun Trust is Not Properly Formed
The mere fact you sign your name to a document that purports to be a trust agreement does not mean that you create a valid trust. To be valid, every trust must satisfy the requirements of the law of the state in which it is created. Trusts are state specific. Before you can determine if your trust is validly created, you must know which state law applies to your trust. Arizona Revised Statutes Section 14-10107 specifies which state law will govern a trust. It states:
“A. The meaning and effect of the terms of a trust are determined by the law of the jurisdiction designated in the terms of the trust instrument.
B. In the absence of a controlling designation in the terms of the trust, the laws of the jurisdiction where the trust was executed determine the validity of the trust, and the laws of descent and the law of the principal place of administration determine the administration of the trust.”
All Arizona trusts are governed by and must comply with the Arizona Trust Code contained in Arizona Revised Statutes Title 14, Chapter 11. The 11 requirements that all Arizona trusts must satisfy are listed below. If any of the 11 requirements is not satisfied, the legal significance of the failure is that the trust is defective and therefore it does not exist. Every Arizona trust must satisfy each of the following requirements:
1. The trust maker must have the capacity to create a trust. Capacity means legal capacity, i.e., the trust maker is of sound mind and understands the significance of creating the trust. Being of sound mind means the trust maker knows the nature and extent of his or her assets, the people who are the natural objects of the trust maker’s bounty, the disposition of assets that the trust makers is making in the trust agreement, and how these elements relate to form an orderly plan for the disposition of the trust maker’s property. A minor child (under age 18 in Arizona) does not have the capacity to be a trust maker or a trustee of a trust. Arizona Revised Statutes Section 14-10402.A.
2. The trust maker must indicate an intention to create the trust. This fact should be stated clearly in the trust agreement. Arizona Revised Statutes Section 14-10402.A.
3. The trust must have at least one definite beneficiary unless it is:
a. A charitable trust.
b. A trust for the care of an animal . . . .
c. A trust for a noncharitable purpose . . . .
Arizona Revised Statutes Section 14-10402.A. If your trust agreement does not name at least one beneficiary, the trust is not valid.
4. The Arizona trust must have at least one trustee. See Arizona Revised Statutes Section 14-10701, which set forth the requirements for a trustee to accept the position of trustee.
4. The trustee must have duties to perform. Arizona Revised Statutes Section 14-10402.A.
5. The same person cannot be the sole trustee and sole beneficiary. Arizona Revised Statutes Section 14-10402.A.
6. An Arizona trust must be created by one of the following methods:
a. By transferring property to another person as trustee during the trust maker’s lifetime (a living trust) or by will (a testamentary trust) or other disposition taking effect on the trust maker’s death.
b. By the owner of property declaring that the owner holds identifiable property as trustee.
c. By the exercise of a power of appointment in favor of a trustee. This method is rarely if ever used to create an NFA gun trust.
Arizona Revised Statutes Section 14-10401.A. Warning: To be valid, an Arizona trust must own property. An Arizona trust that does not own property is not a valid trust. If the only property to be owned by your trust is one or more Title II firearms, your trust will not be valid unless you properly transfer at least one firearm to the trust. If you do not know how to evidence and prove that a firearm has been transferred to the trust, you risk BATFE claiming you did not create a valid trust.
7. The Arizona trust must be created for lawful purposes that are not contrary to public policy and possible to achieve. Arizona Revised Statutes Section 14-10404.
8. The Arizona trust and its terms must be for the benefit of its beneficiaries. Arizona Revised Statutes Section 14-10404.
9. A purported Arizona trust is void, in whole or in part, to the extent its creation was induced by fraud, duress or undue influence. Arizona Revised Statutes Section 14-10406.
10. The Arizona trust must have a principal place of administration in Arizona that meets one of the following requirements:
a. A trustee’s principal place of business is located in or a trustee is a resident of Arizona.
b. All or part of the trust administration occurs in Arizona.
Arizona Revised Statutes Section 14-10108.A. Note: Arizona Revised Statutes Section 14-10108.B states: “A trustee is under a continuing duty to administer the trust at a place appropriate to its purposes, its administration and the interests of the beneficiaries.” This statute also states: “The trustee shall notify the qualified beneficiaries of a proposed transfer of a trust’s principal place of administration at least sixty days before initiating the transfer.”
Warning About Amending or Revoking an Arizona Trust: Arizona Revised Statutes Section 14-10107 states: “If a trust is created by written instrument, it may be amended or revoked only by written instrument executed by the settlor.” “Settlor” means a person, including a testator, who creates or contributes property to a trust. If more than one person creates or contributes property to a trust, each person is a settlor of the portion of the trust property attributable to that person’s contribution except to the extent another person has the power to revoke or withdraw that portion. Arizona Revised Statutes Section 14-10103.16. See also Arizona Revised Section 14-10602.
11. The Arizona trust must not violate the Arizona’s Rule Against Perpetuities contained in Arizona Revised Statutes Section 14-2901. For more on this rule, watch the great murder mystery “Body Heat” starring William Hurt, Kathleen Turner and Ted Danson and read “Estate Planning and Body Heat.”
How Do You Know if Your Arizona Gun Trust Satisfies All of the Requirements for a Valid Arizona Trust?
If you buy a software program that creates generic trusts or copy a trust agreement you get off the internet or from another person how will you know if you have created a valid Arizona trust? If your trust does not satisfy any one of the 11 requirements listed above, your trust fails and you do not have a valid legally existing trust. No valid trust means the trustees are not legally able to own or possess the NFA Title II firearms and everybody named as a trustee could be charged with felony violations of the NFA.
I submit that the inability of non-lawyers and lawyers who are not Arizona trust lawyers to know of the 11 requirements and to be able to recognize when one or more of the requirements is not satisfied is the primary reason you should hire an experienced NFA gun trust lawyer® to prepare your NFA gun trust.
Mistake #2: The Gun Trust Does Not Have Necessary Provisions Specifically Written for Trusts that are to Hold NFA Title II Firearms
Here’s simple test to determine if a trust agreement should be used to create a trust to hold NFA Title II firearms.
Gun Trust Litmus Test: Does the trust agreement contain the words “National Firearms Act” or “Bureau of Alcohol Tobacco Firearms & Explosives” or “BATFE” or “Form 5320.20” or “Title II firearms” or “Form 1” or “Prohibited Person” any where in the agreement? Each of these words or phrases should not only mentioned in an NFA gun trust, but the provisions that contain these terms are inserted by the NFA knowledgeable attorney in a properly worded NFA gun trust to accomplish very specific and important requirements that are unique to gun trusts. Your vanilla generic trust does not contain any of these terms because it is not intended to hold Title II firearms.
If your trust agreement does not pass the Gun Trust Litmus Test do you really think you should use the agreement for an NFA gun trust?
If you get past the first hurdle and create a valid Arizona trust do you have a vanilla revocable living trust or a trust that is written for the sole purpose of holding NFA Title II firearms? If your trust agreement is a generic trust agreement, the trustees and beneficiaries are at risk of violating the criminal provisions of the NFA.
Mistake #3: The Gun Trust Has a Trustee or Beneficiary Who is a Prohibited Person
One of the reasons an NFA gun trust needs to mention the term “prohibited person” is because it needs language that disqualifies any person from being a trustee or beneficiary of the trust if that person is a “prohibited person” under the NFA. Prohibited persons, as you might guess, cannot own or possess Title II firearms. Do you know the definition of “prohibited person” under the NFA? If you do not, then you risk having a prohibited person becoming a trustee or a beneficiary of your gun trust, which would be a criminal nightmare for the unsuspecting prohibited person who is a trustee or beneficiary.
The NFA gun trust agreement I provide to clients is created by the gun trust lawyer® David Goldman and modified by me to comply with Arizona trust law and gun law.
Mistake #4: The Title II Firearms are Not Transferred to the NFA Gun Trust
People create gun trusts to own NFA Title II firearms. The trust will not own a firearm unless it is legally transferred to the trust. Many people sign a trust agreement, but never actually transfer ownership of any or all of the Title II firearms to the trust. A Title II firearm is not owned by Owner 1 today and then magically transmutes to Owner 2 tomorrow. Title II firearms must be transferred from the current owner to the successor owner according to the legal requirements of the applicable state law. In Arizona, the transfer of ownership of a Title II firearms is accomplished by the current owner signing the appropriate written document that assigns ownership from current owner to successor owner.
If you fail to legally transfer ownership of any Title II firearm to your gun trust, then any trustee who uses or possesses that firearm risks being charge with a criminal violation of the NFA.
Mistake #5: The Gun Trust Agreement allows a Beneficiary Who is Not a Trustee to Use or Possess a Title II Firearm
Most generic living trusts allow beneficiaries to use, possess and receive distributions of trust assets. A properly drafted NFA gun trust prohibits a person who is a mere beneficiary from using or possessing a Title II firearm. Only the trustees of a Gun Trust have the legal right to use or possess Title II firearms owned by the trust.
Mistake #6: Using Personal Funds to Purchase a Title II Firearm for the NFA Gun Trust
When you form an NFA Gun Trust to acquire one or more Title II firearms, the money to purchase the firearms must come from the owner of the firearms, i.e., from the trust. The Trustee of the Gun Trust must open a bank account in the name of the Gun Trust then deposit into that account the money needed to purchase Title II firearms and administer the trust. When the trust buys an NFA Title II firearm, it writes a check on the Gun Trust’s checking account and pays for the firearm with the Trust’s funds.
Warning: When you have an NFA Gun Trust, do not pay for Title II firearms with your money. Always purchase Title II firearms with Gun Trust money.
Extra Credit Reading On Problems With Using Generic Trust Agreement for an NFA Gun Trust