USA – ARKANSAS Law and Practice Contributed by: Aaron Bundy and Danya Bundy, Bundy
tion trust state, at Sections 28-72-701 to 28-72-714. An irrevocable self-settled spendthrift trust with at least one qualified Arkansas trustee can now shield contributed assets while the settlor keeps a distri - bution veto, a testamentary power of appointment, discretionary access, and trustee replacement rights, and challenges require clear and convincing proof of a fraudulent transfer within short statutory windows. The rule against perpetuities has been modernised as well, inside a constitutional boundary. Article 2, Sec - tion 19 of the Arkansas Constitution declares perpe - tuities contrary to the genius of a republic. Arkansas adopted the Uniform Statutory Rule Against Perpetui - ties in 2007 and extended its wait-and-see period to 365 years in 2023, so multi-century trusts are now possible by statute. As no appellate court has yet measured a 365-year term against the constitutional prohibition, families building truly perpetual vehicles often still select an out-of-state situs. 3.2 Recognition of Trusts Trusts are fully recognised and routinely used, and they are comprehensively governed by the Arkansas Trust Code. Courts enforce them according to their terms, banks and title companies handle trust owner - ship without friction, and farmland, timber, and closely held business interests are titled in trusts every day. The Trust Code’s default rules yield to the instrument in most respects, which rewards careful drafting. Trusts created in other jurisdictions are respected under the Trust Code’s governing law provisions and ordinary conflict-of-laws principles, and Arkan - sas courts administer disputes involving out-of-state trusts holding Arkansas assets. The practical cau - tion is not recognition but administration. Trustees of foreign-situs trusts holding Arkansas land should understand the marital property rights and foreign ownership rules before taking title. 3.3 Taxation of Trusts, Foundations and Similar Entities Located in Other Jurisdictions An Arkansas resident may serve as fiduciary of a trust established elsewhere and may be a beneficiary of one, and each role carries mappable state tax con - sequences. The statutory driver is the settlor, not the trustee. Under Section 26-51-201 of the Arkansas
Code Annotated, a trust created by a nonresident settlor owes Arkansas income tax only on enumerated Arkansas-source income, principally Arkansas land, tangible property, and in-state businesses, regard - less of where the trustee sits, while trusts created by Arkansas settlors remain in the Arkansas net. Income distributed to an Arkansas resident beneficiary is tax - able to the beneficiary, with credits generally avail - able for taxes paid to other states, and under the US Supreme Court’s decision in North Carolina Depart- ment of Revenue v Kimberley Rice Kaestner 1992 Family Trust , a beneficiary’s residence standing alone will not support taxing undistributed trust income. The planning runs both directions, although the stakes are smaller here than in high-tax states given the 3.7% rate and the capital gain exclusion. Bracket compres - sion is not small, since a non-grantor trust reaches the top federal rate at USD16,000 of taxable income, so distribution planning usually moves more money than situs planning. Beneficiaries and fiduciaries of non-US trusts carry federal reporting obligations, with penalties severe enough to justify specialist attention. 3.4 Tax Consequences of Fiduciary and Beneficiary Roles The consequences are federal. A grantor serving as trustee of a revocable trust changes nothing, since the trust is a grantor trust and estate-included in any event. A grantor serving as trustee of an irrevocable trust risks estate inclusion under Sections 2036 and 2038 of the Internal Revenue Code if retained powers touch beneficial enjoyment, so discretionary distribu - tion decisions belong with an independent trustee. A beneficiary serving as trustee holds a general pow - er of appointment, with estate inclusion and creditor exposure, unless authority to distribute to that benefi - ciary is confined to an ascertainable standard relating to health, education, maintenance, and support. Our practice is to draft beneficiary-trustee powers to the ascertainable standard and lodge tax-sensitive discre - tion with independent co-trustees. Grantor trust sta - tus is used deliberately, since the grantor’s payment of the trust’s income tax is an additional transfer-tax-free benefit to the trust. Any tax reimbursement provision should be discretionary with an independent fiduciary rather than mandatory, and it should be in the instru-
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