How a Total Return Unitrust Works
Traditional income trusts pay net accounting income to the current beneficiary. This can create tension. If the trustee invests for growth, income drops.
If the trustee invests for income, the trust's long-term value may suffer. A total return unitrust fixes this. It pays out a fixed percentage of the trust's fair market value each year.
The payout does not depend on how the return was earned. Whether the trust earned dividends, interest, or capital gains, the amount stays the same.
The percentage to be used in determining the unitrust amount shall be a reasonable current return from the trust, but not less than three per cent or more than five per cent, taking into account the intentions of the settlor of the trust as expressed in the governing instrument, the needs of the beneficiaries, general economic conditions, projected current earnings and appreciation for the trust, and projected inflation and its impact on the trust.
A.R.S. § 14-11014(E)This gives the trustee freedom to invest for total return. The beneficiary getting payouts receives a steady, reliable amount. The remainder beneficiaries gain from a balanced strategy that does not trade growth for current income.
Who Can Make the Conversion
A disinterested trustee can convert without court approval. This means a trustee who does not personally benefit from the trust. Proper notice must go to the settlor, all qualified beneficiaries, and any trust adviser.
If no one objects within thirty days, the conversion takes effect. Net accounting income under the old rules no longer controls payouts.
A trustee, other than an interested trustee, or if two or more persons are acting as trustee, a majority of the trustees who are not an interested trustee, in its sole discretion and without the approval of the court may: 1. Convert an income trust to a total return unitrust. 2. Reconvert a total return unitrust to an income trust.
A.R.S. § 14-11014(A)When only interested trustees serve, extra safeguards apply. The interested trustee must appoint a neutral person to set the percentage and valuation method. Property used by a beneficiary may be left out of the valuation.
If neither path works, the trustee can ask the probate court for an order. A surviving spouse with a marital-deduction trust can block or reverse the conversion.
Why Conversion Matters for Families
When trust assets no longer produce enough yield, a unitrust lets the trustee invest differently. The beneficiary still gets regular payouts. The percentage draws from net accounting income first, then other income classes, then principal if needed.
For families with trusts holding stocks, bonds, and real property, this option can cut conflict. Current beneficiaries who want more income and future beneficiaries who want growth can both benefit. The three-to-five percent range adjusts with the trust's total value over time.