How a Total Return Unitrust Works
Traditional income trusts distribute net income to the current beneficiary, which 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 solves this by distributing a fixed percentage of the trust's fair market value each year, regardless of how the income was actually earned.
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 flexibility to invest the portfolio for total return, rather than chasing income-producing assets. The beneficiary receiving distributions gets a predictable, sustainable payout, and the remainder beneficiaries benefit from a more balanced investment strategy.
Who Can Make the Conversion
A disinterested trustee (one who does not personally benefit from the trust) can convert without court approval, as long as proper notice is given to the settlor, all qualified beneficiaries, and any trust adviser or protector. If no one objects within thirty days, the conversion takes effect.
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, the statute adds safeguards. The interested trustee must appoint a disinterested person to determine the percentage, valuation method, and any asset exclusions. If neither path works, the trustee can petition the probate court for an order. A surviving spouse with a marital-deduction trust retains the right to block or reverse the conversion entirely.
