What Makes an Express Unitrust Different
While A.R.S. 14-11014 covers converting an existing income trust into a unitrust, this statute addresses trusts that were designed as unitrusts from the start. The governing instrument itself requires annual distributions equal to a fixed percentage of the trust's net fair market value. There is no conversion step because the trust was always meant to work this way.
Distribution of a fixed percentage unitrust amount is considered a distribution of all of the income of the total return unitrust and is not a fundamental departure from applicable state law, regardless of whether the total return unitrust is created and governed pursuant to section 14-11014 or by the terms of the governing instrument.
A.R.S. § 14-11015(B)This matters for tax purposes and for trustees managing distributions. The statute confirms that paying out a fixed percentage counts as distributing all trust income, which keeps the trust in compliance with rules that require income distributions to beneficiaries.
The Percentage Range and What Happens Outside It
The same three-to-five percent range from the conversion statute applies here. A payout within that range "reasonably apportions the total return" of the trust. If the trust document calls for a payout above five percent, the statute treats the excess as a distribution of principal rather than income.
An express total return unitrust that provides for a fixed percentage payout in excess of five per cent per year is considered to have paid out all of the income of the total return unitrust and to have paid out principal of the trust to the extent that the fixed percentage payout exceeds five per cent per year.
A.R.S. § 14-11015(F)The trust document can also grant the trustee discretion to treat capital gains as part of the unitrust distribution, or it can specify the ordering of income classes. Without specific direction, distributions follow a default priority: net accounting income first, then ordinary income, then short-term capital gains, then long-term capital gains, and finally principal.
