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A.R.S. § 14-11015

Express Unitrusts Designed From the Start

Verified April 4, 202657th Legislature, 1st Regular Session

Some trusts are drafted as unitrusts from the beginning, rather than being converted later. A fixed percentage payout of three to five percent counts as a distribution of all trust income. This structure is built into the trust document itself and does not require a conversion step.

Title 14, ARIZONA TRUST CODE

azleg.gov

What Makes an Express Unitrust Different

A.R.S. 14-11014 covers converting an existing income trust into a unitrust. This statute is different. It addresses trusts built as unitrusts from the start.

The trust document itself requires yearly payouts equal to a fixed percentage of the trust's net fair market value. There is no conversion step. The income beneficiary gets a steady payout tied to the trust's total value.

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 payouts. The statute confirms that a fixed percentage payout counts as paying all trust income. As a result, the trust stays in line with rules that require income to go 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 in that range "reasonably apportions the total return" of the trust.

If the trust document sets a payout above five percent, the law treats the extra amount as principal. In other words, only the first five percent counts as 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 let the trustee treat capital gains as part of the payout. It can set the order in which income classes are used.

Without specific direction, payouts follow a default order. Net accounting income comes first, then ordinary income, then short-term capital gains, then long-term capital gains, and finally principal.

Why This Structure Matters

An express unitrust skips the steps needed for a conversion. The settlor builds the payout method right into the trust document.

This clarity helps every income beneficiary who will get payouts during the trust's life. It also cuts the risk of disputes because the payout method is locked in from day one.

14-11015. Express total return unitrusts; definition A. A unitrust amount may be determined by reference to the net fair market value of the trust's assets in one year or more than one year. B. 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. C. An express total return unitrust may provide a mechanism for changing the unitrust percentage similar to the mechanism provided under section 14-11014. D. If an express total return unitrust does not specifically grant a power to change the unitrust percentage or change to an income trust, the trustee shall have no such power. E. A distribution of the fixed percentage of not less than three per cent nor more than five per cent reasonably apportions the total return of a total return unitrust. F. 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 and principal to the extent the payout exceeds five per cent. G-I. Provisions regarding capital gains treatment, distribution ordering, and asset exclusions. J. Definition: express total return unitrust means a trust requiring annual distribution of a unitrust amount equal to a fixed percentage of not less than three nor more than five per cent of the net fair market value of the trust's assets, valued at least annually.

This page provides general legal information about Arizona statutes and is not legal advice. For guidance on how this law applies to your situation, speak with a qualified attorney.

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