Income vs. Principal: The Core Distinction
When a trust holds assets, some of those assets generate current returns, like dividends, interest, or rent. Under this statute, those returns are classified as "income." The underlying assets themselves, held for future distribution when the trust terminates, are classified as "principal." Getting this distinction right matters because income beneficiaries and remainder beneficiaries have competing interests.
"Income" means money or property that a fiduciary receives as current return from a principal asset and includes a portion of receipts from a sale, exchange or liquidation of a principal asset, to the extent provided in sections 14-7410 through 14-7424.
A.R.S. § 14-7401(4)An income beneficiary is someone entitled to receive net income from the trust during its term. A remainder beneficiary is the person who receives the principal when the income interest ends. In many family trusts, a surviving spouse receives income for life, and the children receive the principal after the spouse passes.
Fiduciary, Trustee, and the Accounting Period
The statute defines "fiduciary" broadly. It includes personal representatives, trustees, executors, administrators, and anyone performing substantially the same role. This means the principal and income rules can apply both during trust administration and during estate settlement.
"Fiduciary" means a personal representative or a trustee and includes an executor, an administrator, a successor personal representative, a special administrator and a person performing substantially the same function.
A.R.S. § 14-7401(3)The accounting period defaults to a calendar year but can be a different twelve-month period chosen by the fiduciary. It also includes partial periods at the beginning or end of an income interest. These definitions work together to create a consistent framework for trustees to follow when deciding what goes to income beneficiaries now and what stays in principal for remainder beneficiaries later.
