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A.R.S. § 14-7402

Fiduciary Duties: Trust Income and Principal

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

The law sets a clear order for how a fiduciary splits receipts and expenses between trust income and principal. The trust document comes first. If the trust gives discretion, that discretion controls. If the trust is silent, the default rules apply. The fiduciary must act fairly toward all beneficiaries.

Title 14, TRUST ADMINISTRATION

azleg.gov

The Allocation Hierarchy

When a trustee receives money or pays an expense, the question is: does this come from income or principal? This statute sets the order of priority under the uniform principal and income act.

The trust document comes first. If the trust says how to split something, the trustee follows those instructions.

Shall administer a trust or estate in accordance with the terms of the trust or the will, even if there is a different provision in this article.

A.R.S. § 14-7402(A)(1)

If the trust gives the fiduciary discretion over how to split principal and income, that discretion controls. The result may differ from what this article would require or permit.

Only when the trust is silent does the fiduciary fall back on the default rules. If neither the trust nor this article addresses a receipt or expense, it goes to principal.

The Duty of Impartiality

No matter which method applies, the fiduciary must be fair and reasonable. This means balancing the interests of income beneficiaries against remainder beneficiaries.

Income beneficiaries want current distributions. Remainder beneficiaries want the principal preserved and growing.

A fiduciary shall administer a trust or estate impartially, based on what is fair and reasonable to all of the beneficiaries, except to the extent that the terms of the trust or the will clearly manifest an intention that the fiduciary shall or may favor one or more of the beneficiaries.

A.R.S. § 14-7402(B)

There is one exception. If the trust clearly states that the fiduciary may favor one beneficiary over another, that instruction controls.

For example, some trusts prioritize a surviving spouse's income needs over preserving principal for children. When the trust is clear about that intent, the fiduciary follows it.

Families should understand that these rules protect every beneficiary. A trustee who ignores the split between principal and income risks personal liability.

A. In allocating receipts and disbursements to or between principal and income, and with respect to any matter within the scope of sections 14-7405 through 14-7409, a fiduciary: 1. Shall administer a trust or estate in accordance with the terms of the trust or the will, even if there is a different provision in this article. 2. May administer a trust or estate by the exercise of a discretionary power of administration given to the fiduciary by the terms of the trust or the will, even if the exercise of the power produces a result different from a result required or permitted by this article. 3. Shall administer a trust or estate in accordance with this article if the terms of the trust or the will do not contain a different provision or do not give the fiduciary a discretionary power of administration. 4. Shall add a receipt or charge a disbursement to principal to the extent that the terms of the trust and this article do not provide a rule for allocating the receipt or disbursement to or between principal and income. B. In exercising the power to adjust under section 14-7403, subsection A or a discretionary power of administration regarding a matter within the scope of this article, whether granted by the terms of a trust, a will or this article, a fiduciary shall administer a trust or estate impartially, based on what is fair and reasonable to all of the beneficiaries, except to the extent that the terms of the trust or the will clearly manifest an intention that the fiduciary shall or may favor one or more of the beneficiaries. A determination in accordance with this article is presumed to be fair and reasonable to all of the beneficiaries.

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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