The Allocation Hierarchy
When a trustee receives money or pays an expense, the question is always: does this come from income or principal? This statute sets the order of priority for answering that question. The trust document is king. If the trust says how to allocate something, the trustee follows those instructions, even if this article says otherwise.
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 discretionary authority over allocation, the fiduciary can exercise that discretion, even if the result differs from what this article would require. Only when the trust is silent does the fiduciary fall back on the default rules in this article. And if neither the trust nor this article addresses a particular receipt or expense, it goes to principal.
The Duty of Impartiality
Regardless of which allocation method applies, the fiduciary has a duty to be fair and reasonable to all beneficiaries. In practice, this means balancing the interests of income beneficiaries (who want current distributions) against remainder beneficiaries (who 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 document clearly states that the fiduciary may favor one beneficiary over another, that instruction controls. Some trusts are designed to prioritize a surviving spouse's income needs over preserving principal for children, for example. When the trust is clear about that intent, the fiduciary follows the trust. When it is not, fairness to everyone is the standard.
