Sorting Income From Principal in Estate Settlement
When an estate or trust income interest comes to a close, the money does not simply pass in one lump. The fiduciary has to determine what portion is net income and what is principal. Different beneficiaries may be entitled to each. Property given to a named beneficiary gets its own accounting. The net income from that property goes directly to that beneficiary.
A fiduciary of an estate or of a terminating income interest shall determine the amount of net income and net principal receipts received from property specifically given to a beneficiary pursuant to the provisions of sections 14-7407 through 14-7430 that apply to trustees and paragraph 5 of this section. The fiduciary shall distribute the net income and net principal receipts to the beneficiary who is to receive the specific property.
A.R.S. § 14-7405(1)For everything that is not specifically gifted, the fiduciary determines remaining net income using a different set of rules. Administration expenses like attorney fees, court costs, and fiduciary fees can be paid from either income or principal. The fiduciary decides. Debts, funeral expenses, and death taxes come from principal.
Understanding gross income versus taxable income matters here as well. The fiduciary must track what shows up on income tax returns to make sure the right amounts are allocated. Items reported as taxable income on the estate's returns may still be classified as principal for trust accounting purposes.
Pecuniary Gifts and the Remaining Balance
A beneficiary entitled to a specific dollar amount receives interest or another amount provided by the will, trust terms, or applicable law. That payment comes first from net income. If net income falls short, it comes from principal. After those fixed amounts are satisfied, the remaining net income flows to residuary and remainder beneficiaries.
This layered approach prevents one group of beneficiaries from absorbing funds that belong to another. It also gives fiduciaries a clear order of priority when assets need to be allocated across competing claims during estate settlement.