Final Accounting for Mandatory Income Beneficiaries
When a mandatory income interest ends, typically because the beneficiary has passed away, the trustee does not simply stop payments. Any income that was received but not yet distributed must still be accounted for. The beneficiary who survived the end date, or the estate of a beneficiary whose death triggered the termination, is entitled to their share.
When a mandatory income interest ends, the trustee shall pay to a mandatory income beneficiary who survives that date, or the estate of a deceased mandatory income beneficiary whose death causes the interest to end, the beneficiary's share of the undistributed income that is not disposed of under the terms of the trust unless the beneficiary has an unqualified power to revoke more than five per cent of the trust immediately before the income interest ends.
A.R.S. § 14-7409(A)The exception for beneficiaries who held a broad revocation power makes sense. If the beneficiary could have pulled out more than five percent of the trust at any time, they had the functional equivalent of ownership. In that case, the undistributed income from the revocable portion folds back into principal. It is not paid out separately.
Annuities and the Definition of Undistributed Income
For trusts that pay a fixed annuity or a fixed percentage of asset value, the rules are slightly different. When that obligation ends, the trustee prorates the final payment as needed. This satisfies tax requirements or other purposes in the trust document.
The statute also clarifies what "undistributed income" means. It includes net income received before the income interest ended. It does not include items that are due or accrued. It also does not include income that has already been added to principal under the trust terms. This definition prevents disputes over whether certain items should be treated as income owed to the departing beneficiary or principal belonging to the trust going forward.