Six Categories of Principal Receipts
Trust accounting draws a fundamental line between income and principal. Income typically goes to current beneficiaries during the trust's operation, while principal is preserved for remainder beneficiaries. This statute defines the receipts that belong on the principal side of that line.
A trustee shall allocate to principal: 1. To the extent not allocated to income under this article, assets received from a transferor during the transferor's lifetime, a decedent's estate, a trust with a terminating income interest or a payer under a contract naming the trust or its trustee as beneficiary.
A.R.S. § 14-7413(1)The first category covers the trust's original funding and similar transfers. When someone contributes assets to a trust during their lifetime, or when a trust receives assets from an estate or from a contract like a life insurance policy, those receipts go to principal. This makes sense because they represent the capital base the trust was designed to hold and invest.
Sales, Reimbursements, and Special Situations
Money from selling, exchanging, or liquidating a principal asset also stays in principal. This includes realized profits from those transactions. If the trust recovers money from a third party to reimburse trust expenses, those amounts go to principal as well, unless the recovery specifically compensates for lost income.
Eminent domain proceeds follow a similar logic. The main award for property taken by the government goes to principal, but any separate award specifically for lost income during a period when an income beneficiary had a mandatory interest gets allocated to income instead. The statute also addresses an unusual situation: if the trust earns net income during a period when there is no beneficiary entitled to receive distributions, that income gets added to principal. This prevents income from sitting in limbo and keeps the trust's accounting clean. For trustees managing complex assets, these classifications directly affect what each beneficiary receives. Working with experienced estate planning counsel helps ensure every receipt lands in the right category.
