The Ten-Percent Tests
Trust accounting can get detailed. Arizona recognizes that not every dollar needs to be precisely divided between principal and income. When the allocation would barely move the needle, the trustee can simplify things.
If a trustee determines that an allocation between principal and income required by section 14-7418, 14-7419, 14-7420, 14-7421 or 14-7424 is insubstantial, the trustee may allocate the entire amount to principal unless one of the circumstances described in section 14-7403, subsection C applies to the allocation.
A.R.S. § 14-7417An allocation is presumed insubstantial if either of two conditions is met. First, if the allocation would change net income for the accounting period by less than ten percent. Second, if the asset producing the receipt is worth less than ten percent of the total trust assets at the start of the period.
Practical Limits on This Shortcut
This power is not unlimited. The trustee cannot use it when conflicts of interest are present under the circumstances described in section 14-7403(C). A co-trustee can exercise this power in specific situations, and the power can be released for the reasons outlined in the statute.
This rule applies only to certain types of receipts: deferred compensation and annuity payments, liquidating assets, minerals and natural resources, and timber. It does not apply to every allocation a trustee makes. For routine income like interest and dividends, the standard rules still apply without exception.
The practical effect is significant. For a large, diversified trust, a small royalty check or a minor annuity payment can go straight to principal without the administrative cost of splitting a few dollars between two accounts.
