The Ten-Percent Tests
The trust administration process can get detailed. As part of fiduciary duties, the trustee must follow the terms of the trust when dividing receipts. However, Arizona recognizes that not every dollar needs precise division 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. These include 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.
The practical effect is significant. For a large, diversified trust holding real estate or trust property, a small royalty check or a minor annuity payment can go straight to principal. This avoids the administrative cost of splitting a few dollars between two accounts.
For families, this means your trustee is acting in the best interest of the trust by focusing time and effort where it matters most. Trust administration in arizona does not require busywork over tiny amounts. The trustee can devote energy to decisions that truly affect beneficiaries.
This shortcut does not expose beneficiaries to undue influence or unfair treatment. The ten-percent tests create a clear, objective standard. If an allocation falls outside those limits, the trustee must follow the normal rules.