The Ninety-Ten Split for Natural Resources
Natural resources held in trust are unique assets. Unlike stocks or bonds, extracting minerals or pumping water reduces what is left for future beneficiaries. These assets produce income for a limited time.
Arizona accounts for this by directing the bulk of receipts to principal.
If an amount received as a royalty, shut-in-well payment, take-or-pay payment, bonus or delay rental is more than nominal, ninety per cent must be allocated to principal and the balance to income.
A.R.S. § 14-7420(A)(3)The same ninety-ten split applies to receipts from working interests and other interests not covered elsewhere. However, the trustee allocates nominal delay rentals and nominal annual rent on a lease to income. Only amounts above nominal levels follow the ninety-ten split.
Water Rights and Renewable vs. Non-Renewable Distinctions
Arizona's approach to water rights recognizes a practical reality. Renewable water sources, such as wells that replenish naturally, generate receipts that go entirely to income. Non-renewable water follows the same ninety-ten split as minerals.
The statute applies even if the trust creator was already extracting resources before the trust existed. For trusts that owned resource interests before this article took effect, the trustee has a choice. The trustee can apply the new rules or keep using the prior method.
Trusts that acquire resource interests after the effective date must follow the statutory allocation.
Production payments receive their own treatment. To the extent the agreement includes a factor for interest, that portion goes to income. The balance goes to principal.