Marital Deduction Trusts and the Income Requirement
Both revocable trusts and irrevocable trusts can qualify for the federal estate tax marital deduction. One requirement is that the surviving spouse must receive all income from the trust. The spouse must also have the right to require that the trustee make assets productive.
A trust may hold assets that do not generate enough income. For example, it may hold raw land or growth stocks paying no dividends. In that case, the surviving spouse has a remedy.
If a marital deduction is allowed for all or part of a trust whose assets consist substantially of property that does not provide the spouse with sufficient income from or use of the trust assets, and if the amounts that the trustee transfers from principal to income under section 14-7403 and distributes to the spouse from principal pursuant to the terms of the trust are insufficient to provide the spouse with the beneficial enjoyment required to obtain the marital deduction, the spouse may require the trustee to make property productive of income, convert property within a reasonable time or exercise the power conferred by section 14-7403, subsection A.
A.R.S. § 14-7422(A)The trustee has flexibility in how to respond. Selling the asset and reinvesting in income-producing property is one option. Adjusting the allocation between principal and income under section 14-7403 is another.
The statute lets the trustee decide which approach works best. The trustee may also combine approaches.
Sales Proceeds Outside the Marital Deduction Context
For trusts that do not involve a marital deduction, the rules are simpler. When someone sells an asset, the proceeds go to principal. This applies no matter how much income the asset was producing.
In cases not governed by subsection A of this section, proceeds from the sale or other disposition of an asset are principal without regard to the amount of income the asset produces during any accounting period.
A.R.S. § 14-7422(B)This distinction keeps trust accounting predictable. Income beneficiaries know that a sale of trust property will not suddenly redirect proceeds their way.
As a result, remainder beneficiaries know those proceeds stay in principal where they belong.