Marital Deduction Trusts and the Income Requirement
Certain trusts are designed to qualify for the federal estate tax marital deduction. One requirement for that deduction is that the surviving spouse must receive all of the income from the trust, or at least have the right to require that trust assets be made productive. If the trust holds assets that do not generate enough income, such as raw land, collectibles, or growth stocks paying no dividends, the surviving spouse is not left without 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 gives the trustee the authority to decide which approach, or combination of approaches, works best for the trust.
Sales Proceeds Outside the Marital Deduction Context
For trusts that do not involve a marital deduction, the rules are simpler. When an asset is sold, the proceeds go to principal regardless of how much income the asset was or was not producing. This prevents trustees from reclassifying sale proceeds as income just because the original asset underperformed.
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. Beneficiaries who receive income know that a sale of trust property will not suddenly redirect proceeds their way, and remainder beneficiaries know those proceeds stay in principal where they belong.
