Which Trust Expenses Are Paid from Principal in Arizona

The Principal Side of Trust Expenses

While section 14-7425 covers what comes from income, this statute addresses the other side of the ledger. Principal bears the costs that relate to preserving, distributing, or winding down the trust's capital, rather than maintaining ongoing income.

The remaining half of trustee compensation and shared proceeding costs comes from principal, completing the fifty-fifty split. Beyond that, principal also pays for one-time fees related to accepting the trusteeship, making distributions, and winding down the trust. Costs to prepare property for sale, such as appraisals or staging, also come from principal because they benefit the remainder interest.

Debt, Taxes, and Environmental Costs

Payments on trust debt principal come from principal, which is intuitive. So do expenses for proceedings that primarily concern principal, such as a lawsuit to construe the trust or protect trust property.

Estate, inheritance, and transfer taxes, including penalties, are charged to principal. These taxes apply when property changes hands at death or through other transfers, and they reduce the overall estate rather than current income.

The statute also addresses environmental costs. If trust property requires environmental remediation, the costs come from principal. This includes assessing contamination, cleaning it up, monitoring remedial activities, and defending claims based on environmental matters. These are capital-related expenses that protect the long-term value of trust property.

When trust property is encumbered by an obligation that requires income to be paid directly to a creditor, the trustee must transfer an equal amount from principal to income. This protects the income beneficiary from losing their share to debt service on a principal asset.