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Trustees in Arizona have certain fiduciary duties to the beneficiaries to preserve and protect the trust corpus for the benefit of the beneficiaries. In addition to that, under the Uniform Principal and Income Act, the Trustee has a duty to allocate between the principal assets of the trust and the income of the trust and document such allocation by keeping good records.
There are several reasons for this. In many trusts, you will have income beneficiaries, such as the surviving spouse of the settlor (person(s) who established the trust), with the remaining principal being distributed to the couples children upon the surviving spouse's death or principal beneficiaries.
In order to maintain and account to the surviving beneficiaries and the income beneficiary, Arizona and other states have enacted the Uniform Principal and Income Act. The Act requires the trustee to undertake certain fiduciary duties to account for the differences between the principal assets of the trust, or trust corpus, and the income those assets create.
These fiduciary duties can be found in ARS 14-7402. For those looking for a quick reference, here are the basics:
- A trustee must administer the trust in accordance with the terms of trust documents. This is to make sure the intent of the settlor is carried out by the trustee. If the terms of the trust say that income derived from a trust asset is to be allocated as principal and not to the income beneficiaries, then the trustee must do so.
- The terms of the trust may give the trustee to make discretionary decisions, such as when to distribute income, or how to invest the corpus of the trust. If the trust give the trustee the power to decide what is principal and what is income, the trustee typically must do so with the purpose of effectuating the settlor's intent or to maximize fairness between the different types of beneficiaries.
- If the trust does not prescribe or expressly grant the trustee the discretionary powers to act, the trustee must act in accordance with the ARS to account for the income distribution and the principal. If the terms of the trust do not expressly grant the trustee the power to act in a given situation, the trustee must act in accordance with the Arizona Revised Statutes. In certain situations, it may be beneficial to petition the Court for guidance.
Why is it Important to Distinguish Between the Trust Income Beneficiaries the Remaindermen?
The terms of the trust will determine what is to be considered trust corpus and what is to be designated as trust income. Trust income benefits the income beneficiaries and once the trust is distributed, the trust corpus is distributed between the remainder beneficiaries.
When this happens it is vitally important for the Trustee to account for the differences between trust income beneficiaries and the trust remainder beneficiaries. This is because how the Trustee applies the trust income and assets affect what each type of beneficiary gets from the Trust.
If part of the Trust assets are sold, it is important for the Trustee to understand whether the funds from the sold Trust assets are supposed to be given to the income beneficiary or applied to the Trust corpus for the benefit of the remainder beneficiaries.
For example, a 100 acre plot of land on Sun Valley Parkway just outside of Surprise is a valuable piece of real estate. It will undoubtedly become more valuable over the next several years as Surprise continues to grow and expand. That piece of land would be considered a part of the trust corpus. Until it is either sold or developed, it would likely derive no income to the Trust, so the income beneficiary would receive nothing. However, once it is sold, the terms of the trust would determine whether that is trust income or whether the proceeds should be held for the benefit of the remaindermen.
Failing to Properly Allocate Trust Assets Is a Breach of Fiduciary Duty
If the Trustee fails to properly allocate the monies from the sale according to the Trust terms, then the Trustee will be in breach of their fiduciary duties and be subject to claims from the beneficiaries. Ensuring that proper accounting measures are in place protects the Trustee from breach of fiduciary duty claims. The Uniform Principal and Income Act is in place to ensure that the Trustee takes these measures.
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