August 10, 2011

Trust Accounting

Trust accounting is one of the primary duties of a trustee. The following are some questions that address that topic in detail. 

1. What is trust accounting? 

Trust accounting is the administrative function where the trustee memorializes the decisions, choices and acts made on behalf of the trust. Prob C §§16060-16064. For instance, if a trust owned rental property, the trustee would notate the rental income, the property taxes that were paid, the on-going maintenance costs, etc. in a ledger or some other record-keeping device. 

2. Is the trustee solely responsible for this duty? 

Yes, the trustee is ultimately responsible for maintaining an accurate trust accounting. Prob C §16062(a). However, the trustee is permitted to delegate this duty, subject to the trustee’s general supervision, to an enrolled agent, certified public accountant or an attorney. Prob C §16012(b). This is often the common result because the trustee is typically a family member who lacks the skill, time or attention to handle trust accounting. 

3. Whom must the trustee account to? 

The trustee must account "to each beneficiary to whom income or principal is required or authorized in the trustee's discretion to be currently distributed." Prob C §16062(a). However, if the trustee and the beneficiary are the same person, there is no duty to account. Prob C §16064(c).

For purposes of illustration assume the following facts: in August 2011, Hal and Wendy establish a revocable trust, naming themselves as co-trustees and beneficiaries, and their children as remainder beneficiaries, Samuel and Donna. Hal and Wendy choose their friend Fenton as the sole successor trustee. At which point, since Hal and Wendy are both trustee and beneficiary, there would be no duty to account to Samuel and Donna. Prob C §16064(c). Later on, Hal and Wendy tragically pass away in a hot air balloon accident that goes horribly awry in Yellowstone National Park. Fenton then steps into the trustee role and assumes all trust duties. Since Donna and Wendy are the current beneficiaries but are not trustees, Fenton would be required to provide a trust accounting to Samuel and Donna. Prob C §16062(a). 

4. How often do trustees have to account? 

Trust created on or after June 30, 1987, including via will, require that the trustee provide an accounting annually. Prob C §16062. Furthermore, trustees are also required to provide an accounting when there is a change of trustee and when the trust terminates. Prob C §16062. Finally, a trustee upon reasonable request by a beneficiary is required to provide the requested information to the beneficiary. Prob C §16061. 

5. What happens if a trustee fails to provide an accounting? 

In such case, the beneficiary may petition the appropriate probate court to compel the trustee to render to the court an accounting, provided that the trustee has not rendered an accounting within 60 days after a beneficiary's written request or in the 6 months preceding that request.

From Q3, assume the date is August 2012 and Fenton has not provided an annual accounting to Samuel and Donna. Both are concerned with Fenton’s handling of the trust as there are rumors that he has a propensity to focus on fruitless activities and has not rendered an accounting that year. On August 15, 2012, Samuel and Donna send Fenton a certified letter informing Fenton of their desire for a trust accounting in accordance with Prob C §16061. Fenton willfully ignores the request because he is pre-occupied with his fantasy baseball team and the upcoming fantasy football season. Come October 16, 2012, Samuel and Donna are entitled to petition the local probate court to compel Fenton to provide the court with a trust accounting. Moreover because Fenton, as trustee, has a duty to provide the Samuel and Donna with an accounting, he could arguably be removed as trustee for breach of trust. Prob C § 16060. 

6. What are the required contents of a trust accounting? 

Prob C §16063 requires that a trust accounting contain:

(1) A statement of receipts and disbursements of principal and income that have occurred during the last complete fiscal year of the trust or since the last account.

(2) A statement of the assets and liabilities of the trust as of the end of the last complete fiscal year of the trust or as of the end of the period covered by the account.

(3) The trustee’s compensation for the last complete fiscal year of the trust or since the last account.

(4) The agents hired by the trustee, their relationship to the trustee, if any, and their compensation, for the last complete fiscal year of the trust or since the last account.

(5) A statement that the recipient of the account may petition the court pursuant to Section 17200 to obtain a court review of the account and of the acts of the trustee.

(6) A statement that claims against the trustee for breach of trust may not be made after the expiration of three years from the date the beneficiary receives an account or report disclosing facts giving rise to the claim.

7. Does a trust accounting require court approval? 

No, not every trust accounting requires court approval. Yet certain trusts do require approval, such as specific special needs trusts or a substituted judgment trust. Prob C §2580.