State laws require legal trust accounting for trust accounts. In California, your beneficiaries should be kept reasonably informed regarding the trust and its administration if you have a trust account for an estate or trust.
At least once a year, as well as at termination of a trust and whenever the trustee changes, trustees are required to inform beneficiaries about the assets in trust and how they have been used.
HOW OFTEN DO TRUSTEES NEED TO ACCOUNT?
California Probate Code 16062 gives beneficiaries the right to demand an accounting at least annually from the trustees. Trustees must also provide an accounting within 60 days if a trust beneficiary demands an accounting in writing.
WHAT IS TRUST ACCOUNTING INCOME?
“Trust accounting income” formula is one of the methods used to determine how much income is available for distribution to beneficiaries by the trustee. A trust’s TAI is calculated by adding all sources of income together and subtracting all expenses. The TAI formula will also be used to prepare the tax returns of the trust in certain circumstances.
WHO IS RESPONSIBLE FOR TRUST ACCOUNTING?
California law requires a trustee to report annually to current trust beneficiaries, i.e., those currently entitled to receive income and principal distributions. Other than the settlor(s) of the trust, all trustees are responsible for account keeping.
As a trustee, trust accounting is extremely important. In case you need assistance completing your legal tasks within a given timeframe, trust accounting is an absolute necessity.
Keeping an attorney on board keeps the trustee in check while also protecting him from such liabilities by ensuring legal procedures are followed. An accounting must, for example, be accompanied by a legal notice, so beneficiaries are aware that they may dispute the accounting within 180 days of receipt. If the trustee petitions the court for approval of the accounting and notifies all beneficiaries, this time can be shortened to 30 days. In the absence of accounting, the trustee remains liable for future court actions.
In case of court approval, a trust accounting should meet the California Probate Code’s requirements too — an attorney should look over the accounting to ensure compliance with the state law.
It is important to note that accountings for trusts in California are governed by the California Probate Code, separate from tax or financial accountings prepared by a certified public accountant. A balanced trust accounting is one where the charges equal the credits.
TRUST ACCOUNTING FOR IRREVOCABLE TRUSTS.
A trustee is an “agent of fiduciary.” An agent of a fiduciary is someone entrusted with property or power for another’s benefit. Therefore, as a trustee, you are legally able to manage or control the assets held in trust, as long as you do so in a manner that is in the best interests of the beneficiaries.
Because the trust is created for the benefit of beneficiaries, the law sets forth certain duties owed by trustees to beneficiaries, such as the duty to avoid conflicts of interest, the duty to act impartially, and the duty to account for beneficiaries. The trustee must keep the beneficiaries of the trust reasonably informed of the trust and its administration.
Under the law, trustees must provide beneficiaries with reports about the assets, liabilities, receipts, and disbursements of a trust, as well as the specifics about the administration of the trust that affect the beneficiary’s interest, including the trust terms.
If a trust is revocable by the settlor (the person who established and funded the trust), the only person to whom the trustee is accountable is the settlor. However, if it is uncertain whether the settlor is competent, it is prudent to have the trustee voluntarily account to the eventual remainder beneficiaries unless the settlor objects. Legally, the ultimate beneficiaries do have a right to request accountings from the trustee if the creator (the settlor) of the trust is no longer competent.
As a general rule, as long as the trust does not waive the requirement, the trustee must deliver accounting to each beneficiary to whom income or principal is required or authorized to be distributed at any time during the current year. A remainder beneficiary to whom nothing is currently to be distributed does not necessarily have the right to a complete accounting; however, the trustee should make reasonable efforts to inform the remainder beneficiaries, as per the Probate Code.
WHAT SHOULD TRUST ACCOUNTING INCLUDE?
- Account statement showing all principal and income held by the trust during the previous fiscal year or from the last account.
- Detailed breakdown of assets and liabilities as of the end of the last complete fiscal year for the trust or the end of the period covered by the account.
- Compensation of the trustee after the last complete fiscal year of the trust or since the last account.
- Trustees must report the agents they hired, their relationship to the trustee, if any, and their compensation, for the most recent complete fiscal year or since the last account.
- A legal statement that the beneficiary of the account may apply to the court pursuant to Section 17200 to obtain a review of the account and the trustee’s actions.
- A statement that clarifies that claims against trustees for breach of duty cannot be made after the expiration date of accounting, i.e 180 days from the date of receipt of an accounting.
The typical trust accounting might be broken down into sections as follows:
- Assets you had on hand when the accounting period started
- Received income (interest, dividends, rent) during the accounting period
- Gains/losses on asset sales (if anything was sold during the accounting period)
- Payments made during the accounting period (e.g., bills paid, taxes paid, distributions to beneficiaries, trustee fees, etc.). Your check register should contain sufficient details to document any such cash payments.
- Assets on hand at the end of the period (i.e., what you have as of that date)
- Liabilities (such as a mortgage on real estate or other loans) should be documented clearly for accounting purposes.
HOW TO DEMAND FORMAL ACCOUNTING.
The trustee is required to provide the beneficiary with trust accountings when they are due, such as at the end of each year in which the trustee has operated. However, if a trustee fails or refuses to account, beneficiaries must take action.
A written accounting request must be submitted either by yourself or your lawyer. Upon receiving your written accounting request, the trustee has sixty days to provide it.
If the trustee fails to do so, there is a last resort of petitioning the probate court pursuant to Probate Code section 17200, asking the court to order the trustee to account.
WHAT IS A PETITION FOR ACCOUNTING OF TRUST?
The petition for accounting of trust is a request a beneficiary can submit to a court to ask the court to order the trustee to provide detailed information about the trust assets. The trustee has 60 days to provide an accounting when a trust beneficiary requests one in writing.
California Probate Code grants beneficiaries the right to petition the probate court for an accounting of trust if the trustee fails to produce an accounting within a reasonable time period. The petition simply asks the court to order the trustee to provide an accounting, as required by law.
CAN TRUST BENEFICIARIES SUE A TRUSTEE?
Yes, trust beneficiaries can sue a trustee. If a trustee is being negligent in their duties, a beneficiary can sue them. A trustee is legally obligated to act in the best interest of the beneficiaries. If they don’t, they may be held liable for any resulting damages.
Reasons why trust beneficiaries might sue a trustee include:
- Mismanagement or theft of trust assets.
- Failure to distribute trust assets or provide an accounting.
- Conflicts of interest, such as self-dealing.
- Not paying taxes on time or incurring unnecessary fees.
LET EXPERIENCED ATTORNEYS HELP YOU NAVIGATE TRUSTEE ACCOUNTING IN CALIFORNIA.
We recommend that trustees retain the services of an experienced trust lawyer as soon as they are appointed, especially if it is their first time acting as a trustee.
A trust administration lawyer would explain the requirements the trust instrument places upon the trustee and guide the trustee in its proper administration.
Klosek Law Firm has the experience, breadth, and depth to handle trust administration matters effectively. If you are a trustee who is looking for legal counsel to execute your duties — we can help. Contact us today for a consultation.