One reason why people opt for trusts over wills when estate planning is because trusts, unlike wills, are not subject to probate — a court-supervised process that can be time-consuming, costly and public. This, however, does not mean that a trustee’s activities won’t be subject to supervision.
Some of the only tools beneficiaries have for monitoring the trustee’s activities are trust accountings, which disclose essential information about the finances of the trust and can reveal if the trustee is engaged in misconduct. Keep reading to learn more about trust fund accounting and the common accounting mistakes trustees make.
For successor trustees managing a trust effectively involves thoroughly accounting for its assets and liabilities — a process that goes by the name of trust accounting. While trust accounting requirements vary from state to state, reviewing trust accounting examples online can be a good place for trustees to start, regardless of where they’re located, to get an idea of what trust accountings look like and entail.
While trust accountings won’t necessarily be reviewed by the court, they will be reviewed by beneficiaries of the trust, as the accountings provide them with financial information about the trust, which they need in order to enforce their rights. Without having trust accountings to review, beneficiaries will essentially be blind to the activities of the trust and trustee.
Being that trusts are created for the benefit of beneficiaries, their lacking the ability to enforce their beneficiary rights defeats the purpose of trusts. This is why it’s important for trustees to take their trust accounting duties seriously.
While trust accounting can be as simple as creating an inventory of trust assets and tracking which of those assets are being distributed to beneficiaries, it is typically much more complicated than that. Trustees may wish to familiarize themselves with the accounting of trusts by looking over trust accounting sample reports.
The time it takes for a trustee to account will depend on a number of factors, including the size and complexity of the trust, and how thorough their logbooks are. However, the main factor determining how long a trust accounting will take to prepare is whether or not trustees have a skilled probate attorney in their corner to whom they can delegate this task.
Working with trusts day in and day out, probate attorneys will have the experience to prepare code-compliant accountings quickly and accurately without the trustee having to involve themselves in the process.
Although trust accounting is easier if you maintain meticulous logs of your work, keep records of transactions you make on behalf of the trust, understand your state’s trust accounting requirements, and can do basic math, it still has managed to land many trustees in trouble over the years. This is because they either failed to provide accounting to beneficiaries, or provided them with incomplete or inaccurate accountings.
While minor errors, such as computational errors, often can be easily fixed, there are other more severe errors, such as the omission or mis-valuing of trust assets, or other disclosures in an accounting that reveal mismanagement of trust assets, which can cause beneficiaries to believe that the trustee has committed a breach of trust (e.g., by misusing, mismanaging or stealing trust assets). Under these circumstances, the beneficiaries may decide to sue the trustee to try to have them suspended or removed and surcharged. If the court finds the trustee to be at fault, they could be held liable for paying damages, their own attorney’s fees and costs, as well as the beneficiaries’ attorney’s fees and costs from their own pockets.
Needless to say, trustees can end up paying handsomely for the mistakes they make while trust accounting. This is why it’s recommended that they work with a trust attorney during the accounting process. A trust attorney not only can assist with preparing accountings but also with defending accountings should the need arise.
There is little ambiguity in the law when it comes to the accounting of trusts. As a result, it is ideal for the trustee to devote time to understanding California Probate Code section 16063, which lays out the specific details that should be included in every trust accounting, and consult with an attorney if there’s any aspect of trust accounting that they don’t understand.
Section 16063 states:
An account furnished pursuant to Section 16062 shall contain the following information:
(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.
Using a trust accounting spreadsheet template may be the best way for trustees to begin the trust accounting process and understand the disciplined decisions that go into every step.
The law requires trustees to provide formal accountings to trust beneficiaries at least once a year while trust administration is ongoing, when there is a change of trustees, and upon termination of the trust. Trustees may also have to comply with requests for accountings made by beneficiaries or the court, even if they have already submitted their required annual accounting for that year.
While the court does not supervise trustees as it does executors and administrators, it still holds trustees to the same ethical standards. As a result, if a beneficiary brings a claim against the trustee for breaching their trustee duties, the court will review their accountings to determine whether the claim against them is valid as part of an evidentiary hearing.
Beneficiaries also will usually review a trustee’s accountings to keep tabs on the trustee’s actions, the trust’s finances and the progression of trust administration. In fact, many beneficiaries will hire a probate attorney to review the trustee’s accountings on their behalf, since the attorney can generally be more effective when looking for red flags than they can.
When trust accountings are found to be incorrect, or if they point to possible misconduct on the part of the trustee, beneficiaries may choose to challenge the accountings. If this happens, it is crucial for trustees to hire an attorney to defend them.
When it comes to trust accounting, even a small mistake can result in a major financial and legal catastrophe for the trustee. Not only could a trustee be removed from their role and surcharged for improper trust accountings, but their relationship with the beneficiaries of the trust could become hostile.
As previously mentioned, trustees who are confused about their accounting duties can study annual trust accounting templates, spreadsheets and examples — all of which can easily be found through a simple internet search. Additionally, they can employ the best practices for trust accounting, which are discussed in the subsections below.
If you’re a trustee, tracking every dollar that enters and leaves the trust is an absolute necessity. Records must be kept for the benefit of the beneficiaries and courts, and, and to help administration progress smoothly. Whether you opt to maintain a file of trust documents or scan trust documents onto your computer, staying organized is of utmost importance, since the court or beneficiaries could technically ask you to account at any time.
Imagine if a trust continues to be active for 20 years without anyone keeping records. This would not just be a disservice to the grantor of the trust, but to the people whom they wanted to inherit from their trust as well. Without records, trustees could easily remove funds from the trust to use for their own purposes, and no one would be able to track them.
By keeping thorough records of every transaction made on behalf of the trust, the beneficiaries of the trust can rest assured that trust assets are safe, well-managed, and going to the right people. It will also help the trustee to gain the confidence of beneficiaries and steer clear of disputes with them. Lastly, it’s important to back up and keep extra copies of records you’re maintaining for the trust.
For example, if you are using trust accounting software, your records could be erased by merely tapping the wrong key. This is why it is a good idea to maintain a physical file of financial documents related to the trust, even if you are completing most of your trust accounting duties on a computer.
Trustees often make the mistake of commingling their personal assets with those of the trust, falsely believing that if they eventually return the assets to their correct place, no harm was done. The problem is that this is not just a slippery slope but a breach of the trustee’s duties as well. Trustees are required by the law to keep trust assets separate at all times.
It is easy for trustees to avoid commingling assets by opening a bank account for the trust. From this account, trustees can withdraw funds to pay for the services of professionals, make disbursements to beneficiaries, compensate themselves and more. Trustees should never place their own assets in this account or withdraw funds for personal use from this account, even if they plan to return them as early as the next morning.
Trust accounting is generally the most challenging aspect of the trust administration process. It’s also not the only obligation trustees are required to fulfill. This is why even experienced trustees try to lessen their workload by hiring a qualified attorney to prepare their accountings. Taking this approach not only guarantees that the resulting accountings will be in line with California’s trust accounting requirements, but that the trustee will have the capacity to satisfy all of their other administrative responsibilities as well.