A fiduciary is an individual in whom another has placed the utmost trust and confidence to manage and protect their property and/or money. The relationship is where one person has an obligation to act for another’s benefit and a way for the fiduciary to report the activities of the property they are managing is through fiduciary accountings.
A common type of fiduciary is a trustee, the person that is responsible for overseeing a trust. For example, Homer is the trustee and he is in charge of the Maude Flanders Trust (Trust). The beneficiaries of her trust are her sons, Rod and Todd. When Maude dies, the trust property would be distributed to the beneficiaries, Rod and Todd, in accordance to the trust documents and probate code.
As a fiduciary of Maude’s trust, Homer’s responsibilities include preparing and maintaining trust records, keeping financial statements, and filing tax returns. Part of those records are, accountings of the Trust’s property.
The fundamental objective of the accounting should be to provide essential and useful information to the parties interested in the assets of the trust.
The following may be examples of interested parties:
- Other Trustees
- Probate courts
Examples of Property
Some examples of property that may be in the Trust are as follows:
- Real Estate (including the mortgage)
- Cash in a bank account
- Cash, stocks, bonds and mutual funds in a brokerage account
- Personal property
Without a fiduciary accounting of the Maude’s trust, how would Homer know the amount of property he’s responsible to distribute to Rod and Todd? Or, how would Rod and Todd know how much is owed to them?
Therefore, Homer would need to take an inventory of the property in Maude’s trust when he takes over the trust as trustee, which may be the date of Maude’s death. How would Homer know what should be included in the trust? He would refer to the trust document and most likely consult with an attorney on how to read the trust document.
Maude’s trust documents may allow Homer to use the trust funds for her funeral arrangements, pay for the Rod and Todd’s schooling, selling of her house, provide a monthly allowance, pay himself for overseeing the Trust, etc… Homer should be tracking all the disbursements made from Maude’s trust.
Maude’s trust may have income and be receiving funds from investments in a brokerage account, life insurance proceeds, interest on a savings account. Homer should be accounting for Trust receipts too. The accountings should include all the transactions that occurred related to the Trust. These accounting records can then also be used to prepare the Trust tax returns.
Depending on the type of fiduciary, there are different accounting requirements. In Homer’s case being a trustee, generally he should, account to each beneficiary (Rod and Todd):
- at least annually,
- upon a change in trustee(s), and
- when the Trust terminates.
Should Rod or Todd feel it is necessary to take any actions against Homer’s accountings, there is a three-year statute of limitations for a breach of trust. This statute begins running either when the beneficiary receives the trustee’s accounting that “adequately discloses the existence of a claim against the trustee for breach of trust,” or when the beneficiary discovers or reasonably should discover the “subject” of the claim. There are also ways for the trustee to shorten the statute of limitations to 180 Days.
A trustee’s accounting has certain minimum requirements set forth in Probate Code section 16063, which describes the substance, but not the format, of the trustee’s accounting. However, if the trustee would like to begin running the statute of limitations, it would be a best practice for trustees to prepare their accountings at the level of detail that meets the disclosure requirements in court filings as required by Probate Code sections 1060. For instance, court accountings require each transaction show the date, source and nature or purpose versus Probate Code section 16063.
Probate Code section 16063 requires such aggregated financial information as follows:
- “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.
- 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.”
Homer may follow Probate Code sections 16063 to meet his duty to account with less time, detail, effort than in a court format. However, should Rod and Todd have concerns or objections about Homer’s accountings of Trust activities, he would be required to review or possibly re-do his accountings to meet the disclosure requirements in a court accounting. The court accounting would require specific detailed schedules with summaries and certain supplementary schedules.
Homer would also be at risk of the court disallowing the cost of re-preparing the accountings in different format. Therefore, it would be wise for Homer and other fiduciaries, to initially prepare Trust accountings in the acceptable court format.
Onisko & Scholz, LLP has extensive experience in fiduciary accountings for trusts, probate, conservatorships, and guardianships. Should you have any questions and would like assistance in preparing your accountings or estate and trust tax filings, please do not hesitate to contact us. It preparation of fiduciary accountings, there are certain key documents that are essential, see my Blog titled “FIDUCIARY ACCOUNTING RECORD MUST HAVES” for details.
By: Natalie Keam, CPA, CFE
Manager, Onisko & Scholz