Trusts-duty to account to beneficiaries & types of accounting

TRUSTS – DUTY TO ACCOUNT TO BENEFICIARIES & TYPES OF ACCOUNTING

By: David L. Crockett, Attorney, CPA

Types of Accounting:  Trust accounting may be (1) Informal; (2) Formal (non-court) according to Probate Code §16063 format; or (3) Court accounting according to Probate Code §1060 et. seq. requirements. The trust accounting is to be prepared by the Trustee and/or under his/her authorization.

People involved in a trust.  Because trusts are not filed or recorded with any government agency, laws have been established to make sure that heirs and trust beneficiaries have some way to find out about a trust and its assets.  The parties involved in a trust (which is all written into the trust document) are typically the Trustors who set up the trust, the Trustees who administer the trust (and who are legally required to prepare an accounting) and the Beneficiaries who are the persons who are to receive assets and income from the trust.

State laws re trust accounting.  The California probate code sections state the laws about providing accountings to trust beneficiaries.  Generally, the trustee only has to provide the annual accounting to “each beneficiary to whom income or principal is required or authorized in the trustee’s discretion to be currently distributed.”  Probate Code §16062(a).   The trust document has to be read and interpreted to determine who is entitled to accountings.

What is an Informal accounting?  This is generally the starting point, especially in less complicated trusts.  An informal accounting will typically include:

  1. List of assets (money) & property on hand and a list of the debts at the beginning of the trust accounting period.
  2. The checkbook for the accounting period showing all deposits & checks/withdrawals.
  3. Bank statements covering the accounting period.
  4. Escrow closing statements for any property sold.
  5. Ending list of assets (money) & property on hand.
  6. Proposed distribution schedule.
  7. A waiver of formal accounting and/or legal notice under Probate Code §16063 that the recipient of the account may petition the Court within three years to obtain a review of the accounting and acts of the trustee.

What is a Formal (non-court) Accounting pursuant to Probate Code §16063?  A formal accounting is what is generally done and does not involve any court proceedings or filing with the government.  It is simply done by the trustee and sent out to the trust beneficiaries.  There are six separate types of data that have to be provided in an “accounting”.  The law is pretty much a listing of common sense types of information needed to determine what is in a trust.  The key items requires are: a statement of receipts and disbursements which have occurred during the last year; a statement of assets and liabilities as of the end of the last fiscal year; a statement of the trustee’s compensation; a description of the agents hired by the trustee, their relationship to the trustee and their compensation paid; and a statement that the recipient may petition the court for review and that such a petition must be within 3 years.

What is a Court Accounting under Probate Code §1060 et.seq?  If a trust accounting matter becomes disputed, the trustee or any trust beneficiary may file a Court Petition/lawsuit to have the Court decide on accounting disputes and other trust disputes.  Also, if a trustee anticipates disputes, the trustee can file the accounting and force the beneficiaries to either accept it or file their objections.   In such cases where a trust accounting is filed with the Court the Accounting laws under Probate Code §1060 et. seq. describe the format and information required.  Trustees usually hire fiduciary accountants to prepare these accountings as a lot of detail is required.  The basics required under Probate Code §1061 are to provide a “summary of account” showing (1) a list of the property on hand at the beginning; (2) the value of assets received; (3) the amounts of any receipts of income or principal; (4) net income from a trade or business; (5) gains on sales; (6) the amount of disbursements; (7) loss on sales; (8) net loss from trade or business; (9) distributions to beneficiaries; and (10) property on hand at the end of the accounting period, stated at its carry value. Also, Probate Code §1062 requires detailed schedules with specific information on all receipts and disbursement, essentially a checkbook.  In addition, Probate Code §1063 requires a schedule showing the estimated market value of each asset on hand at the end of the accounting period.  Note that this description is intended to explain generally what is required but all of the Probate Code requirements are to be covered by the person actually doing the court accounting.  The Court has staff and attorneys which review court accounting filed and will advise the Judge and parties involved of any “deficiencies” (i.e. failures to comply with the detailed law) in any court accounting filed.  If something is not right then it will have to be redone and refiled with the Court before the accounting can be approved.

What if the accounting provided doesn’t provide all all the beneficiary wants to know?  Answer:  There is another law that allows beneficiaries to get some information short of a formal full accounting.  Even if it is a clear cut case where no annual accounting is required, the beneficiaries still have legal rights.  OR, if some sort of accounting is provided but more information is wanted, California Probate Code §16060 provides as follows:  “Trustee’s general duty to report information to beneficiaries.  The trustee has a duty to keep the beneficiaries of the trust reasonably informed of the trust and its administration.” Also, Probate Code §16061 provides,” upon reasonable request of a beneficiary (including a remainder beneficiary), the trustee shall report to the beneficiary by providing requested information to the beneficiary relating to the administration of the trust relevant to the beneficiary’s interest.”

This law has been interpreted by the courts to mean that the duty to provide information is independent of the duty to provide an accounting.  The concept is that beneficiaries are entitled to obtain information reasonably necessary to enable them to enforce their rights under the trust.  For example, in the trust example mentioned above where the children are not entitled to receive anything from the trust until after both parents have passed away, the children would still want to know what the trust assets are and how they are invested, etc.  So, children in this situation would be legally entitled to demand specific information and the trustee would have to provide it.  If information is not provided or if it is inadequate, the beneficiaries can file a probate court petition  (lawsuit) to seek a court order for the trustee to provide the requested information.

How often is an accounting required?.  The law requires an accounting to be done at least annually, at the termination of the trust, and upon a change of trustees.

Exceptions to duty to provide accounting.  The law does not require  an accounting to any beneficiary of a revocable trust, for the period when the trust may be revoked.  This can be a tricky area because the period when the trust may be revoked DOES NOT include the time when the Trustor is incompetent.  Situations arise when a Trustor becomes mentally incompetent and a successor Trustee takes over.  In that case the Trust cannot be revoked because a mentally incompetent person does not have legal capacity to revoke his trust and therefore an accounting is required.  Also, there are court rulings which have allowed beneficiaries to go back to periods prior to a Trustor’s death.  In a case where a Trustor/Trustee is alive but resigns as the Trustee and the Trustee’s son (or another person) takes over as the successor Trustee,  acts as the Trustee for 5 years, and then the Trustor dies.  Courts have decided that after the death of the Trustor, the beneficiaries may file an action against the successor Trustee for any alleged improper acts during the time the Trustor was not the Trustee and in effect compel and accounting.  i.e. the 5 years prior to the Trustor’s death in this example.  See Crowley v. Katleman (1994) 8 Cal.4th, 666.  Also In Re Estate of Giraldin (2012) 55 Cal.4th 1058.

Death of first spouse situation.  A typical Trust formed by a married couple requires the trust to be divided up into “his half” and “her half” on the death of the first spouse to die. The portion of the first spouse to die becomes a permanent irrevocable trust.  An accounting is then required for only the permanent irrevocable portion so that the beneficiaries (typically the children) know what is there and can keep watch on what will eventually be coming to them.

What if the accounting is not provided?  Beneficiaries who are entitled to receive a current accounting would need to make a written demand to the trustee if an accounting is not provided.  If the accounting is not provided in the proper form as required by the law quoted below, then after 60 days the beneficiary can file a probate court petition (lawsuit) to get a court order requiring the trustee to prepare the proper accounting.

Typical problem area.   Trust accounting  can be a source of disagreement and frustration to family members and surviving spouses because everyone wants to know what is in the trust and what they will get out of it.  For example, in many typical living trusts established by a husband and wife, the trust provides that when the first spouse passes away that the trust stays in tact and the surviving spouse controls the entire trust and is entitled to income and principal distributions for the rest of his/her life.  The children often are not to be given anything until both spouses pass away.  However, since part of the trust becomes permanent on the death of the first spouse, the children would typically be entitled to an accounting.  This can be especially annoying to children where one of the parents has died and the surviving parent is handling the entire trust and taking liberties with the trust assets and/or spending beyond what the trust allows.  The children are understandably concerned that by the time the surviving parent has passed away the trust assets may have dwindled.  These concerns also arise when there is a new spouse in the picture or if the surviving parent has health or mental problems or is subject to undue influence.

Here are the California laws pertaining to trust accounting:

[Note:  The laws cited below are the ones deemed applicable to the subject of this article and is not a complete statement of all Probate Code sections which may apply to a particular situation.]

Formal (non-court) accounting.  Cal Prob Code § 16062 et. seq

  • 16062.  Duty to account to beneficiaries

(a)           Except as otherwise provided in this section and in Section 16064, the trustee shall account at least annually, at the termination of the trust, and upon a change of trustee, to each beneficiary to whom income or principal is required or authorized in the trustee’s discretion to be currently distributed.

(b)           A trustee of a living trust created by an instrument executed before July 1, 1987, is not subject to the duty to account provided by subdivision (a).

(c)            A trustee of a trust created by a will executed before July 1, 1987, is not subject to the duty to account provided by subdivision (a), except that if the trust is removed from continuing court jurisdiction pursuant to Article 2 (commencing with Section 17350) of Chapter 4 of Part 5, the duty to account provided by subdivision (a) applies to the trustee.

(d)           Except as provided in Section 16064, the duty of a trustee to account pursuant to former Section 1120.1a of the Probate Code (as repealed by Chapter 820 of the Statutes of 1986), under a trust created by a will executed before July 1, 1977, which has been removed from continuing court jurisdiction pursuant to former Section 1120.1a, continues to apply after July 1, 1987. The duty to account under former Section 1120.1a may be satisfied by furnishing an account that satisfies the requirements of Section 16063.

(e)           Any limitation or waiver in a trust instrument of the obligation to account is against public policy and shall be void as to any sole trustee who is either of the following:

(1)           A disqualified person as defined in Section 21350.5.

(2)           Described in subdivision (a) of Section 21380, but not described in Section 21382.

 

  • 16063.  Contents of account; Presentation

(a)            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.

(b)           All accounts filed to be approved by a court shall be presented in the manner provided in Chapter 4 (commencing with Section 1060) of Part 1 of Division 3.

 

  • 16069.  Exceptions to duty to account, provide terms of the trust or requested information

The trustee is not required to account to the beneficiary, provide the terms of the trust to a beneficiary, or provide requested information to the beneficiary pursuant to Section 16061, in any of the following circumstances:

(a)           In the case of a beneficiary of a revocable trust, as provided in Section 15800, for the period when the trust may be revoked.  (b) If the beneficiary and the trustee are the same person.

 

Court accounting laws.  Cal Prob Code § 1060 et. seq

 1060 Governance of Chapter; additional information required

This chapter governs all accounts to be filed with the court. Except as specifically provided elsewhere in this code, or unless good cause is shown therefore, no information in addition to that required in this chapter need be in an account.

  • 1061 Summary; contents; format

(a)           All accounts shall state the period covered by the account and contain a summary showing all of the following, to the extent applicable:

(1)           The property on hand at the beginning of the period covered by the account, which shall be the value of the property initially received by the fiduciary if this is the first account, and shall be the property on hand at the end of the prior account if this is a subsequent account.

(2)           The value of any assets received during the period of the accounting which are not assets on hand as of the commencement of the administration of an estate.

(3)           The amount of any receipts of income or principal, excluding items listed under paragraphs (1) and (2) or receipts from a trade or business.

(4)           Net income from a trade or business.

(5)           Gains on sales.

(6)           The amount of disbursements, excluding disbursements for a trade or business or distributions.

(7)           Loss on sales.

(8)           Net loss from trade or business.

(9)           Distributions to beneficiaries, the ward or conservatee.

(10)         Property on hand at the end of the accounting period, stated at its carry value.

(b)           The summary shall be in a format substantially the same as the following, except that inapplicable categories need not be shown:

SUMMARY OF ACCOUNT
CHARGES:
Property on hand at beginning of account (or Inventories) $
Additional property received (or Supplemental Inventories)
Receipts (Schedule ______)
Gains on Sale or Other Disposition (Schedule _______)
Net income from trade or business (Schedule_______)
Total Charges: $
CREDITS:
Disbursements (Schedule _______) $
Losses on Sale or Other Disposition (Schedule _______)
Net loss from trade or business (Schedule ______)
Distributions (Schedule ______)
Property on hand at close of account (Schedule ______)
Total Credits: $

(c)            Total charges shall equal total credits.

(d)           For purposes of this section, the terms “net income” and “net loss” shall be utilized in accordance with general accounting principles. Nothing in this section is intended to require that the preparation of the summary must include “net income” and “net loss” as reflected in the tax returns governing the period of the account.

 

The summary shall be supported by detailed schedules showing the following:

(a)           Receipts, showing the nature or purpose of each item, the source of the receipt, and the date thereof.

(b)           Disbursement, including the nature or purpose of each item, the name of the payee, and the date thereof.

(c)            Net income or loss from a trade or business, which shall be sufficient if it provides the information disclosed on Schedule C or F of the federal income tax return.

(d)           Calculation of gains or losses on sale or other disposition.

(e)           Distributions of cash or property to beneficiaries, ward or conservatee, showing the date and amount of each, with the distribution of property shown at its carry value.

(f)            Itemized list of property on hand, describing each item at its carry value.

 

  • 1063 Additional schedule; estimated market value of assets; changes during accounting period; income disbursements, interest; distributions; liabilities; real property in foreign jurisdiction.  

(a)           In all accounts, there shall be an additional schedule showing the estimated market value of the assets on hand as of the end of the accounting period, and a schedule of the estimated market value of the assets on hand as of the beginning of the accounting period for all accounts subsequent to the initial account. The requirement of an estimated value of real estate, a closely held business, or other assets without a ready market, may be satisfied by a good faith estimate by the fiduciary.

(b)           If there were purchases or other changes in the form of assets occurring during the period of the account, there shall be a schedule showing these transactions. However, no reporting is required for transfers between cash or accounts in a financial institution or money market mutual funds as defined in subdivision (d) of Section 8901.

(c)            If an estate of a decedent or a trust will be distributed to an income beneficiary, there shall be a schedule showing an allocation of receipts and disbursements between principal and income.

(d)           If there is specifically devised property, there shall be an additional schedule accounting for income, disbursements, and proceeds of sale pursuant to Section 12002 and subdivision (a) of Section 16340.

(e)           If any interest has been paid or is to be paid under Section 12003, 12004, or 12005, or subdivision (b) of Section 16340, there shall be a schedule showing the calculation of the interest.

(f)            If the accounting contemplates a proposed distribution, there shall be a schedule setting forth the proposed distribution, including the allocation of income required under Section 12006. If the distribution requires an allocation between trusts, the allocation shall be set forth on the schedule, unless the allocation is to be made by a trustee after receipt of the assets. If the distribution requires valuation of assets as of the date of distribution, the schedule shall set forth the fair market value of those assets.

(g)           If, at the end of the accounting period, there are liabilities of the estate or trust, except current or future periodic payments, including rent, salaries, utilities, or other recurring expenses, there shall be a schedule showing all of the following:

(1)           All liabilities which are a lien on estate or trust assets.

(2)           Taxes due but unpaid as shown on filed returns or assessments received subsequent to filing of returns.

(3)           All notes payable.

(4)           Any judgments for which the estate or trust is liable.

(5)           Any other material liability.

(h)           If the guardian or conservator has knowledge of any real property of the conservatee or ward located in a foreign jurisdiction, the guardian or conservator shall include an additional schedule that identifies the real property, provides a good faith estimate of the fair market value of the real property, and states what action, if any, will or has been taken to preserve and protect the real property, including a recommendation whether an ancillary proceeding is necessary to preserve and protect the real property.

 

  • 1064 Petition for approval of account; contents; additional petitions

(a) The petition for approval of the account or a report accompanying the petition shall contain all of the following:

(1)           A description of all sales, purchases, changes in the form of assets, or other transactions occurring during the period of the account that are not otherwise readily understandable from the schedule.

(2)           An explanation of any unusual items appearing in the account.

(3)           A statement of all compensation paid from the assets subject to the account to the fiduciary or to the attorneys for the fiduciary other than pursuant to a prior court order.

(4)           A statement disclosing any family or affiliate relationship between the fiduciary and any agent hired by the fiduciary during the accounting period.

(5)           An allegation disclosing whether all of the cash has been invested and maintained in interest bearing accounts or in investments authorized by law or the governing instrument, except for an amount of cash that is reasonably necessary for the orderly administration of the estate.

(b)           The filing of an account shall be deemed to include a petition requesting its approval, and may include additional petitions for authorization, instruction or confirmation authorized by the code, including, but not limited to, a request for an order for compensation of the fiduciary and the attorney for the fiduciary.

(c)            For purposes of this section, “family” means a relationship created by blood or marriage. For purposes of this section, “affiliate” means an entity that directly or indirectly through one or more intermediaries’ controls, is controlled by, or is under common control with, the fiduciary.

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