A common conversation I have during a trust administration with my clients who are acting as trustees is about trust accountings. We discuss when an accounting is required, who is entitled to an accounting, whether the trustee should seek waivers of account and of course, how much will it cost. My advice to my client is that an accounting should be done. Then we discuss how best to do it.
The reason why I advise against waivers of a trust accounting is because an accounting done in accordance with the Probate Code requirements provides protection to the trustee. The Probate Code provides for a three-year statute of limitations on actions by beneficiaries against a trustee for a breach of trust. This statute of limitations does not begin to run until the beneficiary receives an accounting from the trustee that “adequately discloses the existence of a claim against the trustee for breach of trust” or the beneficiary discovers or reasonably should discover the claim. If a complete and accurate accounting is not provided to the beneficiaries either because the beneficiaries waived an accounting or the trustee failed to account, then that three-year statue of limitations does not begin to run and the trustee is on the hook essentially forever. Even if the trustee did nothing wrong, but did not provide an accounting, a beneficiary could decide years or decades later when all the records and information have been lost or destroyed, that they want an accounting – the trustee still must provide an accounting.
Let’s say that the trustee heeds my advice and decides that they will prepare an accounting and not seek waivers, what is the best way to do an accounting? The trust accounting provisions in the Probate Code do not provide a lot of guidance on the format of an accounting. It just requires that there be schedules for receipts, disbursements, assets and liabilities. However, if the trustee is going to seek court approval of the accounting – discussed in more detail below – then the accounting has to be in the format required by Probate Code §1060 et seq. Even if the trustee is not going to seek court approval, it is best to use the court required format in the event a beneficiary objects and the accounting ends up before the court anyway. This saves the trustee from having to revise their accounting to meet the requirements of the code.
Court accountings have two sets of schedules – the required schedules and the auxiliary schedules. The required schedules are (1) summary of account, (2) assets on hand at beginning, (3) additional assets received, (4) receipts, (5) gains on sales, (6) net income from trade or business, (7) disbursements, (8) distributions, (9) losses on sales, (10) net losses from trade or business and (11) assets on hand at end. The auxiliary schedules are (1) estimated market value, (2) changes in form of assets, (3) specifically devised property, (4) interest on bequests, annuities or property (5) proposed distributions and (6) schedule of liabilities. All these schedules tell a story of how the trustee managed the trust assets showing what happens for every penny that came in and went out. By following that penny from one schedule to the next, the beneficiary understands all that has happened in the trust administration.
Now, the accounting schedules have been prepared and the accounting balances, hopefully. What is the next step? If the accounting is sent to all those who are entitled to receive an accounting – per the trust terms discussing accountings or those who are receiving income or principal from the trust – without a cover letter, then the trustee has to wait three years to see if anyone objects to the accounting or brings an action against them. Most trustees do not want to wait that long to see if they will get sued or to keep the administration open potentially incurring trust income taxes. There are three options available to shorten the three-year timeframe. First, if the trust instrument itself includes a provision that shortens the time-frame for a beneficiary to object to an accounting for not less than 180 days, the trustee can send a cover letter with the accounting to the beneficiary that includes the specific language found in Probate Code §16461.
If the trust does not contain a provision limiting beneficiary objections to trustee accounts to 180-days or more, or the trustee wants to shorten the time frame even more, then they have two options – obtain court approval of the accounting or ask for a release of liability from the beneficiary after providing a full account. Obviously, obtaining court approval for an accounting is much more costly because you have court fees and more attorney time is involved. Another downside to court approval is that the requirements of who gets notice of a trust petition typically is more broad than who is entitled to receive an accounting. But, court approval could effectively reduce the time frame for a beneficiary to object down to 30 days which is the required notice period for a trust matter. And, the trustee will have a court order in hand which approves their accounting.
An issue to be aware of when seeking court approval of a trust accounting is that the court has the ability under Probate Code §17202 to dismiss a petition if is not reasonably necessary to protect the interest of the trustee or a beneficiary. Some courts are dismissing trust accounting petitions if the trustee does not show a reason why court approval is required – i.e., beneficiary disputes or coupling it with another request such as a proposed distribution.
Seeking a release of liability from a beneficiary who has received an accounting is less expensive and can reduce the time frame to a much shorter time. However, the beneficiary has to have capacity to provide a release. If you have a trust beneficiary who is a minor or there are unknown or unascertained beneficiaries, then you are limited to seeking court approval if the trustee wants to shorten the time frame a beneficiary can object to an accounting.
If you are a trustee or you represent a trustee and want help with a trust accounting, please contact us to discuss.