Accepting the role of trustee comes with unique responsibilities, ethical obligations and a significant amount of risk. Even the most well-intentioned trustee can be subjected to scrutiny by beneficiaries, regulators and courts. It is in the best interest of trustees to take proactive measures to protect themselves against potential lawsuits and other liabilities. One of the most effective ways of accomplishing this is through annual trust accountings.
Designed to give the beneficiaries a clear picture of a trust’s activities, a trust accounting provides a detailed account of the opening asset balance, current principal and income balance, gains and losses, sales, expenses, trustee commissions and other activities at any given point in time. These calculations are made according to the Uniform Principal and Income Act (UPIA), which provides guidelines for how trusts should be administered, including how funds should be allocated to principal and income accounts. Within the trust accounting report is also a “final combined amount” that determines the actual funds remaining for unpaid expenses and final distribution to beneficiaries.
In many cases, the trustee does not have an accounting prepared until the trust’s assets are ready for final distribution to the beneficiaries. In some states, such as Florida, an annual trust accounting is required each year – a practice that holds so many invaluable benefits for both beneficiary and trustee that it should be considered for adoption by all trustees.
Litigation of Trusts
Even in states where annual trust accountings are not required to be filed, the court can compel the trustee to provide the accountings retroactively if the trust is contested or the trustee’s actions are called into question for fraud or misuse of funds at any point during the life of the trust.
As with any dispute, some of the best evidence that can support a trustee when a trust is contested comes in the form of documentation. Annual trust accountings protect the trustee with accurate and easily accessible evidence that would be much more difficult to gather many years later.
Other than providing evidence in the case of litigation, annual trust accountings could prevent a lawsuit from being pursued in the first place, or significantly limit the length of time in which a lawsuit can be brought.
When an annual trust accounting is prepared in real-time, beneficiaries are asked to sign off on it each year, agreeing to its accuracy and instantly releasing the trustee from any liability related to that year’s handling of the trust. If the beneficiaries do not agree to sign an annual trust accounting, it can still be filed with the court, at which time the statute of limitation begins to run, potentially limiting the amount of information that can be contested by the beneficiaries at any given time.
Trusts with Charitable Beneficiaries
If charities are among the beneficiaries of a trust, the trustee will be required to provide the Attorney General with annual accountings before any funds can be distributed. Acting as the charity’s representative, the Attorney General will conduct a thorough review of all accountings and sign off on all funds that are distributed from the trust to charitable organizations. Knowing that the accountings will be required eventually makes the choice of annual accounting even more logical.
Making Changes to the Trust
Certain changes to a trust, such as the removal of a trustee where the trust document may be silent, may need the approval by the court and will require annual trust accountings. The trustee will be held accountable for providing these accountings to the court.
The transparency that annual trust accountings provide is particularly important for trustees who take commissions. Preparing the accountings each year makes it much easier to document not only the amount of the commission but also the computation method (based on either inventory value or fair market value). It also confirms that the commissions were allocated correctly (1/3 to income and 2/3 to principal).
Annual trust accountings are also a way for the trustee to track that he or she is receiving the correct amount of commissions that are due each year. If the full commissions are not taken out in any given year, it is assumed that the trustee waived the income portion, and he or she can only claim the principal amount in subsequent years.
There are many practical benefits of annual trust accountings, regardless of the reason why they are needed. Compiling and calculating the data one year at a time is clearly more efficient and accurate than trying to detail it in hindsight, when documentation can be lost, memories fade and validity can be called into question much more easily.
Annual trust accountings are relatively straightforward for an experienced trust accountant to compile but would require a considerable amount of time if done by trustees themselves, especially the farther back they are required to go. Statements from brokerage houses, real estate closing statements and other documentation need to be tracked down and compiled precisely within UPIA guidelines. Valuations may also be needed to support certain amounts included in the accountings – an activity done much more easily and quickly in present time.
The trust absorbs the cost of the annual accountings, at the discretion of the trustee. And because annual accountings require less research, investigation and legwork, they can be a much more cost-effective option as well.
Case in Point
To illustrate these benefits, consider this alternative to annual trust accountings. I was recently retained to conduct the accountings of a client’s trust from 1999 all the way to 2017. Because the trust was created in New York State, the trustee was never required to file annual accountings. The need arose when a trustee was requesting to be released from his role and liability, which required court approval. Furthermore, because charities were included among the beneficiaries, the reports also had to be submitted to and reviewed by the Attorney General.
While we were ultimately able to compile the entire 19 years of information, and the trustee was successfully relieved of his duties, the process of going back that many years put the trustee in a much more precarious position than he should have been. Unknown deposits and disbursements couldn’t be identified, for example, leaving the trustee open to dispute. The process also required significantly more time and expense than it would have had the accountings been made year-by-year.
A Matter of Risk
While it is true that beneficiaries can sign off on the trust each year without a formal accounting, it is risky to assume that this will always be possible. Any number of situations can arise that will require the annual documentation, and disputes can arise without warning. If charitable beneficiaries are involved, the trustee is guaranteed to need the annual reports sooner or later.
Choosing whether to provide annual trust accountings to the beneficiaries is ultimately a matter of how much risk the trustee is willing to assume, after carefully assessing the terms, parties and circumstances surrounding the trust. While mandated to protect the beneficiaries in certain jurisdictions and situations, annual trust accountings can actually prove to be just as valuable to the trustees themselves.
Reprinted with permission from the January 21, 2020 edition of the New York Law Journal © 2019 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. ALMReprints.com – 877-257-3382 – firstname.lastname@example.org.