Across the board, companies need financial statements to assist them with understanding and managing assets, income, and expenses, which can be very complex. By the same token, fiduciary or trust accounting can improve the management of a trust by providing visibility into the financial workings of the trust. This provides the trustor, trustee, and beneficiaries with the information necessary to make prudent decisions, prolong or improve the life of trust assets, and better manage tricky decisions that may arise during the distribution of assets.
Fiduciary accountings are financial statements for your trust or estate. They include both summaries and detail of the information about assets held, income earned, expenses incurred, and any debts owed by the trust. This information provides visibility into the appropriateness of trust expenses and disbursements, tax liability and how to avoid as much of it as possible, and strategies to maximize trust income while limiting portfolio risk. Aside from benefitting all parties to the trust, however, trust accountings are required unless all beneficiaries consent to forego an accounting.
What are the requirements? Trust accountings are governed by the U.S. Uniform Principal and Income Act (UPAIA) and the California probate code section 16063. California requires, at a minimum, that trust accountings be prepared annually, at the termination of a trust, and upon a change in trustees. Among other items, trust accountings must include information pertaining to receipts and disbursements, assets and liabilities, trustee fees, and a written statement initiating a three-year statute of limitations, during which time the beneficiaries may petition the court for review of trustee decisions. Trust accountings, however, are not required for revocable trusts or in the event that all beneficiaries consent to foregoing a trust accounting. It is possible to opt out.
What are the costs? While they are both beneficial and required, these accountings also present significant costs that should be taken into consideration. Because trust accounting services are typically performed by accounting or legal firms with specific expertise in trust and probate law, the cost of such services may add up. As a result, the trustee and beneficiaries must determine if the benefits of the accounting outweigh the costs. Once the choice is made to have an accounting, the trustee must determine who will prepare the statements, keeping in mind that they follow a unique set of rules and often include complex situations. While the trustee may prepare the accountings on their own, in many instances the task is outside of their scope of expertise and they should look to accounting or legal professionals for assistance. The trustee should seek out a firm with extensive knowledge in the trust and estate field and experience in preparing accountings. In addition to creating complete and accurate accountings, the professional should also be a resource for any questions or concerns the trustee may have concerning the management of the trust.
Is it worth it? Trust accountings are typically required, but also come with costs which must be considered. So why should you get one? From the trustor’s perspective, the inclusion of language in the trust documents calling for periodic trust accountings may provide better long-term results in the management of trust assets to achieve the trustor’s original goals. From the trustee’s perspective, trust accountings establish a statute of limitations which limits the legal liability of the trustee for past decisions. Finally, from the beneficiary’s perspective, trust accountings provide visibility into the operations of the trust and offer the comfort of knowing that the trust is operating correctly.
Trust accountings represent a significant component of trust management, and the benefits of investing in accountings warrant serious consideration. If you are interested in exploring the value of trust accountings or the complex legal matters associated with them, please feel free to contact your L&B professional at (858) 558-9200.