Trustee Duty to Send Beneficiary Accountings

Maybe so.  Regardless, it is prudent.

What is a Fiduciary Accounting? A Trustee generally has an annual duty to report to the trust beneficiaries in the form of a fiduciary accounting.

·         A fiduciary accounting is a comprehensive report of the financial activity within a trust (or estate) during the reporting period.

·         The accounting should reflect all the receipts, disbursements, assets, and liabilities administered by the Trustee (the fiduciary),

·         All financial activity should be properly allocated between trust principal and income.

·         We typically recommend fiduciary accountings be prepared in the format prescribed by National Fiduciary Accounting Standards, requiring special software.  A bank or trust company will produce monthly statements that comport with these standards.

Fiduciary Accounting Requirements. A fiduciary accounting may be required by the trust instrument and/or by state statute.  It is important to consult with legal counsel to understand the trust agreement and how state law intersects with or overrides the trust agreement.

·         In Michigan, for example, a trust agreement may not override state law, as follows:  A fiduciary can be ordered to prepare a fiduciary accounting by probate court at the request of a beneficiary.

Relief of Liability. A fiduciary may decide to produce an accounting to ensure that he or she is ultimately released from liability for transactions reported in the fiduciary accounting.

·         In Michigan, for example, Trustee liability for transactions reported in the fiduciary accounting is limited to one year from the date the beneficiary is sent the fiduciary accounting.

Beneficiary Rights. An accounting also protects the beneficiaries because it requires the fiduciary to disclose all of the activity in the trust (or estate) that the beneficiary can review and, if the beneficiary disagrees, can challenge.

·         State law and the governing instrument may permit a beneficiary to waive in writing his or her right to an annual accounting.  Beneficiaries who are already receiving monthly investment advisory statements may feel comfortable waiving this right for the sake of cost savings.

Fiduciary Accounting Income. A fiduciary accounting importantly computes and discloses the amount of annual fiduciary accounting income, distributable to beneficiaries under the terms of the trust instrument.

·         The trust instrument may advise the Trustee on transactions that comprise fiduciary accounting income.  If not, state law provides a roadmap for computing fiduciary accounting income. Fiduciary accounting income is a complex computation, so it is important to consult with trust legal counsel.

Tax Returns. Fiduciary accounting income may affect a trust’s income tax filings.

·         Fiduciary accounting income is required to be disclosed on the trust’s annual income tax return for “complex” trusts (trusts distributing something other than just “all net accounting income” in any given year).

·         While a completely different concept than taxable income, fiduciary accounting income may actually affect the allocation of taxable income between the trust and its beneficiaries.

In Conclusion. Because a Trustee has a legal liability for his or her actions, and also a legal duty to report to trust beneficiaries on trust transactions pursuant to the trust instrument and governing state law, the preparation of an annual fiduciary accounting is a “must-do” Trustee responsibility.

·         Trust beneficiaries may be entitled to waive their rights to accountings.

·         Preparing a fiduciary accounting facilitates the computation of fiduciary accounting income, which is required to make trust distributions and prepare trust income tax returns.

·         Having a professional Trustee like an attorney or trust company can ensure this important annual responsibility is accomplished.

All of our blog posts are for educational purposes only and should not be relied upon without consulting your own professional advisors. Content can become obsolete and will not be updated to reflect federal, state and local law changes.