Trust Accountings: More Than Just Financial Statements
January 21, 2021
A trustee stands in a fiduciary or confidential relation to another, holds the legal title to property, but maintains it in trust for the benefit of another. The trustee owes a fiduciary duty to that other person, i.e., the beneficiary.
Because the trustee is holding the trust property for the benefit of the beneficiary, the law imposes fiduciary duties upon the trustee. One of the most fundamental duties owed by a trustee to a beneficiary is the duty to inform and account. However, trustees often fail to provide adequate information to the trust’s beneficiaries. A substantial amount fiduciary litigation commences with a beneficiary not receiving a proper trust accounting or explanation of the trustee’s actions or conduct during the course of the trust administration.
A trustee cannot fulfill his duty to account by merely turning over to a beneficiary the trust’s financial statements, the check register of the trust bank account, copies of bills and receipts. Rather, a trustee has a duty to provide a proper and sufficient statutorily-required trust accounting. The accounting must match the actual bank records, make allocations to principal and income.
Florida Statute §736.0813 provides that “the trustee shall keep the qualified beneficiaries of the trust reasonably informed of the trust and its administration.” The trustee’s duty to inform and account includes, but is not limited to, providing each beneficiary of an irrevocable trust with a trust accounting from the date on which the trustee became accountable to each qualified beneficiary at least annually and on termination of the trust or upon change of the trustee. Fla. Stat. §736.0813(1)(d).
Florida Statute §736.08135 details the trust accounting requirements. “A trust accounting must be a reasonably understandable report from the date of the last accounting or, if none, from the date on which the trustee became accountable, that adequately discloses” the following information:
(2)(a) The accounting must begin with a statement identifying the trust, the trustee furnishing the accounting, and the time period covered by the accounting.
(b) The accounting must show all cash and property transactions and all significant transactions affecting administration during the accounting period, including compensation paid to the trustee and the trustee’s agents. Gains and losses realized during the accounting period and all receipts and disbursements must be shown.
(c) To the extent feasible, the accounting must identify and value trust assets on hand at the close of the accounting period. For each asset or class of assets reasonably capable of valuation, the accounting shall contain two values, the asset acquisition value or carrying value and the estimated current value. The accounting must identify each known noncontingent liability with an estimated current amount of the liability if known.
(d) To the extent feasible, the accounting must show significant transactions that do not affect the amount for which the trustee is accountable, including name changes in investment holdings, adjustments to carrying value, a change of custodial institutions, and stock splits.
(e) The accounting must reflect the allocation of receipts, disbursements, accruals, or allowances between income and principal when the allocation affects the interest of any beneficiary of the trust.
The form for a trust accounting is found in Florida Probate Rule 5.346. This form is more than just financial statements for the trust’s assets, but outlines each of the above points for the requirements set forth in Fla. Stat. 736.01835. A trustee who is not adequately informing and accounting to a beneficiary and not providing these statutorily required trust accounting may be found in “breach of trust”. A trustee can be compelled by the court to provide information and accountings to a beneficiary, for not adequately informing and accounting to a trust beneficiary.
What are the nuances on who to account to? During a settlor’s lifetime, the trustee’s duty to account extends to just the settlor, but as to the qualified beneficiaries, this does not arise till after the trust becomes irrevocable (usually on a settlor’s death).
How often is a trustee to account? A trustee must provide an accounting to the beneficiaries annually, when there is a change of the trustee and on the termination of the trust. Notably, a qualified beneficiary can only waive his or her right to an accounting if the waiver is in writing. And, this waiver may be withdrawn for later accountings. Sometimes, if looking to waive the annual accountings, it may be prudent for both the beneficiary and the trustee to have the beneficiary waive accountings on an annual basis to track what accounting is being waived for which particular year.
Clear, distinct, accurate and complete record keeping is important. This is two-fold. First, it is so the beneficiary can tell whether the trustee has acted with prudently and impartially, as well as whether the costs of the trust administration have been reasonable. Second, it is so that the trustee discloses all of his or her actions and confirm said actions by way of the records, thereby alleviating his or her liability. It is often helpful to involve a CPA or bookkeeper familiar with the requirements of trust accountings, to assist the trustee with tracking all disbursements, receipts, transactions, and to assure the trustee maintains backup for any receipts, disbursements or other documents to support the trust accounting.
Failure to account is a breach of fiduciary duty. Without a proper statutory accounting disclosing the management of the trust by the trustee, a trustee would have no accountability to the beneficiaries – the trustee is in breach. An accounting provides the beneficiary the proof on how he or she has performed his or her fiduciary duties. The refusal or failure to provide the beneficiary with relevant information on the trust’s assets, how the trust is being administered or other information on the trustee’s management of the trust is in breach.
What remedies does a beneficiary have if a trustee is in breach? Seeking to remove the trustee, reduce or deny compensation to the trustee, requiring the trustee to return money or property to the trust are some of the various recourses that a beneficiary may seek, through filing an action with the court. Failure to maintain records for a trust may lend to a court not only disallowing certain expenditures of a trustee, but indeed charging those against a trustee as well.
If beneficiaries consented or ratified a trustee’s actions, or released a trustee, then a trustee will not be held liable. This is important because the beneficiary must know and understand their rights relative to the trustee’s actions and the consent. If not, a concern may be whether the consent was induced by improper conduct of a trustee.
Once a trust accounting has been provided, disclosing all matters, then the four-year statute of limitations begins to run. If an accounting is not provided to the beneficiaries, or that accounting does not disclose all material matters, then the statute of limitations never runs as to the non-disclosed matters. However, if the accounting is accompanied by a “limitations notice”, as set out in Fla. Stat. §736.1008, as part of a “trust disclosure document”, then there is a short 6-month window for actions adequately disclosed in the trust accounting for a beneficiary to bring a cause of action regarding same, or he or she will be barred from doing so at a later date.
One other option for a trustee is to seek court action, to have the court review and settle their accounts. This is more typically done in seeking to terminate a trust and seeking the court’s approval of the final accounting, but it is also an option for a trustee who continues to serve in that fiduciary capacity.
If you are serving as a trustee and have questions about your fiduciary duties to your beneficiaries, or if you are a beneficiary looking to obtain information about a trust, it is prudent to seek advice from an experienced trust lawyer.