Trusts are an uniquely American estate planning invention and the revocable trust has become a standard tool used by most middle-class Americans to avoid the cost of probate. Most trusts involve having the married couple create a trust whereby the children are the ultimate heirs of at least part of the estate but only after the surviving spouse dies. These are commonly called “marital trusts” or “QTIP” trusts and probably constitute well over sixty percent of the revocable trusts that exist. The reader is invited to review the numerous other articles on this site to learn the basics of such trusts.
As discussed in our article as to duties of trustees to beneficiaries, a trustee has a fiduciary duty to all beneficiaries, the highest duty known to law. That includes doing nothing as trustee that is not in the interests of the beneficiary.
In California, a trustee is required to account to the beneficiaries as to the activities of the trust unless certain exceptions apply. What that accounting is and when it is required is the subject of this article.
The Duty to Account:
Most trusts do not have regular court or state agency supervision. They are private documents, essentially an agreement between the trustor who creates the trust and the trustee who maintains the trust for the benefit of the beneficiaries who are protected by the trust.
And since trusts are seldom filed or recorded with any government agency, laws have been established providing that heirs and beneficiaries have a method to review trust activities and what is happening with trust assets.
In this state, the California probate code provides the statutory authority as to providing accountings to trust beneficiaries. Absent specific exceptions, a trustee must submit annual accounting to, “…each beneficiary to whom income or principal is required or authorized in the trustee’s discretion to be currently distributed.” The trust document normally determines who is entitled to accountings based on the instructions as to distributions.
Recently, California courts have been expanding the people who are entitled to a trust accounting so legal counsel should be consulted to determine whether an accounting is available. The trustee is well advised to either provide an accounting or have good legal authority as to why the accounting need not be provided.
- DEFINITION OF “ACCOUNTING.” California Probate Code section 16063 cites six separate types of data that must be provided in an “accounting”. The essential items required are: a statement of receipts and disbursements; a statement of assets and liabilities; a statement of the trustee’s compensation; a description of any agents hired (certified public accountants, attorneys, professional managers, financial managers, property managers, etc.); and a statement that the recipient may petition the court for review of the accounting and that such a petition must be within three years of receipt of the accounting.
- HOW OFTEN IS AN ACCOUNTING REQUIRED? The law requires an accounting to be done at least annually, at the termination of the trust, and upon a change of trustees.
- EXCEPTIONS TO REQUIREMENT FOR ACCOUNTING. During the time when a trust may be revoked by the trustor, no accounting is normally required. Note that if the trustor becomes incompetent, even if alive and a beneficiary, the accounting becomes necessary since the trustor is no longer competent to revoke thus the trust is irrevocable. The law does not require an accounting to any beneficiary of a revocable trust, for the period when the trust may be revoked.
- DEATH OF FIRST SPOUSE EVENT. A typical “QTIP” Trust formed by a married couple requires the trust to be divided up into “his half” and “her half” on the death of the first spouse to die. The portion of the first spouse to die becomes an irrevocable trust. An accounting is then required for only the irrevocable portion so that the beneficiaries (typically the children) know what is there and can keep watch on what will eventually be coming to them. Of all the accountings that are routinely ignored, this is probably the most common.
If the trustee fails to account, he or she is in violation of the statute and his or her fiduciary duty. If the beneficiaries are harmed by the lack of accounting, the trustee may be liable. Further, the court may become involved, may levy sanctions and could even remove the trustee. Certainly, the fees of the trustee would be at risk of being reduced or eliminated.
Beneficiaries who are entitled to receive a current accounting should make a written demand to the trustee if an accounting is not provided. If the accounting is not provided in the proper form as required by the law, then after sixty days the beneficiary can file a probate court petition to seek a court order requiring the trustee to prepare the proper accounting and can request reimbursement for the fees and costs they incur in bringing the petition. Such reimbursement is in the court’s discretion and not guaranteed.
Note that the statute of limitations for wrongful acts against the trustee (if one is not a minor) is three years from when the accounting is provided, or facts become known to the beneficiary of the wrongful act. The wise trustee should want to provide accountings to start the statute of limitations running.
The actual statute follows, but remember to update this since statutes can be altered over time:
Cal Prob Code § 16062. Duty to account to beneficiaries
Except as otherwise provided in this section and in Section 16064, the trustee shall account at least annually, at the termination of the trust, and upon a change of trustee, to each beneficiary to whom income or principal is required or authorized in the trustee's discretion to be currently distributed.
A trustee of a living trust created by an instrument executed before July 1, 1987, is not subject to the duty to account provided by subdivision (a).
A trustee of a trust created by a will executed before July 1, 1987, is not subject to the duty to account provided by subdivision (a), except that if the trust is removed from continuing court jurisdiction pursuant to Article 2 (commencing with Section 17350) of Chapter 4 of Part 5, the duty to account provided by subdivision (a) applies to the trustee.
Except as provided in Section 16064, the duty of a trustee to account pursuant to former Section 1120.1a of the Probate Code (as repealed by Chapter 820 of the Statutes of 1986), under a trust created by a will executed before July 1, 1977, which has been removed from continuing court jurisdiction pursuant to former Section 1120.1a, continues to apply after July 1, 1987. The duty to account under former Section 1120.1a may be satisfied by furnishing an account that satisfies the requirements of Section 16063.
Any limitation or waiver in a trust instrument of the obligation to account is against public policy and shall be void as to any sole trustee who is either of the following:
A disqualified person as defined in Section 21350.5.
Described in subdivision (a) of Section 21380, but not described in Section 21382.
Cal Prob Code § 16063. Contents of account; Presentation
An account furnished pursuant to Section 16062 shall contain the following information:
A statement of receipts and disbursements of principal and income that have occurred during the last complete fiscal year of the trust or since the last account.
A statement of the assets and liabilities of the trust as of the end of the last complete fiscal year of the trust or as of the end of the period covered by the account.
The trustee's compensation for the last complete fiscal year of the trust or since the last account.
The agents hired by the trustee, their relationship to the trustee, if any, and their compensation, for the last complete fiscal year of the trust or since the last account.
A statement that the recipient of the account may petition the court pursuant to Section 17200 to obtain a court review of the account and of the acts of the trustee.
A statement that claims against the trustee for breach of trust may not be made after the expiration of three years from the date the beneficiary receives an account or report disclosing facts giving rise to the claim.
All accounts filed to be approved by a court shall be presented in the manner provided in Chapter 4 (commencing with Section 1060) of Part 1 of Division 3.
Cal Prob Code § 16069. Exceptions to duty to account, provide terms of the trust or requested information
The trustee is not required to account to the beneficiary, provide the terms of the trust to a beneficiary, or provide requested information to the beneficiary pursuant to Section 16061, in any of the following circumstances:
In the case of a beneficiary of a revocable trust, as provided in Section 15800, for the period when the trust may be revoked.
If the beneficiary and the trustee are the same person.
Probate Code Section 16060 Methodology
Even if there is no requirement for an annual accounting (during the time the trust is revocable, for example), another probate code statute allows beneficiaries to get vital information even if not a full formal accounting. The beneficiaries still have legal rights. California Probate Code §16060 provides as follows:
Trustee's general duty to report information to beneficiaries. The trustee has a duty to keep the beneficiaries of the trust reasonably informed of the trust and its administration.
The courts have held that the duty to provide information is separate from any duty to provide an accounting. The concept is that beneficiaries are entitled to obtain information reasonably necessary to enable them to enforce their rights under the trust. Using that more general duty, a formal demand may be made upon the trustee and if ignored, a petition filed with the court.
When there is a professional trustee, everyone expects a regular professional accounting. The problem arises when the trustee is a family member…often mom or dad…who has failed to account and most beneficiaries in the family do not even know such a duty exists. Years can go by without an accounting and often the children beneficiaries are shocked and dismayed when the surviving spouse finally dies to discover that much of their inheritance has been spent or, just as common, there are no real records to account as to what happened with what asset during the decade or two that the surviving spouse was trustee for them.
The most typical situation arises when one parent dies and a part of the trust becomes irrevocable and an accounting is required for the eventual beneficiaries…usually the children. The remaining spouse, who is usually the sole trustee, often does not even know an accounting is due and would be annoyed to know that his or her children are entitled to an accounting of what the surviving spouse considers her or his own property. The children, perhaps worried as to what they will eventually inherit or how the money is being spent, are anxious to ask but fear a breakdown in family relations if they do.
Example: A typical family trust in which the surviving spouse gets income for life, the right to invade for need, and the remaining principle (corpus) goes to the children upon the death of the surviving spouse. The surviving spouse is to account annually. And does not. The assets are not divided into two trusts, one irrevocable and the surviving spouse just assumes he or she has the right to spend whatever he or she wants to.
The surviving spouse may be invading corpus and not aware that he/she is not to do that unless there is need and the need is not just his or her discretion. The children know they are to get what is left…but often do not even know what is in the irrevocable trust.
Such a situation can result in anguish for the entire family if not handled with both discretion and some wisdom. A family conference or bringing in a trusted advisor, such as a long-time pastor or attorney, is often a good idea. But the children must realize that doing nothing does not protect their interests.
It is important to note that asking for an accounting does not only provide information but acts to educate trustees as to their actual duties and obligations. It is not unusual for a trustee to be surprised that they must account, and they are more than willing to do so once they realize the law requires it.
More troublesome is the trustee that is not a parent but a more distant relative or even a stranger. This often happens as trustees die or become unable to perform and successor trustees take over who may have little real relationship with the beneficiaries or are simply ignorant of their actual duties. Often, they may be elderly with little energy to learn the requirements to account.
Being a trustee is often a difficult and usually a thankless duty and one easily ignored if the beneficiaries do not actively protect their interests. The first step of protection is to get annual accountings as the law provides. Just as with taxes, it is a necessary and often unwelcome task that must be accomplished each year.