PEOPLE INVOLVED IN A TRUST. Because trusts are not filed or recorded with any government agency, laws have been established to make sure that heirs and trust beneficiaries have some way to find out about a trust and its assets. The parties involved in a trust are typically the Trustors who set up the trust, the Trustees who administer the trust and the Beneficiaries who are the persons who are to receive assets and income from the trust.
STATE LAWS RE TRUST ACCOUNTING. The California probate code sections quoted below state the laws about providing accountings to trust beneficiaries. Generally, the trustee only has to provide the 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 has to be read and interpreted to determine who is entitled to accountings. Keep in mind however that the 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. Especially if the trustee is refusing to account and/or claims that an accounting is not required.
WHAT DOES “ACCOUNTING” MEAN. The California probate code section 16063 quoted below has 6 separate types of data that have to be provided in an “accounting”. The law is pretty much a listing of common sense types of information needed to determine what is in a trust. The key 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 the agents hired; and a statement that the recipient may petition the court for review and that such a petition must be within 3 years.
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 DUTY TO PROVIDE ACCOUNTING. The law does not require an accounting to any beneficiary of a revocable trust, for the period when the trust may be revoked. This can be a tricky area because the period when the trust may be revoked DOES NOT include the time when the Trustor is incompetent. Situations arise when a Trustor becomes mentally incompetent and a successor Trustee takes over. In that case the Trust cannot be revoked because a mentally incompetent person does not have legal capacity to revoke his trust and therefore an accounting is required.
DEATH OF FIRST SPOUSE SITUATION. A typical 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 a permanent irrevocable trust. An accounting is then required for only the permanent 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.
WHAT IF THE ACCOUNTING IS NOT PROVIDED? Beneficiaries who are entitled to receive a current accounting would need to 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 quoted below, then after 60 days the beneficiary can file a probate court petition (lawsuit) to get a court order requiring the trustee to prepare the proper accounting.
TYPICAL PROBLEM AREA. Trust accounting can be a source of disagreement and frustration to family members and surviving spouses because everyone wants to know what is in the trust and what they will get out of it. For example, in many typical living trusts established by a husband and wife, the trust provides that when the first spouse passes away that the trust stays in tact and the surviving spouse controls the entire trust and is entitled to income and principal distributions for the rest of his/her life. The children often are not to be given anything until both spouses pass away. However, since part of the trust becomes permanent on the death of the first spouse, the children would typically be entitled to an accounting. This can be especially annoying to children where one of the parents has died and the surviving parent is handling the entire trust and taking liberties with the trust assets and/or spending beyond what the trust allows. The children are understandably concerned that by the time the surviving parent has passed away the trust assets may have dwindled. These concerns also arise when there is a new spouse in the picture or if the surviving parent has health or mental problems or is subject to undue influence.
There is another law that allows beneficiaries to get some information short of a formal full accounting. If it is a clear-cut case where no annual accounting is required, 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.”
This law has been interpreted by the courts to mean that the duty to provide information is independent of the 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. For example, in the trust example mentioned above where the children are not entitled to receive anything from the trust until after both parents have passed away, the children would still want to know what the trust assets are and how they are invested, etc. So, children in this situation would be legally entitled to demand specific information and the trustee would have to provide it. If information is not provided or if it is inadequate, the beneficiaries can file a probate court petition (lawsuit) to seek a court order for the trustee to provide the requested information.
Here are the California laws pertaining to a formal full trust accounting:
Cal Probate 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 Probate 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 Probate 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.
WFB Legal Consulting, Inc.–A BEST ASSET PROTECTION Services Group–Lawyer for Business