California Trustee Accounting Requirement (2023)

Introduction:

Trusts are a unique invention of American estate planning, and the revocable trust has become a standard tool used by most middle-class Americans to avoid spending an estate. In most trusts, the couple establishes a trust in which the children are the ultimate heirs to at least a portion of the property, but only after the death of the surviving spouse. These are commonly known as "marriage foundations" or "QTIPs" and probably account for more than sixty percent of revocable relationships in existence. The reader is invited to read the many articles on this site to get acquainted with the basics of such funds.

As discussed in our article on trustee duties to beneficiaries, a trustee has a fiduciary duty to all beneficiaries, the highest duty known by law. This includes doing nothing as a trustee that is not in the best interest of the beneficiary.

In California, a trustee must account to the beneficiaries for the activities of the fund, except where certain exceptions apply. What is this accounting and when it is required is the topic of this article.

Responsibility:

Most trusts are not subject to regular supervision by a court or government agency. They are private documents, essentially an agreement between the trustee establishing the trust and the trustee managing the trust, for the benefit of the beneficiaries protected by the trust.

And since funds are rarely filed or registered with a government agency, laws have been enacted that provide that heirs and beneficiaries have a method of verifying the activities of the fund and what happens to the assets of the fund.

In this state, California probate law provides the legal authority to provide accounting to trustees. Subject to certain exceptions, a trustee is required to file financial statements for "...each beneficiary to whom distribution of income or principal is currently required or authorized, at the discretion of the trustee." The deed of trust generally determines who has the right to bill under the distribution instructions.

California courts have recently expanded the number of individuals entitled to trustee accounting, so legal counsel should be consulted to determine if accounting is available. It is recommended that the trustee provide accounting records or have good legal authority as to why accounting records are not required.

1. DEFINITION OF "ACCOUNTING". California Probate Code section 16063 lists six different types of data that must be reported in an "accounting record." The essential elements required are: a statement of income and expenses; a statement of assets and liabilities; a statement of the director's remuneration; a description of the designated representatives (certified accountants, attorneys, professional managers, financial managers, property managers, etc.); and a statement that the recipient may apply to the court for an audit and that such a request must be made within three years of receipt of the invoice.

2. HOW OFTEN IS ACCOUNTING NEEDED? The law requires accounting to be done at least annually, upon termination of the trust and after a change in trustee.

3. EXCEPTIONS TO ACCOUNTING REQUIREMENTS. Liability is normally not required during the period in which the trustee can revoke a trust. Note that if the trustee becomes incompetent, even if alive and useful, accountability becomes necessary as the trustee no longer has the power to revoke, thus the trust is irrevocable. The law does not require a beneficiary of a revocable fund to account for the period that the fund is revocable.

4. EVENT OF DEATH OF THE FIRST SPOUSE. A typical "QTIP" trust formed by a married couple requires that the trust be divided into "one-half" and "one-half" upon the death of the first deceased spouse. The deceased first spouse's portion becomes an irrevocable trust. Accounting is then only necessary for the irrevocable part, so that the beneficiaries (usually the children) know what is there and can see what happens to them. Of all the accounts that are routinely ignored, this is probably the most common.

If the trustee is not accountable, they are in breach of the Articles of Incorporation and their duty of loyalty. When beneficiaries are harmed by a lack of accountability, the trustee may be held liable. The court can also intervene, impose sanctions and even remove the trustee. Trust fees would certainly be in danger of being reduced or abolished.

Beneficiaries entitled to receive a checking account must submit a written request to the Trustee if they do not maintain an account. If records are not kept as required by law, the beneficiary may, after sixty days, file a probate petition to obtain a court order requiring the trustee to maintain proper records and may request reimbursement of fees and expenses incurred in filing the petition. Such reimbursement is at the discretion of the court and is not guaranteed.

Note that the statute of limitations for wrongful acts against the trustee (unless he is a minor) is three years from the date of responsibility or knowledge of the facts by the beneficiary of the wrongful act. The wise administrator must be willing to be accountable to initiate the application of the statute of limitation.

The actual bylaws follow, but remember to update them as bylaws can change over time:

Cal Prob Code § 16062. Responsibility to beneficiaries

Except as otherwise provided in this Section and in Section 16064, the trustee shall render accounts at least annually upon termination of the trust and change of trustee for any beneficiary from whom any income or principal may be required or authorized to discretion of the trustee to be distributed at present.

A trustee of a living fund created by an instrument signed before July 1, 1987 shall not be subject to liability under subsection (a).

A trustee of a trust established by a will made before July 1, 1987 shall not be subject to liability under subsection (a) unless the trust is established in accordance with Article 2 (commencing with Section 17350). of Chapter 4 Released from the continuing jurisdiction of Part 5, liability under subsection (a) applies to the trustee.

Except as provided in Section 16.064, the liability of a trustee under Section 1120.1a of the former Probate Act (superseded by Chapter 820 of the Articles of 1986) under a trust created by a will made before 1 July 1, 1977, which was withdrawn from the jurisdiction of the surviving court under former Section 1120.1a, survives on July 1, 1987. Liability under former Section 1120.1a may be satisfied by providing an account that meets the requirements of Section 16063.

Any limitation or waiver in a trust statement is contrary to public policy and void for any individual trustee who is any of the following:

A person disqualified under Section 21350.5.

Described in subclause (a) of Section 21380 but not described in Section 21382.

Cal Prob Code § 16063. Account content; presentation

An account provided under section 16062 must contain the following information:

A statement of receipts and capital expenditures and accrued income during the trust's most recent full financial year or since the last account.

A statement of the fund's assets and liabilities as of the end of the fund's most recent full financial year or the end of the accounting period.

The remuneration of the trustee for the most recent complete financial year of the trust or since the last account.

The agents appointed by the trustee, their relationship with the trustee, if any, and their remuneration in the last full fiscal year of the trust or since the last account.

A statement that the recipient of the account may apply to the court for judicial review of the account and the trustee's actions under Section 17200.

A statement against the trustee for breach of trust cannot be made after three years from the date the beneficiary received a statement or report of the facts that gave rise to the claim.

All accounts submitted for court approval must be submitted in the manner provided in Chapter 4 (commencing with Section 1060) of Part 1 of Division 3.

Cal Prob Code § 16069. Exceptions to Liability, Trust Terms Provision or Information Requested

The trustee shall have no obligation to account to the beneficiary, provide a beneficiary with the terms of the trust, or provide any information requested by the beneficiary pursuant to Section 16061 if any of the following circumstances exist:

If you are the beneficiary of a revocable trust under section 15800, the trust may be revoked for the period.

When the beneficiary and the trustee are the same person.

Methodology of Section 16060 of the Probate Law

Even when annual accounts are not required (for example, during the trust's cooling-off period), another Probate Code statute allows beneficiaries to obtain important information even if it is not a complete formal record. Beneficiaries still have statutory rights. California Probate Code §16060 states the following:

General obligation of the administrator to share information with the beneficiaries. The trustee has a duty to give reasonable notice to the beneficiaries of the trust about the trust and its administration.

The courts have ruled that disclosure is independent of any accountability. The concept is that the beneficiaries have the right to obtain information reasonably necessary to enable them to assert their rights under the trust. Using this more general duty, a formal claim can be made against the trustee and failure to comply may result in a lawsuit being filed in court.

PRACTICAL:

If there is a professional administrator, everyone expects regular professional accounting. The problem arises when the trustee is a family member...often a mother or father...who has not taken responsibility, and most family beneficiaries are unaware that such a duty exists. Years can go by without counting, and favored children are often surprised and dismayed when the surviving spouse finally dies and discovers that much of their inheritance has been spent, or just as often there are no actual records of what happened to them during one or two years. decades during which the surviving spouse was her trustee.

The most typical situation arises when a parent dies and part of the trust becomes irrevocable and liquidation is required for the eventual beneficiaries...usually the children. The surviving spouse, who is usually the sole trustee, often does not even know that a settlement is owed and would be upset to learn that their children are entitled to a settlement over what the surviving spouse considers to be their assets. The children, perhaps worried about what they will inherit or how the money will be spent, ask eagerly but fear that family ties will be broken if they do so.

Example: A typical family trust in which the surviving spouse receives an annuity, the right to meddle out of necessity, and the remaining fund (corpus) goes to the children upon the death of the surviving spouse. The surviving spouse must register annually. And not. The property is not divided into two funds, one irrevocable, and the surviving spouse just assumes that he has the right to spend whatever he wants.

The surviving spouse may be interfering with the corpus and not know better than to do so unless there is a need and the need is not at their sole discretion. Kids know they should keep what's left...but often they don't even know what's in that irrevocable trust.

Such a situation can be distressing for the entire family if not handled carefully and wisely. A family conference or bringing in a trusted advisor, such as a B. pastor or veteran attorney is often a good idea. But children need to realize that doing nothing is not in their best interests.

It is important to note that the accountability requirement not only provides information, but also serves to educate trustees as to their actual duties and responsibilities. It is not uncommon for a trustee to feel overwhelmed by the need to be accountable, and they are more than willing to do so once they realize it is required by law.

More problematic is the administrator who is not a parent but a more distant relative or even a stranger. This usually occurs when the trustees die or become insolvent, and are taken over by subsequent trustees who may have little actual relationship to the beneficiaries or are simply ignorant of their actual duties. They are often older people with little energy to learn the demands of accountability.

Often a difficult and usually thankless duty, being a trustee is easily ignored if the beneficiaries do not actively protect their interests. The first step in protection is to prepare the legally required financial statements. Like taxes, it is a necessary and often undesirable task that must be completed each year.