The following is an excerpt from Wayne M. Zell’s “Blueprint for Wealth – Successor Trustee Manual” which can be purchased in the Books section of this blog.
Before we go deeper into this issue of accounting, keep in mind that, more often than not, if you, the Trustee, and the beneficiaries are friendly parties, the beneficiaries may waive entirely the need for you to prepare any formal accounting, since it will save time and expense that otherwise will be paid out of the Trust and effectively reduce the beneficiaries’ inheritance. We recommend that any such waiver of accounting by the beneficiaries be done properly in writing and that they be advised of and have the opportunity to exercise their right to independent counsel prior to signing it. If there are any current or potential future conflicts between the beneficiaries and you, the Trustee, or between any of the beneficiaries, you will probably want to prepare the required formal accounting in order to protect yourself against possible future liability.
If the accounting is not waived by all the beneficiaries entitled to the accounting, then you must fulfill your duty to account to them for all Trust income, expenses, distributions and transactions, on at least an annual basis. Keep in mind that, even if all beneficiaries are willing to sign a written waiver of the accounting, it may sometimes be a good idea to proceed with the accounting anyway. The beneficiaries may not fully understand your job and why you are entitled to Trustee compensation (above and beyond what you might also be receiving as an inheritance if you are a beneficiary of the trust) and by providing them with a detailed accounting, they are probably less likely to contest your fee (typically taken by you on an ongoing basis for complex, long-lasting trusts or at the end of the Trust administration process for simple trusts.) When the beneficiaries are provided all the pertinent accounting information, they are less likely to make certain negative assumptions regarding your decisions, which can also help reduce potential conflicts. Furthermore, once the statute of limitations (generally, one to three years, depending on the state in which the Trust is administered) has passed since your delivery of an accounting, your Trustee liability is forever closed, unless your accounting is fraudulent or grossly negligent.
Finally, the reasonable cost of the accounting is payable from Trust assets (you typically will need an attorney and/or accountant to prepare the final accounting in the proper format, after a review of the information you have provided, to be sure it is complete and the accounting will not be false or misleading).
Assuming the accounting is not waived by the beneficiaries, then besides the regular annual accounting, an accounting is usually due upon the occurrence of any of the following events: (1) when a Trust becomes irrevocable by the Grantor (sometimes this may occur upon the incapacity of the Grantor, but most often happens upon the death of the Grantor); (2) if the deceased Grantor is the first spouse of a married couple, this accounting requirement may continue to apply to the “Family” (“Exemption”) and “Marital” Trusts that may be established after his or her death.); (3) upon final distribution of Trust assets and/or full distribution of a particular beneficiary’s share of the Trust; and, (4) when there is a change of Trustee because of your resignation or removal (See the Chapter, “Transition to Another Trustee”). Your attorney can help you determine when an accounting may be necessary and the format in which it must be presented.
Generally, the beneficiaries who are entitled to the accounting are only those to whom income and/or principal is required to be currently distributed (or may be distributed in your discretion). An accounting does not usually need to be delivered to all future contingent and remainder beneficiaries. The attorney can help determine whether the Trust document or state law changes these general rules. The beneficiaries who are entitled to the accounting are the ones who must all waive the accounting if the determination is made not to prepare it.
If a beneficiary has questions about your accounting, you should answer them truthfully and as quickly as possible, to avoid creating a conflict. If, after receiving any requested information or explanation, a beneficiary objects to your accounting, you may then wish to proceed with filing a formal accounting with the appropriate local court, so that the matter may be resolved by the final court-approved accounting and you will be absolved of any further liability. Obviously, this can create considerable delays in distributing the beneficiaries’ inheritance, as well as considerable additional Trust expense that will reduce their inheritances. Therefore, you should only file a formal court accounting after careful consideration of the pros and cons with your attorney for the Trust.
Assuming you file an accounting, there is no reason to be unduly afraid or anxious about this task, provided that you maintained good recordkeeping (as described in the Chapter, “Recordkeeping”) and prepared the information necessary for your accountant to prepare the Trust income taxes (as described in the Chapter, “Income Taxes”). Usually, the only types of transactions that may pose some complexity for the accountant occur when the tracing of funds must be done in detail, such as when assets are sold and the proceeds reinvested, or accounts are opened and closed, or when money is shifted between accounts.