A Guide to Trust Accounting for Irrevocable Trusts

Many different kinds of trusts exist, but they fall under two categories: revocable trusts and irrevocable trusts. Understanding the difference between the two is crucial to trust accounting in California. Generally, the difference is simple – grantors can change the revocable trust at any time (as long as they are competent), while you typically can’t change an irrevocable trust without a court order or beneficiary approval.

At Marcia L. Campbell, we have been helping people prepare accurate and compliant accountings for irrevocable trusts for decades. Learn what you need to know about trust accounting for irrevocable trusts.

An Expert Guide to Trust Accounting for Irrevocable Trusts

For trustees overseeing an irrevocable trust, accounting is an essential part of their role. This responsibility offers crucial transparency to benefit beneficiaries and trustees alike. From record-keeping to liabilities, here is what you need to know:

Related Article: Trust Accounting 101: How Do I Prepare a California Trust Accounting

Record Keeping

A trust accounting for an irrevocable trust must include incredibly detailed and accurate records, which requires continuous work. These are tax-paying entities, so you must document all trust transactions. Generally speaking, you want to distinguish between:

• Income and principal receipts
• Income and principal disbursements
• Expenses allocable to principal and expenses allocable to income

“Trust accounting is different from normal accounting and bookkeeping, and even personal income tax bookkeeping. You are responsible to account for each penny, including every receipt, every disbursement, every gain, every loss, every distribution, and every asset change in the trust. This is a time-consuming and labor-intensive process that requires an expert eye to avoid disputes and penalties,” explained Marcia L. Campbell, expert trust accountant. 

Related Article: Common Trust Accounting Mistakes to Avoid

Taxes

Another consideration for an irrevocable trust accounting is taxes. These entities are taxable with a taxpayer identification number. You must file an income tax return each calendar year for a trust (and separate sub-trusts.)

“This is an incredibly specialized field. If an accountant isn’t well-versed in the intricacies of fiduciary accounting, it can result in issues when you prepare an accounting. For example, depending on how trust income has been accumulated, your trust may require additional taxes or refunds. There are other probate rules to consider, and the process can become complicated without the expertise or experience of a trust accountant,” elaborated Marcia. 

Related Article: What is the Purpose of a California Trust Accounting?

Trustee Powers and Duties

Generally speaking, the trust document outlines the trustee’s powers, which can be broad or restrictive.

Even when a trustee receives total control, they must always act in good faith and in the best interest of beneficiaries and the trust. If a trustee delegates responsibilities to other parties, they are still accountable for them, which includes preparing an accounting.

Trustees must fulfill what is known as a fiduciary duty. This duty includes a duty of loyalty and impartiality, a duty to avoid conflicts of interest, a duty to responsibly administer trust investments, and a duty to provide each beneficiary with an annual trust accounting.

Per Probate Code §16063, Accountings must include detailed statements of:

• Receipts and disbursements of principal and income during an accounting period
• Payments and deposits made during the accounting period
• Assets and liabilities at the end of the accounting period
• The trustee’s compensation
• Assets on hand at the end of the period
• Liabilities as of the last complete fiscal year
• Professionals the trustee hired to administer the trust and their compensation

Related Article: Debunking Common Trust Accounting Myths

Trustee Liabilities

Another reason professional CPA trust accounting is crucial boils down to liabilities. Trustees must file taxes, invest properly, and maintain accurate records. Any negligence can result in being liable for penalties, compound interest, and other penalties.

Related Article: Trust Accounting Basics and Tips for New Trustees

Premier Trust Accounting in California

By law, trustees must provide beneficiaries with reports about the assets, liabilities, receipts, and disbursements, which are all features of trust accounting. An accounting should also include trust terms and specifics about how they have administered it. Failure to provide accurate and compliant accountings can result in costly penalties or outright trustee removal depending on the severity. Ultimately, working with an expert trust accountant from the beginning is crucial to navigating complex requirements.

With Marcia L. Campbell, you can rest assured that your accounting will be accurate and compliant. Visit our contact page and fill out a form to get started.