A trust is a legal document that designates a trustee to manage assets for a grantor while the grantor is incapacitated or has died. The grantor also may want the trustee to manage the trust assets while the grantor is still alive. In this case, the beneficiaries would not necessarily get an accounting – the grantor would get one. All beneficiaries have a right to certain information as it relates to their interest in the trust after the grantor has died.
Beneficiaries are entitled to know how trust assets are being managed, what type of disbursements are being made, how the trustee is being compensated, and whether any income has been earned on trust property. This information is usually provided to the beneficiaries in the form of trust accounting.
What is Trust Accounting?
Trust accounting is a detailed record that includes information about all income and expenses of a trust. Information that should be included in a trust accounting includes details regarding:
- Taxes paid, disbursements made to trust beneficiaries, and gains and losses on trust assets
- Fees and expenses paid to advisors of the trustee, such as attorneys, CPAs, and financial advisors
- Compensation and expense reimbursements paid to the trustee
To prepare an accurate trust accounting, an inventory of trust property, and copies of all account statements, invoices, and receipts must be kept. It is recommended that trustees keep records organized and utilize financial planning software to better track expenses and investments. Trust accounting is usually required annually for a trust. When the trust is settled, a final accounting may be required.
Trustees must comply with state trust accounting laws and perform their fiduciary duties to the best of their ability. If a trustee fails to perform their fiduciary duties in administering the trust, they could face serious ramifications. In regard to trust accounting, if a trustee fails to provide accounting or other pertinent information to the beneficiaries, the trustee may be removed from the position. Furthermore, if the trustee fails to maintain accurate records or provides false information to the beneficiaries, the trustee may be held personally liable. If a trustee has questions regarding their state’s trust accounting laws, they should consult with an attorney.
Preparing a trust accounting can be very complicated and overwhelming for the average trustee. Due to the complexity and serious ramifications called by mistakes, it is highly recommended to have a qualified and experienced CPA prepare trust accountings. Before choosing a CPA to assist with matters regarding a trust, confirm that the professional has experience with trust accounting. Trust accounting is much different than preparing individual or corporate tax returns. If the CPA in question does not have substantial experience with trust matters, continue the search for a qualified professional.
Annual trust accountings are not only required by some trust documents or probate code, but they also provide protection for trustees in the event that a beneficiary contests the trustee’s actions. Because trustees can be held personally liable, working with an experienced CPA is in your best interest.
If you have any questions about your trust, please contact us at 951-686-3608 or fill out a contact form and someone on our team will reach out.