As the successor trustee in a trust administration, one of your most important tasks is to create and maintain a trust accounting. The accounting must include the trust assets and values as of the decedent’s date of death, the current assets and values, the expenses, the amount you will reserve for future expenses, and the proposed distribution amounts to each beneficiary.
The purpose of the accounting is to tell the story of the trust assets and transactions with enough detail for the beneficiaries to understand and trust your presentation of the trust financials. Ultimately, the beneficiaries want to know what they are getting. And you want your accounting to be truthful and easy for them to believe.
In many cases, especially when there is a high trust level between the beneficiaries and the trustee, a simple spreadsheet will suffice. But the spreadsheet still needs to contain the information required by California law.
First, we tell our trustee clients to keep track of everything, and to put it in a spreadsheet.
The trustee needs to document the date-of-death assets and values. These often include the home, bank accounts, and brokerage accounts.
This is part of the same process we discuss in Trust Inventory: Locate, Protect, and Value Trust Assets.
The value of the home can be documented by an appraisal or the sale price, if the home is sold shortly after the date of death.
The value of the bank and investment accounts will be the most recent statement values.
Investment accounts can go up and down based on market fluctuations. We typically recommend that the trustees liquidate the investment accounts soon after they gain access. This takes the trustee out of the role of investment advisor, which is not the trustee’s role, and keeps the focus on gathering and preserving the trust assets.
Keep track of all expenses.
In many trust administrations, it may take several weeks for the trustee to gain access to the decedent’s accounts, and, sometimes, bills need to be paid. In many of those situations, the trustee will foot the bill. But the trustee needs to be reimbursed.
Keep receipts, and record each expense and reimbursement on the accounting spreadsheet.
You will need to establish a trust bank account to receive the liquidated investment accounts, proceeds from the sale of the home, and cash from other bank accounts.
The best scenario is to eventually have one trust account from which to receive deposits and pay the bills. We explain how to set this up in How to Open a Trust Bank Account in California After Death.
If you can consolidate the decedent’s bank and liquidated investments into one account, your accounting becomes easier because every transaction will be listed on the bank statement.
Once the trust's investment accounts are liquidated and a home is sold, the trust bank account can suddenly hold a substantial amount of cash.
That raises an issue trustees sometimes overlook: FDIC insurance limits.
Under current FDIC rules, trust deposits are generally insured at $250,000 for each eligible beneficiary, up to a maximum of $1.25 million per trust owner at a single FDIC-insured bank when the trust has five or more eligible beneficiaries.
The rules depend on the number of trust owners and eligible beneficiaries, so don't simply assume the entire balance is insured.
This comes up frequently after the trustee sells the decedent's home. If the trust will temporarily hold more cash than the applicable FDIC limits, talk with the bank about the available coverage and consider spreading the funds among separately insured banks.
Opening accounts at two branches of the same bank does not create additional FDIC coverage.
Once you set up the trust bank account, everything should flow through it, and if every transaction flows through it, your bank statements are the truth for the accounting.
If you sell the house, the proceeds go into the trust account. If you liquidate an investment account, the cash goes into the trust account. If the trust receives a tax refund, rent payment, insurance proceeds, or other income, deposit it into the trust account.
Likewise, pay the administration expenses from that account whenever possible.
For each transaction, record:
Keep the supporting invoices and receipts.
If the trustee paid expenses personally before gaining access to the trust accounts, document those expenses and show the trustee's reimbursement.
Don't simply list "Trustee reimbursement — $4,832." Explain what was reimbursed.
The goal is for a beneficiary to be able to follow what happened without having to guess.
If the trust owns the decedent’s residence, many of the larger transactions in the accounting will involve maintaining and eventually distributing or selling the property. We discuss those decisions separately in What to Do With the Family Home in a California Trust Administration.
If your spreadsheet is accurate and presents a transparent picture of the trust assets and transactions, then in most cases, the beneficiaries will be satisfied.
California Probate Code §16063 tells us what a statutory trust accounting must contain. Among other things, it must disclose the trust's receipts and disbursements, assets and liabilities, trustee compensation, and the agents hired by the trustee and their compensation. It should also tell the beneficiary that he can petition the probate court to review the accounting and that claims against the trustee for breach of trust may be subject to a three-year statute of limitations.
When the trust assets are ready to be distributed, we send the beneficiaries the accounting spreadsheet with an agreement and waiver of further accounting, asking them to approve the accounting and waive the need for subsequent accounting.
If all the beneficiaries sign the agreement and waiver, then the trustee can be assured the beneficiaries will not contest the accounting, and the trustee will not have to reserve additional funds from the trust to cover potential litigation and attorney fees — which means she can distribute more of the trust funds to the beneficiaries.
However, sometimes we encounter a recalcitrant beneficiary who, for whatever reason, and often the reason is not that the accounting was insufficient, will demand a formal accounting.
Usually the demand is more personal, such as the beneficiary thought Mom should have named him the trustee, or he has held a long-term grudge against the trustee and the other beneficiaries, or, a more recent phenomenon, ChatGPT told him he was entitled to “an official” probate accounting.
We see the same family dynamics arise in other parts of an administration, especially when beneficiaries disagree over property. I discuss some of those situations in What Happens When Beneficiaries Disagree Over Personal Property?.
A beneficiary can demand an accounting. That does not mean the beneficiary can demand a full-blown probate accounting and require the trustee to prepare one.
If the trust does not require a formal probate accounting, the trustee's obligation is generally to provide an accounting that satisfies the Probate Code. That means the accounting must contain the information required by Probate Code §16063, as described above.
A formal probate accounting is different. That is the more technical accounting format used when an accounting is filed with the probate court for approval. It breaks the administration into formal schedules for receipts, disbursements, gains and losses, distributions, and property remaining on hand.
If a beneficiary receives a complete and accurate accounting and then says, "I want a formal probate accounting," that demand alone does not require the trustee to prepare one.
If the beneficiary believes the accounting is inadequate, the beneficiary can make a written demand for an accounting. If the trustee does not provide the requested accounting within 60 days, and no accounting was provided during the preceding six months, the beneficiary can petition the probate court under Probate Code §17200 to compel one, subject to the statutory exceptions.
But this is not without a cost.
If he wants the formal probate accounting, he must put skin in the game: hire and pay for an attorney to file the petition. Then, the trustee must also hire an attorney to respond to the petition and may need to hire an accountant to prepare the probate accounting. That is money taken out of the trust, which means less paid out to the beneficiaries.
In addition, it will take several months, if not many more, to get an order on the petition, which substantially delays the payouts to the beneficiaries.
This is also why the trustee’s obligation to keep good records is part of the larger fiduciary responsibility we discuss in What Is Fiduciary Duty in California?.
There are two different deadlines.
Some trusts contain a provision limiting the time a beneficiary has to object to matters disclosed in an accounting. Probate Code §16461 allows the trustee to use that procedure if the trust contains the required type of provision and the statutory requirements are followed.
The accounting must adequately disclose the item, and the beneficiary must receive the required statutory notice in at least 12-point bold type. The objection period generally cannot be less than 180 days.
If the beneficiary does not make a written objection within that period, he can be barred from later asserting a claim against the trustee concerning an item that was adequately disclosed in the accounting.
But the 180-day procedure is not available merely because the trustee puts the §16461 notice in the accounting. The trust itself must contain the type of provision contemplated by §16461.
If §16461 does not apply, the longer statute of limitations under Probate Code §16460 generally controls. If the beneficiary receives a written accounting or report that adequately discloses the facts giving rise to a claim against the trustee, the beneficiary generally has three years from receiving the accounting to file a court proceeding based on that claim.
So, in practical terms, if the trust permits us to use the §16461 procedure, we want to include the required statutory notice and start the 180-day objection period. Otherwise, a beneficiary may have as long as three years after receiving an adequately disclosed accounting to bring a breach-of-trust claim.
But if the beneficiaries approve the accounting and sign a waiver before the trustee makes the final distributions, the trustee does not have to sit around waiting for either the 180-day or three-year period to expire.
The accounting is one of the later steps in the overall administration. For the larger sequence of what the trustee should be doing and when, see California Trustee Timeline: Day 1 Through Day 180.
A trust accounting does not need to be complicated, but it does need to be complete, accurate, and easy for the beneficiaries to understand. The accounting must do two things: 1) fulfill the requirements of the California Probate Code, and 2) tell the story of the trust administration in a way that instills trust and confidence with the beneficiaries.
If you keep good records from the beginning, run the administration through a dedicated trust account, document the major transactions, and clearly show what each beneficiary will receive, the accounting usually does what it is supposed to do: explain what happened to the trust assets and give the beneficiaries confidence in the administration.
And when questions or disputes do arise, a well-prepared accounting puts the trustee in a much better position to answer them and bring the administration to a close.
If you have been named successor trustee of a California trust and would like help with the administration, Contact Us to schedule a free initial 15 minute call with one of our estate planning attorneys.