Understanding Trustees’ Fiduciary Accounting Responsibilities by Rick D. Bazzani, CPA
Posted on October 10, 2024
by
Rick Bazzani
The people you name to administer your trusts play a pivotal role in protecting your assets. Not only do they have the fiduciary duties to make prudent investment decisions and manage the distribution of trust assets as specified in your trust agreements, but they are also legally responsible for ensuring beneficiaries receive a full accounting of all trust activity. When trustees fail to fulfill these obligations, they put the trust and themselves at risk of often hostile litigation.
Whether trustees simply overlook their requirement to prepare regular fiduciary accountings or avoid it due to the laborious efforts required, they open the trust to disputes and put themselves in legal jeopardy of having to pay restitution from their personal assets. At that point, the courts can compel trustees to provide the fiduciary accountings for all missing years and recall facts that may have occurred many years ago. This can become a challenging and logistical nightmare, especially for the trustee who also failed to retain accurate records.
As an example, consider a common estate-planning situation in which a couple establishes a trust for the benefit of their two children upon the death of both parents. Knowing that the elder child is more fiscally responsible, the parents draft the trust allowing their firstborn to receive his portion of the inheritance outright upon the parent’s passing. The parents place the younger child’s portion of their estate in a trust and appoint the older child trustee to prevent the younger child from burning through his inheritance too quickly. Without the benefit of fiduciary accountings, the younger child may assume that he is not receiving the proper trust distributions to which he is entitled. He subsequently may bring legal action against his sibling for mismanagement of the trust and demand the termination of all co-trustees as well as the immediate distribution of all assets to him regardless of the parent’s original wishes. Similar disagreements between heirs may arise when they have conflicting interests, such as when one beneficiary wants to take regular distributions from a trust’s remaining assets while the other prefers to reinvest the assets and grow the trust for future generations.
To avoid these circumstances and any presumptions of improper trust management, trustees must ensure that all relevant parties have material facts concerning the trust’s assets, income and disbursements. It enables trustees to refute any claims of fiduciary impropriety and demonstrate that they upheld their responsibilities to “administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries” and in accordance with the wishes of the grantors. Whether trustees prepare and file these annual fiduciary accountings on their own or hire experienced professionals to take on these responsibilities does not matter. The aim is to dispel any beliefs of improper trust management and temper discord between related parties, thereby mitigating the risk of future trust litigation.
When trustees accept the fiduciary responsibilities of administering a trust, they also accept the associated risks that come with that role. It is critical they understand all relevant laws and their ability to abide by them while navigating carefully through often complex issues and family relationships. The transparency that results from fiduciary accountings of trust activities creates a high level of trust between all parties, which can go a long way in preventing unnecessary trust litigation.
About the Author: Rick D. Bazzani, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he provides individuals and entrepreneurs with a broad range of tax-efficient estate, trust and gift-planning services. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or info@bpbcpa.com.
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