A fiduciary, such as the executor of an estate or trustee of a trust, is in a position of power and control over the estate or trust. As such, a fiduciary has certain legal duties to the beneficiaries of the estate or trust. One of the key responsibilities of the executor or trustee is to provide fiduciary accounting. The accounting must provide detailed information on the assets, income, expenditures, and liabilities of the estate or trust. Fiduciaries have a duty to protect the interests of beneficiaries and must invest prudently and not waste assets. The accounting allows the beneficiaries and court to verify that the funds have been handled appropriately.
Estate Accounting Requirements
At the conclusion of the administration of an estate, the fiduciary should provide an accounting to the beneficiaries before distributing any assets from the estate. The accounting should list all assets in the estate, income earned by the estate while the estate was being administered, expenses paid by the estate (such as taxes or funeral expenses), and outstanding liabilities owed by the estate.
Trust Accounting Requirements
A fiduciary may be required to provide trust beneficiaries with periodic accounting throughout the lifetime of a trust. The timing and type of accounting depend on what is written in the trust and relevant state law. However, the trust can also state that a trustee does not have to prepare regular accountings.
A trust accounting will also be required if a court orders it. Trust beneficiaries can ask a court to compel a trustee to provide an accounting if they feel the trust is being mismanaged by the trustee.
When an accounting is prepared, it must detail all assets held by the trust, distributions made by the trust, expenses paid, and outstanding liabilities.
Review and Approval of the Fiduciary Accounting
Once the accounting is prepared, it must be reviewed and approved by the beneficiaries, or the court, depending on whether it is a formal or informal accounting.
In a formal accounting, the fiduciary submits the accounting to the appropriate surrogate or probate court. The court will review and approve the accounting but can require changes to be made prior to approval.
In an informal accounting, the fiduciary submits the accounting to the beneficiaries and seeks their approval. If the beneficiaries approve, they will sign receipts and releases acknowledging that they received the accounting and stating that they agree with the contents of the accounting.
Importantly, beneficiaries can question the fiduciary in both formal and informal accountings.
Pitfalls of Fiduciary Accountings
Estate and trust accountings include extensive financial details of all transactions during the accounting period. Failure to provide such information can be deemed a breach of fiduciary duty resulting in personal liability for the executor or trustee. As a result, it is essential to maintain detailed and complete records, particularly with respect to payments received by the estate or trust, and made by the estate or trust.
Beneficiaries commonly question expenses paid by the fiduciary. A fiduciary must account for their own fees, legal and accounting fees, and other third-party expenses they pay on behalf of the estate or trust. To avoid potential problems, a fiduciary should have ample support and documentation to justify all expenditures.
Legal Assistance with Fiduciary Accountings
Fiduciaries can be held personally liable for mismanaging funds and failing to properly account to beneficiaries. As such, it is best to work with an experienced attorney to avoid mistakes. Our attorneys are highly experienced in estate and trust administration issues and can assist you with executing your fiduciary duties and preparing an accounting. Contact us for a consultation today.