Serving as a trustee is a responsibility that must be undertaken with care because trustees act in a fiduciary capacity. They owe certain legal duties to the beneficiaries of the trust and can be personally liable for breaching those duties. Accordingly, inexperienced trustees face many potential pitfalls. One of the most serious of these is the open-ended nature of the statute of limitations on claims involving a trustee’s failure to provide a fiduciary accounting to beneficiaries.
What Is a Fiduciary Accounting?
Trustees, depending on the state where the trust is located and the terms of the trust, can be required to prepare an account for the court and the beneficiaries. This fiduciary accounting details all assets held by the trust, distributions made from the trust, expenses paid, and outstanding liabilities. The point of the accounting is to show the court and the beneficiaries that the trustee has handled the trust assets appropriately and acted in accordance with the terms of the trust.
What Is the Statute of Limitations on Fiduciary Accountings?
Section 213 of New York’s Civil Practice Law & Rules sets a six-year statute of limitations on fiduciary accountings. However, the statute of limitations does not start running until the trustee repudiates its duties by clearly stating to the beneficiaries that he or she refuses to account.
How Does the Open-Ended Statute of Limitations Affect the Trustee’s Liability?
Trustees who fail to provide an accounting but never outwardly repudiate their duties to the beneficiaries may find it very difficult to defend against lawsuits from a beneficiary claiming misappropriation of trust assets or failure to account. Trustees cannot assert a defense that the statute of limitations period has run, or that the beneficiaries unreasonably delayed in bringing an action (known as “laches”) no matter how many years have passed unless the trustee clearly refused to provide a fiduciary accounting at some point in time. Without repudiation, the statute of limitations never starts running, so trustees may be sued for any errors or omissions made during the entire length of time they were acting as trustees. The more time that has passed, the harder it may be for the trustee to reconstruct financial records and mount a defense.
Notably, the burden of proof is on the trustee to show that the statute of limitations has run out with evidence that the trustee either provided an accounting or repudiated.
How Can a Trustee Minimize Liability for Failure to Account?
The most important way to reduce potential liability is for a trustee to comply with the terms of the relevant trust instrument or will. Therefore, if an accounting is required at set intervals or when certain events occur, the trustee must abide by those provisions.
However, even if the trust and/or will does not compel a trustee to produce periodic accountings, this does not mean a trustee never has to account, or never should account. A trustee should be forthcoming about offering information to a beneficiary. This will help alleviate distrust among the parties as well as reduce the risk of lawsuits. In the event a beneficiary requests an accounting, the trustee should always be prepared to account.
In addition, it is advisable to provide periodic accountings even without a request. The reason is that it limits the timeframe when the trustee can be sued. A trustee can file a formal accounting with the appropriate court and either seek a waiver and consent of the accounting from the beneficiaries or seek court approval. In this way, the beneficiaries cannot sue for any errors or omissions that occurred prior to the accounting being approved by the beneficiaries or court. The trustee can also account informally and request that a beneficiary acknowledge receipt of the accounting and waive any objections to the accounting.
Where a trustee truly wishes to repudiate, it should be done in writing and should clearly alert all beneficiaries to ensure the statute of limitations starts to run.
If you are a trustee, our attorneys can help you avoid the pitfalls of the statute of limitations and proactively minimize your risks of future claims.