Fiduciary Accounting: Prepare it When You do the 1041 and Avoid a Lawsuit Later

Most individual trustees are not aware of their obligation to provide beneficiaries with an annual trust accounting. Simply getting the trust’s income tax return prepared is not enough; that satisfies the IRS, but not the Florida statutory requirement of an accounting.

A trust accounting, also known as a fiduciary accounting, is a detailed report of all financial transactions of the trust that show the beneficiaries the value of the trust assets at the beginning of the year, all the income and expenses and changes in asset values during the year, and winds up with a year end balance sheet.

Failure to provide the annual accounting is a breach of the trustee’s duty as a fiduciary, which can lead to litigation with beneficiaries who have not been fully informed of the trust activities. Think step-children who don’t like how much money step-mom is receiving from the trust dad created when he died.

Once a breach of trust is alleged, the plaintiff/beneficiaries can potentially prevent the trust from paying for defense counsel out of trust funds, meaning the trustee is coming out of his or her personal pocket to pay for the defense.

We have been involved in a case where no accountings were provided for nearly 40 years. Imagine the volume of work (and expense!) involved in locating records, and, in that case, getting appraisals of assets each year for the last forty years! The judge was not amused. Nor was the trustee when he was paying for his lawyers out of his own pocket.

An accounting gives the trustee the opportunity to, for example, disclose trustee’s fees, the asset allocation between income and growth and how expenses are allocated between the current income beneficiary and the remainder beneficiaries.

All “qualified beneficiaries” must receive the accounting. In a “credit shelter,” “bypass” or “QTIP” trust, this means not only the surviving spouse, but also the next generation of beneficiaries. Yes, the children and the step-children must be shown the accounting.

Florida statutes allow a trustee to include a limitation notice on the accounting that limits the beneficiaries to six months from receipt of the accounting to bring a lawsuit for actions disclosed in the accounting, or be forever barred from doing so. We recommend sitting down with the beneficiaries to go over the accounting and answer any questions that it might bring to mind.

So, this year when you prepare the trust income tax return, also prepare a trust accounting. Avoid a lawsuit!