California law requires that a trustee keep each beneficiary of the trust reasonably informed of the trust and its administration. The trustee must account annually to any beneficiary who is currently entitled to income or principal.
The Annual Trust Accounting is a document that must be presented in a certain format under California law in order to protect the trustee and start the period during which a beneficiary might file an action against the trustee for improper trust administration.
A trust accounting is prepared in a different format from a financial statement of the type prepared by an accountant. Therefore, if the trustee has an accountant prepare the trust accounting annually, the trust attorney should review it. Although preparing formal accountings will add to the expense of administration, the cost is payable from the trust, is tax deductible, and will be spread among all the beneficiaries.
Under California law, even those beneficiaries who are not currently entitled to income or principal may have a right to demand an accounting by the trustee. While the trustee may not currently expect that such a demand will ever be made by the remainder beneficiaries, the trustee cannot be certain that circumstances will not change.
Under California law, the annual accounting is to be prepared for the trust’s tax year which just ended and must include the following information:
- A statement of receipts and disbursements of principal and income that have occurred during the last year.
- A statement of the assets and liabilities of the trust.
- The trustee’s compensation.
- The agents hired by the trustee, their relationship to the trustee, if any, and their compensation.
- A statement that the recipient of the accounting may petition the court under California Probate Code Section 17200 to obtain a court review of the account and of the acts of the trustee.
- A statement that claims against the trustee for breach of trust may not be made after the expiration of a specified period of time from the date the beneficiary receives an account or report disclosing facts giving rise to the claim.
If any dispute between a beneficiary and a trustee arises, or if a beneficiary decides to question a trustee’s actions in administering the trust, the first items the beneficiary will demand are copies of the annual trust accountings. If these have not been prepared and distributed in prior years, the trustee will struggle to reconstruct poorly kept trust records (covering years of transactions) in order to comply with demands being made long after the fact.
The annual trust accountings are required by California law and they provide a trustee with protection if a beneficiary contests the trustee’s actions. For these reasons alone, the accountings must be prepared.
A trustee who does not prepare annual accountings does so at his or her own risk.
It is important to make sure that a trust is being administered properly and no actions are taken that might negatively impact the trust’s assets or the beneficiaries, nor cause any adverse tax consequences.
In order to make sure no mistakes are made during the trust administration process, the trustee should schedule periodic meetings with the trustee’s attorney and the other advisors, to go over how the trust is being administered.