TRUSTS-DUTY TO ACCOUNT TO BENEFICIARIES

TRUSTS-DUTY TO ACCOUNT TO BENEFICIARIES

By: David L. Crockett, Attorney, CPA

UCLA Law School ’69, UC Berkeley ’66

Newport Beach, Ca 949-851-1771

www.trustandprobatelawyers.com

People involved in a trust. Because trusts are not filed or recorded with any government agency, laws have been established to make sure that heirs and trust beneficiaries have some way to find out about a trust and its assets. The parties involved in a trust (which is all written into the trust document) are typically the Trustors who set up the trust, the Trustees who administer the trust and the Beneficiaries who are the persons who are to receive assets and income from the trust.

State laws re trust accounting. The California probate code sections quoted below state the laws about providing accountings to trust beneficiaries. Generally, the trustee only has to provide the annual accounting to “each beneficiary to whom income or principal is required or authorized in the trustee’s discretion to be currently distributed.” The trust document has to be read and interpreted to determine who is entitled to accountings.

What does “accounting” mean. The California probate code section 16063 quoted below has 6 separate types of data that have to be provided in an “accounting”. The law is pretty much a listing of common sense types of information needed to determine what is in a trust. The key items requires are: a statement of receipts and disbursements; a statement of assets and liabilities; a statement of the trustee’s compensation; a description of the agents hired; and a statement that the recipient may petition the court for review and that such a petition must be within 3 years.

How often is an accounting required? The law requires an accounting to be done at least annually, at the termination of the trust, and upon a change of trustees.

Who is entitled to a trust accounting?

Both deceased. When the Trustors/creators of the trust are both deceased a trust becomes permanent and irrevocable. In such case, persons who are entitled to receive income or principal currently according to the trust provisions are legally required to receive an accounting, unless they have signed legal papers waiving an accounting. (PC§16062).

One deceased & one alive who is competent. When there are two Trustors/creators of the trust (typical husband and wife situation), and one dies, the trust provisions as written typically cause the trust to be divided with the surviving spouse’s portion being revocable the deceased spouse’s portion being permanent and irrevocable. The surviving spouse’s portion of the trust is not required to provide any accounting since it is revocable (PC§16069(a)(1). The deceased spouse’s portion of the trust, although it is permanent, is not required to provide any accounting except to persons or beneficiaries who are entitled to current income or principal distributions. (PC§16062(a).

One deceased & one alive but the one alive is incompetent. Under the newly amended Probate Code §15800(b), where the Trustor/creator is still alive but legally incompetent, annual accountings are required to all persons named as beneficiaries in the trust documentation who would be entitled to a distribution of income or principal upon the demise of the one who is legally incompetent. In other words, when the remaining Trustor/creator is incompetent, the trust cannot be amended and thus falls out of the exception in the law that does not require accountings for revocable trusts.

Single Trustor/creator deceased. An annual accounting is required to be given to all persons named as beneficiaries in the trust documentation. Probate Code §16062(a).

Single Trustor/creator alive but incompetent. An annual accounting is required to be given to all persons names as beneficiaries in the trust documentation even though they are not entitled to any distributions until the trustor is deceased. The law assumes in this instance that the trustor/creator is actually deceased so that persons who will eventually receive trust distributions will have a way to monitor and obtain information about the share they will eventually receive. Probate Code §15800(b).

Change of trustees in a permanent trust. All persons who are entitled to receive distributions of trust income or principal are entitled to an accounting on a change of trustee. Probate Code §16062(a).

Revocable Trust exception to duty to provide accounting. The law does NOT require an

accounting to any beneficiary of a revocable trust, for the period when the trust may be revoked. Thus, for a typical revocable trust, so long as the Trustor is alive and mentally competent, NO accounting is required. This can be a big source of contention where one of the Trustors has died and the one still alive is the stepmother or stepfather. The stepchildren typically will want an accounting but the law doesn’t require it when the stepmother or stepfather is still competent. However, they still may be entitled to some information short of a full accounting under Probate Code §§16060 and 16061 discussed below.

Incompetent but still alive situation-accounting NOW required. Situations arise when a Trustor becomes mentally incompetent and a successor Trustee takes over. In that case the Trust cannot be revoked because a mentally incompetent person does not have legal capacity to revoke his trust although the trust documents say it is revocable. This has caused a lot of confusion and litigation particularly where, for example, the successor Trustee who became the trustee upon the incompetency refuses to account to the children/beneficiaries who are not entitled to any income or trust distributions until the death of the incompetent Trustor. This resulted in an amendment to California Probate Code §15800(b), quoted in full at the end of this article. Effective as of January 1, 2023, where the person holding the power to revoke the trust is not legally competent, then the successor trustee who has taken over upon the incompetency event, must within 60 days of the incompetency provide a copy of the trust to all all persons who would be entitled to trust income or principal upon the death of the incompetent trustor and also must provide to those same persons an annual accounting and information required by Probate Code §16061.

Death of first spouse situation. A typical Trust formed by a married couple requires the trust to be divided up into “his half” and “her half” on the death of the first spouse to die. The portion of the trust belonging to the spouse who is still alive is typically revocable and in such case no accounting is required. The portion of the first spouse to die (known as the “deceased spouse”) becomes a permanent irrevocable trust. An accounting is still NOT required for the permanent irrevocable trust unless income or principal is required or authorized in the trustee’s discretion to be currently distributed. This is frequently the situation where the trust provides that the portion of the deceased spouse is to be held for the life of the surviving spouse and no distributions are to be made to the children/beneficiaries during the life of the surviving spouse.

What if the accounting is not provided? Beneficiaries who are entitled to receive a current accounting would need to make a written demand to the trustee if an accounting is not provided. If the accounting is not provided in the proper form as required by the law quoted below, then after 60 days the beneficiary can file a probate court petition (lawsuit) to get a court order requiring the trustee to prepare the proper accounting.

Typical problem area. Trust accounting can be a source of disagreement and frustration to family members and surviving spouses because everyone wants to know what is in the trust and what they will get out of it. For example, in many typical living trusts established by a husband and wife, the trust provides that when the first spouse passes away that the trust stays in tact and the surviving spouse controls the entire trust and is entitled to income and principal distributions for the rest of his/her life. The children often are not to be given anything until both spouses pass away. However, since part of the trust becomes permanent on the death of the first spouse, the children would typically want an accounting or at least some financial information about the trust. This can be especially annoying to children where one of the parents has died and the surviving parent is handling the entire trust and taking liberties with the trust assets and/or spending beyond what the trust allows. The children are understandably concerned that by the time the surviving parent has passed away the trust assets may have dwindled. These concerns also arise when there is a new spouse in the picture or if the surviving parent has health or mental problems or is subject to undue influence. Even though they may not be entitled to a full accounting, the children or other beneficiaries would have rights to obtain some information under Probate Code §§ 16060 and 16061 discussed below.

There is another law that allows beneficiaries to get some information short of a formal full accounting. If it is a clear cut case where no annual accounting is required, the beneficiaries still have legal rights. California Probate Code §16060 provides as follows:

“§16060.Trustee’s general duty to report information to beneficiaries. The trustee has a duty to keep the beneficiaries of the trust reasonably informed of the trust and its administration.”

In addition, California Probate Code §16061 provides:

“§ 16061. Except as provided in Section 16069, on reasonable request by a beneficiary, the trustee shall report to the beneficiary by providing requested information to the beneficiary relating to the administration of the trust relevant to the beneficiary’s interest.”

These laws have been interpreted by the courts to mean that the duty to provide information is independent of the duty to provide an accounting. The concept is that beneficiaries are entitled to obtain information reasonably necessary to enable them to enforce their rights under the trust. For example, in the trust example mentioned above where the children are not entitled to receive anything from the trust until after both parents have passed away, the children would still want to know what the trust assets are and how they are invested, etc. So, children in this situation would be legally entitled to demand specific information and the trustee would have to provide it. If information is not provided or if it is inadequate, the beneficiaries can file a probate court petition (lawsuit) to seek a court order for the trustee to provide the requested information.

Here are the California laws pertaining to disclosure and a formal full trust accounting:

California Probate Code, ARTICLE 3. Trustee’s Duty to Report Information and Account to Beneficiaries [16060 – 16069]

16060. The trustee has a duty to keep the beneficiaries of the trust reasonably informed of the

trust and its administration.

16061. Except as provided in Section 16069, on reasonable request by a beneficiary, the trustee shall report to the beneficiary by providing requested information to the beneficiary relating to the administration of the trust relevant to the beneficiary’s interest.

16062. Duty to account to beneficiaries
(a)Except as otherwise provided in this section and in Section 16064, the trustee shall account at least annually, at the termination of the trust, and upon a change of trustee, to each beneficiary to whom income or principal is required or authorized in the trustee’s discretion to be currently distributed.

(b)A trustee of a living trust created by an instrument executed before July 1, 1987, is not subject to the duty to account provided by subdivision (a).

(c) A trustee of a trust created by a will executed before July 1, 1987, is not subject to the duty to account provided by subdivision (a), except that if the trust is removed from continuing court jurisdiction pursuant to Article 2 (commencing with Section 17350) of Chapter 4 of Part 5, the duty to account provided by subdivision (a) applies to the trustee.

(d) Except as provided in Section 16064, the duty of a trustee to account pursuant to former Section 1120.1a of the Probate Code (as repealed by Chapter 820 of the Statutes of 1986), under a trust created by a will executed before July 1, 1977, which has been removed from continuing court jurisdiction pursuant to former Section 1120.1a, continues to apply after July 1, 1987. The duty to account under former Section 1120.1a may be satisfied by furnishing an account that satisfies the requirements of Section 16063.

(e) Any limitation or waiver in a trust instrument of the obligation to account is against public policy and shall be void as to any sole trustee who is either of the following:

(1) A disqualified person as defined in Section 21350.5.

(2) Described in subdivision (a) of Section 21380, but not described in Section 21382.

16063. Contents of account; Presentation
(a)An account furnished pursuant to Section 16062 shall contain the following information:

(1) A statement of receipts and disbursements of principal and income that have occurred during the last complete fiscal year of the trust or since the last account.

(2) A statement of the assets and liabilities of the trust as of the end of the last complete fiscal year of the trust or as of the end of the period covered by the account.

(3) The trustee’s compensation for the last complete fiscal year of the trust or since the last account.

(4) The agents hired by the trustee, their relationship to the trustee, if any, and their compensation, for the last complete fiscal year of the trust or since the last account.

(5) A statement that the recipient of the account may petition the court pursuant to Section 17200 to obtain a court review of the account and of the acts of the trustee.

(6) A statement that claims against the trustee for breach of trust may not be made after the expiration of three years from the date the beneficiary receives an account or report disclosing facts giving rise to the claim.

(b) All accounts filed to be approved by a court shall be presented in the manner provided in Chapter 4 (commencing with Section 1060) of Part 1 of Division 3.

(Repealed and added by Stats. 1997, Ch. 724, Sec. 26. Effective January 1, 1998.)

16064. Accounting not required if waived

The trustee is not required to account to a beneficiary as described in subdivision (a) of Section 16062, in any of the following circumstances:

(a) To the extent the trust instrument waives the account, except that no waiver described in subdivision (e) of Section 16062 shall be valid or enforceable. Regardless of a waiver of accounting in the trust instrument, upon a showing that it is reasonably likely that a material breach of the trust has occurred, the court may compel the trustee to account.

(b) As to a beneficiary who has waived in writing the right to an account. A waiver of rights under this subdivision may be withdrawn in writing at any time as to accounts for transactions occurring after the date of the written withdrawal. Regardless of a waiver of accounting by a beneficiary, upon a showing that is reasonably likely that a material breach of the trust has occurred, the court may compel the trustee to account.

16069. Exceptions to duty to account, provide terms of the trust or requested information
(a) The trustee is not required to account to the beneficiary, provide the terms of the trust to a beneficiary, or provide requested information to the beneficiary pursuant to Section 16061, in any of the following circumstances:

(1) In the case of a beneficiary of a revocable trust, as provided in subdivision (a) of Section 15800, for the period when the trust may be revoked.

(2) If the beneficiary and the trustee are the same person.

(b) Notwithstanding subdivision (a), in the case of a revocable trust, if no person holding the power to revoke the trust, in whole or in part, is competent, the trustee’s duties to account shall be owed to those beneficiaries specified in paragraph (2) of subdivision (b) of Section 15800.

15800. Beneficiary provisions re accounting
Except to the extent that the trust instrument otherwise provides or where the joint action of the settlor and all beneficiaries is required, during the time that a trust is revocable and at least one person holding the power to revoke the trust, in whole or in part, is competent, the following shall apply:

(1) The person holding the power to revoke, and not the beneficiary, has the rights afforded beneficiaries under this division.

(2) The duties of the trustee are owed to the person holding the power to revoke.

(Where person holding power to revoke is not competent). Except to the extent that the trust instrument otherwise provides or where the joint action of the settlor and all beneficiaries is required, if, during the time that a trust is revocable, no person holding the power to revoke the trust, in whole or in part, is competent, the following shall apply:

(1) Within 60 days of receiving information establishing the incompetency of the last person holding the power to revoke the trust, the trustee shall provide notice of the application of this subdivision and a true and complete copy of the trust instrument and any amendments to each beneficiary to whom the trustee would be required or authorized to distribute income or principal if the settlor had died as of the date of receipt of the information. If the trust has been completely restated, the trustee need not include the trust instrument or amendments superseded by the last restatement.

(2) The duties of the trustee to account at least annually or provide information requested under Section 16061 shall be owed to each beneficiary to whom the trustee would be required or authorized to distribute income or principal if the settlor had died during the account period or the period relating to the administration of the trust relevant to the report, as applicable.

(3) A beneficiary whose interest is conditional on some factor not yet in existence or not yet determinable shall not be considered a beneficiary for purposes of this section, unless the trustee, in the trustee’s discretion, believes it is likely that the condition or conditions will be satisfied at the time of the settlor’s death.

(4) If the interest of a beneficiary fails because a condition to receiving that interest has not been satisfied or the trustee does not believe that the condition will be satisfied at the time of the settlor’s death, the duties in paragraphs (1) and (2) shall be owed to the beneficiary or beneficiaries who would next succeed to that interest at the relevant time or period as determined under the trust instrument, as amended and restated.

(1) The method for determining incompetency specified by the trust instrument, as amended or restated.

(2) A judicial determination of incompetency.