Should Beneficiaries Ask For a Periodic Trust Accounting?

If you are a trust beneficiary whose trust has been in existence for more than 10 years, you should ask for a periodic accounting. Here’s why:

Long term trusts are often set up with automatic features. Certain payments are paid from income or principal or both. These could include distributions to beneficiaries, trustee commissions, trust income taxes, etc.

Certain receipts are also allocated to income or principal or both, such as dividends, income, long term capital gains and short term capital gains. These automatic payments are set up by the initial trustee and investment manager in accordance with the trust document and state laws at the time the trust is funded.

Often, however, there are changes to state laws or simply errors in the initial setup. Because commission and tax payments are typically made quarterly, this could mean multiple errors over a ten year period.

Because of the “compounding” effect of errors even smaller or fewer errors really add up over time. As a beneficiary what can you do?

You can ask your Trustee for a checkup in the form of a periodic accounting.

Who prepares the accounting? Hire a fiduciary accountant like FastTax that does nothing but trust accountings and is independent of the Trustees and Investment Managers running your trust. They will be faster, cheaper and more objective, which is in the beneficiaries’ best interest.

Who pays for this accounting? The trust will pay for the cost, usually a few thousand dollars. This will save money in the long run however, because when the trust terminates, this accounting period has already been addressed.

What typically happens in an accounting?

First, the fiduciary accountant will review all of the transactions of the trust for the period of time you and the Trustee specify (for example, from funding date in 1997 until current date of 2007). There will be thousands of transactions for the accountant to compile and reconcile – no easy task!

Next, the fiduciary accountant will flag any errors or areas for correction. Most errors are then corrected retroactively by the Trustee or Investment Manager with notice to the beneficiaries.

Last, the Trustee will issue a draft accounting to the beneficiaries for review and signature. If you are satisfied with the accounting as it is, you would sign a “receipt and release” agreement effectively “closing the books” on that period of trust administration.

If you feel that anything is missing however, you could hire a specialized reviewer to look for errors with a fine tooth comb.

In my experience as a bank trust officer, 90-100% of problems are self-corrected by the trustee in the review process. That said, trust your intuition and spend the extra money for an independent review if warranted.

Just as you wouldn’t drive your car for 100,000 miles without service checks, you should not let your trust run more than 10 years without a service check either!

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