Every beneficiary has rights to check up on the trust’s accounting activities, keep an eye on the accounting, and take legal action if the trustee has not met their obligations.
Trust accounting is one of those things that makes up the foundation of estate planning. It’s a documented understanding of what’s happening inside the trust. This gives the beneficiaries transparency about the financial management of assets.
But what is your right as a beneficiary? And what are the obligations of your trustee? This article is where you will learn both sides of the trust’s management. We’re going to cover trust accounting, and focus exclusively on your rights as a beneficiary and what you should expect from your trustee.
Defining Trust Accounting
But what is trust accounting? Can you explain it to yourself? No? That’s ok. It’s basically a systematic record-keeping of all transactions within a trust. This might mean any income received, the expenses paid, and the overall performance of the trust investments.
This isn’t just for your sake. Trust accounting is actually a legal requirement for all trusts. It gives you that transparency and accountability you need to know if your trust is properly run. And it lets you protect your assets against lawsuits that threaten to claim your assets.
With a good trust accounting report, you should have a clear picture of the health of your trust. You should also be able to follow the decisions made by the trustees. And you should know that your trustee is still keeping the beneficiary at the top of mind.
Key Terms in Trust Accounting
Let’s just define a few terms that are likely to come up in this article. I’m not trying to teach you all accounting terminology, but you should get to know some of the basics.
Trustee:
This is the person or business responsible for managing the trust assets. They are assigned at the creation of the trust.
Beneficiary:
These are the people or organizations that will receive benefits from the trust. This could be the income or the actual assets themselves. The trust exists solely for the beneficiary.
Corpus:
This fancy legalese just means the assets held in the trust. You might come across this term in legal documents. For the sake of clarity, we’ll just use “assets” and you’ll know what we mean.
Distributions:
These are the payments made from the trust to the beneficiaries. Again, this could be income or the disbursement of the assets.
Accounting Period:
Normally, an accounting period is either quarterly or yearly. But it’s a specific time frame for reporting all trust transactions.
You don’t have to master these terms. But it’s good to know your rights as a beneficiary and to know how to advocate for yourself.
The Role of Trust Accounting in Estate Planning
So, what’s with all this accounting? Isn’t a trust just a “set it and forget it” kind of tool?
Not really. Trusts are legally required to provide accounting reports as part of their management. Trust accounting is so important for estate planning. It’s a safeguard for the beneficiaries' interests. And it’s a checkup that protects you from lawsuits and creditors.
If you maintain accurate and on-time trust accounting, you can avoid any arguments or miscommunication. A trust works better if the trustees and beneficiaries work together, not against each other. With trust accounting, you get a good idea of the “boundaries” that your trust has to live by. And when you know the “boundaries”, you know if your trust is doing well.
But nothing goes exactly to plan. With regular trust accounting, you can spot any discrepancies or issues early on. You can diagnose the problem and treat it before it becomes out of hand.
Plus, if you keep up with trust accounting, you can make any necessary changes as the situations change. The economy rises and falls. Family dynamics change. And when they do, you can use the trust accounting period to adapt your trust.
The Rights of Beneficiaries in Trust Accounting
I think it’s important here to remember one thing – the trust exists for the beneficiary. That’s its sole reason for existing.
And as a beneficiary, you have certain rights around trust accounting. You should know these rights so you can protect your interests and get the fair treatment you deserve. When you know your rights, you can hold your trustee accountable and demand transparency.
Legal Rights of Beneficiaries
Regardless of your trust, you, the beneficiary, have certain rights protected by law. These rights include:
- The right to receive information about the trust. This means all the terms and conditions laid out in the trust document.
- The right to review trust accounting records. You should review this every time so you know how the funds are managed.
- The right to receive regular account statements. Expect a consistent timeline of reports. These will outline the financial state of the trust.
- The right to be notified of any distributions made from the trust. This might be on a schedule or at certain pre-marked times. But every distribution is your right to know about.
- The right to take legal action. If you think the trustee is not fulfilling their duties, you can, and should, hold them legally accountable.
If you’re at all concerned about your trust, please talk with legal counsel. They can explain your rights in depth. They will also let you know if you should pursue any legal action.
Financial Rights of Beneficiaries
Ok, so you have legal rights. But did you know you also have financial rights? These are the economic benefits you are entitled to get from the trust. Most of the time, this is in the form of income or the retitling of assets into your name. These rights include:
- The right to receive distributions. If it’s laid out in the trust document, that’s a legal right for you to get what you’re owed.
- The right to request a formal accounting of the trust's financial activities. This should be provided without having to ask. But you should know that it’s completely within your right to expect a trust accounting report.
- The right to be informed of any expenses that may affect you. Sometimes, trusts incur some expenses. Maybe an investment performs poorly. If it will shrink your inheritance, you have the right to know about it.
It’s tempting to just let the trustee manage all the investments within a trust. But stay vigilant. If they’re doing a poor job, that means less money for you. Talk with a financial advisor if you can’t monitor your trust’s performance in the market.
The Duties of Trustees in Trust Accounting
So, we’ve covered the beneficiary. What are the legal obligations of a trustee?
In general, a trustee has a big job. They have to manage the trust’s assets and they have to maintain accurate records. This is the foundation to protect your rights.
It’s also the trustee’s job to know the ins and outs of both the trust document and applicable law.
Responsibility for Accurate Record Keeping
No matter the size of the trust, the main job of a trustee is to keep on top of accounting. This includes reporting on:
- Income received from trust assets
- Any disbursements made to beneficiaries
- All admin costs for managing the trust
The trustee isn’t just doing reporting for your peace of mind. It’s a legal duty. But it’s also for their benefit too.
If you have a responsible trustee, accurate record-keeping gives them a complete picture of the trust's financial performance over time. Once they know how it’s going, they can make adjustments over time. Plus, meticulous documentation protects everyone from disputes or lawsuits.
Along with the performance, trust accounting will document a trustee’s decisions. This means any investment choices or changes. If you have to audit a trust, this documentation is a clear breadcrumb trail for anyone to see the reasoning behind certain decisions.
Obligation to Provide Regular Account Statements
It’s the job of a trustee to give beneficiaries a regular account statement. What’s in these statements? At the bare minimum, you should expect:
- The total value of the trust assets. Keep an eye on how this changes with each report.
- Income generated by those assets. And if there is any income, make sure you know how it’s being used or distributed.
- Expenses that have been deducted from the trust. This is normal. But keep an eye on anything that will impact the money you expect to receive.
- Any distributions made to beneficiaries.
As you can tell, this is a transparent paper trail for you and your trustee to be on the same page. It builds trust between the two parties. It’s a clear and concise update where you can feel secure that everything in the trust is running to plan.
The Process of Trust Accounting
Trust accounting is not merely a financial exercise; this is the very core of a trustee’s duty. Everything they do should be in the best interests of the beneficiaries. That’s why you need all these reports and detailed breakdowns of the trust’s assets.
Steps in Trust Accounting
You will see an expense in every report for the trustee’s oversight and management. It’s either a flat hourly fee or a percentage of the value of the assets.
They have a big role, and so let me clear up what those charges include.
- Documenting all trust transactions accurately.
- Preparing periodic account statements about income, expenses, and distributions.
- Sending those statements to you on a regular schedule.
- Dealing with questions or concerns you have about accounting.
- Making adjustments as needed. These might be changes based on your feedback or any new legal requirements.
Common Challenges in Trust Accounting
At its core, trust accounting exists to bring you clarity. But this isn’t always easy. You might find some of these issues popping up from time to time.
- Discrepancies in recordkeeping that can lead to mistrust.
- Complex assets with hard-to-record performance. In accounting terms, these are called “illiquid assets”. It’s like a real estate property or business interest. It's hard to say how much it’s worth because selling it or retitling it will reduce the value.
- Lack of clear communication between trustees and beneficiaries.
- Difficulty in valuing certain trust assets fairly. Sometimes, it’s not easy to say how much an asset is worth, especially if it’s not a marketable good. Sometimes, the sentimental value of an asset is not the same as the market value.
Disagreements happen. Issues might come up. But you should jump on these early to avoid any problems down the road. The best trusts are based on open communication between the trustee and the beneficiary.
Disputes and Resolutions in Trust Accounting
Sometimes, as hard as you try to avoid, a dispute will pop up. Most of the time, it can be chalked down to a simple miscommunication. But sometimes, it’s more serious. This is what you should know if you find yourself in a dispute of any kind.
Causes of Disputes in Trust Accounting
The most common reasons for a dispute in trust accounting are:
- Lack of regular communication from trustees.
- Inaccurate accounting records.
- Different interpretations of the trust terms.
- General concerns about trustee mismanagement.
If you know what’s causing the dispute, you can figure out how to fix it. For example, if you don’t get regular updates from your trustee, you might feel unimportant and undervalued. But it could be as simple as a wrong address for the reports. Simple fix.
But what if you can’t follow the accounting records? Or they don’t make sense? You might be tempted to question the integrity of your trustee. If left unresolved, this could cause a huge dispute between the two parties. In our opinion, clarity equals security.
Legal Remedies for Beneficiaries
If the worst happens, and you can’t clear something up, you have options.
- Seeking mediation or arbitration to resolve disputes. This is easier and cheaper than going to court. Consider this as your first option.
- Pursuing court action to demand proper trust accounting. If you can’t find common ground, you have the right to take legal action in the courts.
- Requesting the removal of a trustee if misconduct is proven. This is obviously a last resort, but it does happen.
Your Money; Your Rights
If you are named as a beneficiary, you are legally entitled to whatever is in the trust. Not to be too blunt here but you are the reason the trust exists. It’s your money, and you have the right to protect it.
That’s why trust accounting is such an important part of exercising your beneficiary rights. It’s the transparent report that gives you the peace of mind that your money is being well-managed.
If you ever feel like you’re in over your head, you should speak with a legal professional to talk through your options. Or if you need help understanding your reports, speak with a financial advisor who can explain it to you.
Be proactive as a beneficiary so that you get everything that you’re entitled to get. After all, the trust was built with you in mind.
