Among a trustee’s fundamental duties is the duty to keep beneficiaries reasonably informed of the administration of the trust.1 If a trustee weren’t required to keep beneficiaries reasonably informed about trust administration, the whole concept of a trust would be eviscerated. The trustee could loot the trust, and the beneficiaries would have no effective recourse because they’d be unaware of the trustee’s malevolent actions.
There are variations among the states concerning the specifics. For example, in some jurisdictions, trustees are required, regardless of whether a beneficiary so requests, to render accountings,2 at least annually. In other jurisdictions, if the trust instrument so provides, a trustee must provide accountings only to those beneficiaries who request them.3 In some jurisdictions, accountings must be provided (in some cases, only if requested) only to current beneficiaries4 while, in other jurisdictions, trustees must account (again, in some cases, only if requested) to all beneficiaries.5 In Missouri, the settlor can designate one or more permissible distributees of the right to request the trustee’s reports in lieu of providing such reports to any other permissible distributee who’s an ancestor or descendant of the designee.6
Prior Rule
Before promulgation of the Uniform Trust Code (UTC) in 2000 and the Restatement (Third) of the Law of Trusts (Restatement Third) in 2005, in most jurisdictions, a trustee had an absolute duty to provide accountings to beneficiaries regardless of whether they requested them. The well-established general rule was articulated in the Restatement (Second) of the Law of Trusts Section 172 (1959) as follows: “The trustee is under a duty to the beneficiary to keep and render clear and accurate accounts with respect to the administration of the trust.” Whether dilution of that rule was wise is, at the very least, debatable.
Essential Components
The standards for trust accountings vary rather widely. Which components of a trust accounting may be considered essential depends on the jurisdiction being examined. Section 813(a) of the UTC recites, in general terms, a trustee’s responsibility to provide information to beneficiaries. It states: “A trustee shall keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests.” This basic principle is applicable throughout the United States, even where not codified as such. More specifically, UTC Section 813(c) provides: “A trustee shall send to the distributees or permissible distributees of trust income or principal, and to other qualified or nonqualified beneficiaries who request it, at least annually and at the termination of the trust, a report of the trust property, liabilities, receipts, and disbursements, including the source and amount of the trustee’s compensation, a listing of the trust assets and, if feasible, their respective market values.”
The UTC uses the term “report” instead of “accounting” because the UTC drafters wanted to negate any inference that a particular format or degree of formality was necessary to satisfy the requirements of UTC Section 813.7 The drafters suggest that the UTC Section 813 reporting obligation can be satisfied by providing beneficiaries with copies of the trust’s income tax returns and monthly brokerage statements if the information contained therein is complete and sufficiently clear.8 Obviously, monthly brokerage statements, whether or not supplemented by fiduciary income tax returns, would be insufficient to the extent the trust holds assets outside the firm generating the statements. In any event, the “acid test” for a trust accounting’s adequacy is whether the accounting is complete and clear enough to apprise the beneficiaries of what activity has transpired within the trust so they’re reasonably well-equipped to identify and inquire further about or take action with respect to transactions that could constitute breaches of fiduciary duty.
Gold Standard
The “gold standard” for trust accountings was long ago established by high quality corporate fiduciaries. Corporate fiduciaries routinely generate very comprehensive trust accountings in which each and every transaction that occurred during the period covered by the accounting is detailed in a separate line item stating the date of the transaction and its type (for example, receipt, disbursement, purchase, sale, cost basis adjustment), setting out a narrative description of the transaction, indicating the dollar amount involved in the transaction, categorizing the transaction as an income or principal transaction (or both), as the case may be, and showing the transaction’s dollar amount impact, if any, on an underlying trust investment. Corporate fiduciaries usually render trust accountings on a monthly or quarterly basis. Ordinarily accompanying trust accountings produced by corporate fiduciaries are lists of assets setting forth, as to each asset, the number of shares or units (as applicable) held, a description, its cost basis, market value9 and unrealized gain or loss, the annual income it’s expected to generate, its yield to market percentage and how much of the trust’s total portfolio (on a percentage basis) it represents.
Notwithstanding the somewhat lax approach to accountings introduced by the UTC and the Restatement Third, individual trustees would be well advised to strive for producing and providing trust accountings with the same degree of consistency, completeness and clarity with which most corporate fiduciaries perform this important function. There are several readily available software programs that can enable individual fiduciaries, with the assistance of their professional advisors, to prepare trust accountings having a level of quality comparable to that of accountings assembled by corporate fiduciaries.
Embrace the Opportunity
Some individual trustees, though, even when obligated to account to beneficiaries, just don’t do it. They consider the effort too intimidating, too expensive and, particularly when the trustee is related to the beneficiaries, unnecessary. Such a posture is very unwise. A smart trustee who has nothing to hide will embrace the opportunity to account to the beneficiaries. Beneficiaries who have received accountings from the trustee will ordinarily have a relatively short period of time within which to initiate a breach of fiduciary duty action against the trustee regarding transactions adequately disclosed in the accountings.10 By contrast, transactions not adequately disclosed to beneficiaries may be subject to challenge indefinitely or for a very long period of time.11
Endnotes
1. See Uniform Trust Code (UTC) Section 813, Comment; Restatement (Second) of the Law of Trusts Section 173 (1959); Restatement (Third) of the Law of Trusts Sections 82 and 83 (2007).
2. Referred to throughout the UTC as “reports.” See UTC Sections 105(b), 813(c) and 813, Comment. This author prefers the term “accounting” because it has a well understood meaning in both UTC states and non-UTC states.
3. See, e.g., UTC Section 105(8) and (9). In fact, under UTC Section 105(8), a trust instrument may validly direct that even the existence of the trust may be concealed from all beneficiaries except qualified beneficiaries who have attained 25 years of age.
4. Referred to as “distributees or permissible distributees” in UTC Section 813(c).
5. Defined in UTC Section 103(3) as “a person that has a present or future beneficial interest in a trust, vested or contingent, or, in a capacity other than that of a trustee, holds a power of appointment over trust property.”
6. Section 456.1-105.3, RSMo.
7. See UTC Section 813, Comment.
8. Ibid. Note the implied “complete and sufficiently clear” standard.
9. UTC Section 813(c) says market values of trust assets shall be included “if feasible.” This is an important limitation on a trustee’s obligation to provide market values in a list of assets accompanying a periodic trust accounting because it implicitly recognizes that determining the market value of some assets is a time-consuming and expensive process and shouldn’t be required as frequently as with investment assets whose market value is easily ascertained by reference to public market quotations.
10. See, e.g., UTC Section 1005(a), which imposes a 1-year statute of limitations running from the date an accounting adequately disclosing a potential claim and apprising the beneficiary of the 1-year time limit was sent.
11. See, e.g., UTC Section 1005(c), which establishes a 5-year statute of limitations commencing at the earliest of: (1) the trustee’s removal, resignation or death; (2) termination of the beneficiary’s interest in the trust; or (3) trust termination.