Phase IV: Accounting and Distributions
There are several approaches to handling an accounting. The manner in which it is completed can have a critical impact on limiting the trustee’s liability to beneficiaries and successfully concluding a trust administration. Similarly, in making distributions, there are a number of approaches that can be taken for how and when to make distributions. It is not quite as simple as just writing a check. Care needs to be taken to collect reporting information from beneficiaries, distribute the correct amount, and ensure that there are sufficient funds to pay for any final expenses.
-
A trustee is obligated by law to provide an accounting to beneficiaries disclosing:
the value of the assets and liabilities when the trustee first accepted the role or the beginning of the accounting period,
any receipts or disbursements,
accounts that may have been closed or otherwise changed form,
losses and/or gains on sales,
the trustee’s compensation,
compensation to any agents (and a disclosure of their relationship to the trustee), and
the assets on hand at the end of the accounting period.
There are three general approaches that can be taken to an accounting. One approach is a waiver of the accounting requirement altogether, either by the terms of trust or by consent of all beneficiaries. This can be the most economic and efficient approach, but is generally not recommended except in very few circumstances due to the significant downsides. Alternatively, a trustee can provide an “informal” accounting. This is an accounting that is prepared by the trustee, an accountant, the law firm or other professional that generally discloses the items required to be in an accounting - but is not in the court mandated format. A “formal” accounting is one prepared for, and approved by, the court.
For most trust administrations, it typically makes the most sense to provide an “informal” accounting, and we include this within our flat-fee trust administration service.
The accounting also gives the accountant what they need to prepare the applicable returns.
-
Very specific language and timelines are required when delivering an accounting to beneficiaries. Based upon the trust language and the approach taken, we guide trustees through this tricky area of the trust administration process.
-
Prior making distributions, it is common (and recommended) for the trustee to establish a holdback amount to cover any additional expenses that may be incurred following the distribution to beneficiaries. Sometimes the holdback is used for known liabilities (such as property taxes), and is often used for accounting and final legal fees.
-
For most trust administrations, it is recommended and customary to provide an informal accounting to the beneficiaries for approval prior to making distributions. This is an important step to ensuring that there are no unresolved issues prior to making distributions.
-
Which returns need to be filed (individual return, estate return, or a return to report estate tax or make certain elections) will vary greatly from estate to estate. In addition, the timing will vary depending on when the return or election may be due. Often, this will fall within Phase IV, but some returns need to be coordinated carefully.
-
Making distributions involves more than just writing a check. Tax information needs to be obtained, a receipt is recommended and then the property (whether cash, real estate, or other) can be distributed. Often, it is important to enter into a distribution agreement or other documentation confirming the allocations, providing for refunding, releases or other terms depending on the trust and the circumstances.