Does a New York City Trustee Have to Provide a Yearly Accounting or Report?

A trustee takes on a lot of responsibility when they are appointed, from making sure they make good investments to keeping trust property protected from loss. One of the most important things that a trustee should take on is to make sure that they properly understand what kind of record-keeping they must do and when they should provide an accounting of what has been done with the trust. Because of the importance of making sure that an accounting and other trustee responsibilities are done right, everyone named as a trustee should hire an experienced New York City estate attorney to advise them on what duties have to be performed in order to keep out of legal trouble with the courts and beneficiaries.

Proper record-keeping is essential for every trustee, both for tax purposes and because beneficiaries or the courts could ask any time for an accounting of the trust. This means that things such as bank account and investment account information, canceled checks, proof of the purchase or sale of any property or any other financial information should be held on to for the life of the trust.

Failure to provide good accountings could lead to trouble for a trustee and possibly cause them to be at the end of litigation by the beneficiaries of the trust. While state law usually provides that trustee needs to provide an accounting on demand, it is the wisest course of action to simply provide a trust accounting every year whether it is asked for or not. This is because the trustee still has a duty to at least provide basic information to the beneficiaries about what is going on with the trust and leave them “in the loop” about what actions are being taken by the trustee. Full transparency from the trustee could lead to more protection to that trustee as they are being open about what they are doing with trust assets and they are providing proof of what they are doing or not doing with the trust.

Failure to provide regular accountings and to keep the trust’s book in order could lead to many problems with the trustee. The court does not look kindly on a trustee who has not kept good records or has failed to provide an accounting when asked, meaning that the trustee could end up being removed from their position or possibly become liable for issues that arise from not properly investing or protecting estate assets.

Through hiring a New York estate attorney, a trustee can make sure that the handling of trust assets is done in a proper manner and is properly documented. Having an attorney advise a trustee greatly diminishes the chance of the trustee ending up in front of a judge because of angry beneficiaries. If you are a trustee who needs the advice of a New York City estate and trust attorney, call the Law Offices of Albert Goodwin at (212) 233-1233.

What an Accounting Actually Contains

A formal accounting follows a specific structure that has been refined over many years of New York Surrogate's Court practice. The schedules include:

• Schedule A — Principal Received. All assets received by the trust at its inception, with values as of receipt.
• Schedule A-1 — Realized Increases. Gains on sales of trust assets.
• Schedule A-2 — Income Collected. Interest, dividends, rental income, and other income earned during the period.
• Schedule B — Realized Decreases. Losses on sales of trust assets.
• Schedule C — Funeral and Administration Expenses. Amounts paid for the trust's operating costs.
• Schedule C-1 — Unpaid Administration Expenses. Expenses incurred but not yet paid.
• Schedule D — Decedent's Debts Paid. Where the trust was used to pay debts.
• Schedule E — Distributions Made. Distributions to beneficiaries during the accounting period.
• Schedule F — New Investments. Investments made during the period.
• Schedule G — Changes in Investments. Sales, purchases, exchanges, and transfers between accounts.
• Schedule H — Computation of Commissions. The trustee's commissions calculated under SCPA § 2309 or the trust's terms.
• Schedule I — Outstanding Obligations. Anything the trust owes that has not been satisfied.
• Schedule J — Other Matters. Items that do not fit elsewhere.
• Schedule K — Statement of Other Assets. Assets held outside the trust but relevant to the trustee.

The accounting closes with a summary showing total receipts, total disbursements, and balance on hand. When the schedules add up correctly, the trustee has accounted for every dollar.

Informal vs. Formal Accountings

Trustees can provide accountings in two main ways:

Informal accounting. The trustee prepares the accounting (often using the standard schedules) and provides it directly to the beneficiaries. The beneficiaries review and either sign releases approving the accounting or raise concerns. If approved, the trustee is discharged for the period covered without any court involvement.

Formal accounting. The trustee files the accounting with the Surrogate's Court, along with a petition for judicial settlement. The court oversees a process in which beneficiaries can file formal objections to specific items. After resolution of any objections, the court issues a decree settling the account.

Most trustees use informal accountings for ongoing periods and reserve formal accountings for trust termination or for situations where the family is in dispute. Informal accountings are faster and cheaper. Formal accountings provide more robust protection for the trustee against later challenges.

The Receipt and Release Mechanism

When a trustee provides an informal accounting, the trustee typically asks each beneficiary to sign a receipt and release. The receipt acknowledges what the beneficiary has received; the release discharges the trustee from further liability for the accounting period.

Beneficiaries should review accountings carefully before signing releases. Once a release is signed, it is generally binding even if information later surfaces that would have changed the beneficiary's mind. Questions about the accounting should be raised and resolved before signing.

What Beneficiaries Can Object To

When reviewing an accounting, beneficiaries should consider:

• Missing assets. Does the accounting list all the assets you knew the trust held?
• Asset values. Are the values reasonable, particularly for assets that have changed value significantly?
• Investment performance. Has the trust performed reasonably compared to benchmarks?
• Expenses. Are the administrative expenses reasonable for the work done?
• Trustee compensation. Is the trustee taking too much in commissions?
• Distributions. Are the distributions to other beneficiaries (current or prior) consistent with the trust's terms?
• Self-dealing. Are there transactions between the trust and the trustee or related parties?
• Math. Do the totals actually add up?

If concerns exist, the beneficiary should ask questions before signing a release. The trustee is generally willing to provide supporting documentation in response to reasonable requests.

Statute of Limitations on Trust Accountings

Beneficiaries' time to challenge a trustee's conduct is limited. For most claims related to the administration, the statute of limitations is six years. Some claims have shorter periods. The clock typically starts when the beneficiary has notice of the conduct — meaning, when the beneficiary received an accounting or other communication that disclosed the disputed transaction.

This is why providing accountings regularly actually protects trustees. An accounting that has been provided to beneficiaries puts them on notice of trust activity. After the statute of limitations runs, claims related to that activity are barred. Trustees who never provide accountings have indefinitely-running exposure for everything they have done.

Tax Returns and Accountings

The trust's tax returns (Form 1041 for federal, IT-205 for New York) are separate from accountings but related. The tax returns show income, deductions, and the distribution of income to beneficiaries. Beneficiaries are entitled to copies of the Schedule K-1 from the trust's return showing income attributable to them.

The accounting and the tax returns should be consistent in showing the same transactions. Inconsistencies signal problems — either errors in one or both, or worse, intentional inconsistency designed to mislead. Trustees should maintain coherent records that support both accountings and tax returns.