Is a Trust Accounting Required in New York City

A New York trustee is not required to prepare an accounting on their own initiative. Many trusts run for years and end with the remainder distributed against receipts and releases, and no formal account is ever drawn up. What the law requires is that the trustee keep the records from which an accounting can be prepared at any time, and that they account when one of four things happens: a beneficiary demands it, the trust ends or the trustee’s service ends, the trust instrument calls for periodic accountings, or the court orders it. This page explains each trigger, how a trust accounting differs from an estate accounting, and what closes it. It is part of our trust and estate accounting section.

When a Trustee Must Account

When a beneficiary asks

Any beneficiary may ask, whether they are receiving income now or will take the principal later, and a trustee who is asked must account. If the trustee does not, the beneficiary can petition to compel an accounting under SCPA 2205, and the court will order it. For a trust under a will, the court ordinarily entertains a beneficiary’s petition once seven months have passed since letters of trusteeship issued. A lifetime trust has no letters and no waiting period. A co-trustee, a successor trustee and the Attorney General for a charitable beneficiary may also petition. See whether a trustee has to show an accounting to beneficiaries and what happens when a trustee refuses.

When the trust ends or the trustee’s term ends

A trust ends when its terms say so: the income beneficiary dies, a child reaches the age set for distribution, or the purpose is fulfilled. Before paying out the remainder, the trustee accounts for the whole period from funding (or the last settled account) and either collects releases from the remaindermen or obtains a decree. A trustee who hands over the principal without either step is not discharged; the duty to account survives the distribution.

The same is true when a trustee’s service ends before the trust does. A trustee who resigns or is removed accounts to the successor and the beneficiaries; when a trustee dies, their executor accounts for the trust in their place. A successor should insist on that account before accepting the assets; a successor who takes over without one may later be answering for a shortfall that was not theirs.

When the trust instrument requires it

Many trust agreements and wills direct the trustee to furnish annual or periodic statements to the beneficiaries, and corporate trustees do so as a matter of routine; a requirement in the instrument is enforceable like any other term. The instrument can add to the duty; it cannot remove it. A clause that purports to relieve the trustee of ever accounting to anyone is not honored. Provisions that make an annual statement binding unless a beneficiary objects within a short period are read narrowly: they do not bind a beneficiary who never received the statement, a minor, or a person not yet born.

When the court requires it

The court can direct a trustee to account on its own motion under SCPA 2205, and it will insist on a judicial settlement when there is a beneficiary who cannot sign a release: a minor, a person under disability, a charity, remaindermen who are not yet born or cannot yet be identified, or beneficiaries who cannot be found. A trustee who wants a decree discharging them, whether or not anyone has asked, petitions for voluntary judicial settlement under SCPA 2206.

Lifetime Trusts and Testamentary Trusts

A testamentary trust is created under a will. The Surrogate’s Court that admitted the will to probate has jurisdiction over the trust for its entire life. The trustee qualifies before that court and receives letters of trusteeship, the trust has a file number, and every accounting, petition to compel and petition for settlement is filed in that file. The trustee’s account begins with the assets the executor turned over, at the values in the executor’s account.

A lifetime trust (an inter vivos trust) is created by agreement while the grantor is alive. No letters are issued and there is no court file until someone opens one. The Surrogate’s Court has jurisdiction over lifetime trusts, generally in the county where the grantor lived or where the trust is administered, and the Supreme Court has jurisdiction as well. The first petition, whether to compel an accounting or to settle one, attaches the trust instrument and its amendments and identifies the beneficiaries from its terms. While a revocable trust’s grantor is alive, the trustee answers to the grantor alone; the other beneficiaries’ rights to information and an accounting arise when the trust becomes irrevocable, usually at the grantor’s death.

What a Trust Accounting Contains

A trust accounting uses the same schedule format as an estate accounting, with one addition: the schedules are kept in two parallel columns, principal and income, because trust beneficiaries often have different rights to each. An income beneficiary receives the interest, dividends and rent; the remaindermen receive the principal when the trust ends. The two groups have opposing interests in how every receipt and expense is classified, and misallocation between principal and income is one of the most common objections to a trustee’s account.

The opening values matter. Property received in kind is valued at receipt, which for real estate means an appraisal as of the funding date and for a testamentary trust usually means the values in the executor’s account. If a house appraised at $550,000 when the trust was funded is later sold for $600,000, the $50,000 is a realized increase of principal; if 100 shares valued at $10 each are sold at $8, the $200 loss is a realized decrease. Rent from the house before the sale is income. New York’s principal and income rules decide the harder cases of which receipts and expenses belong to which side. Trustee commissions under SCPA 2309 are charged one-third to income and two-thirds to principal unless the will or trust says otherwise.

The account covers the period from funding, or from the last settled account, to the accounting date. A trustee of a long-running trust can settle an intermediate account under SCPA 2210 and start the next period with a clean slate. See how a New York accounting is prepared for the schedules in detail.

The Prudent Investor Act Runs Through the Account

An estate is usually wound up within a year or two; a trust invests for decades. The schedules of new investments and realized gains and losses are therefore read against EPTL 11-2.3, the Prudent Investor Act. A trustee must invest and manage as a prudent investor would, looking at the portfolio as a whole, diversifying unless there is a good reason not to, weighing risk and return against the trust’s purposes and the beneficiaries’ needs, and balancing the income beneficiary’s wish for yield against the remaindermen’s interest in growth. The trustee may delegate investment functions to a professional, chosen and monitored with care. The standard is conduct, not outcome, judged at the time and not with hindsight: a diversified portfolio that lost value in a bad year is not a breach, and a concentrated inherited position that happened to rise is not a defense. The accounting is where those decisions are tested, so the trustee should keep the investment policy and the reasons for major changes alongside the statements.

Closing the Account: Releases, and the Problem of Remaindermen

An informal accounting is delivered to the beneficiaries with the supporting records. If they are satisfied, each signs a receipt and release, usually with a waiver of formal accounting. A release is a contract; it bars the signer’s later objections unless it was obtained by fraud or the trustee withheld material information. A beneficiary who will not sign can be cited in a judicial accounting instead. See receipts and releases.

The difficulty peculiar to trusts is that the people entitled to the principal are often not in a position to sign. A trust for a widow for life, remainder to the grandchildren living at her death, has remaindermen who are minors, unborn or unidentifiable for most of its life. A parent cannot release the trustee on a minor child’s behalf, and an adult remainderman’s release binds only that adult. The same is true where the remainder goes to a charity, whose interest the Attorney General protects. An informal accounting can settle the trustee’s liability to the adults but leaves them exposed to the others indefinitely, which pushes the trustee toward a judicial accounting. There the court appoints a guardian ad litem for minors and unknown or unborn persons, or allows an adult with the same interest to stand for them under its virtual representation rules, and the decree binds everyone cited or represented. That protection is what a trustee finishing a twenty-year trust is buying. See judicial accountings and informal accountings.

Records, Annual Statements and Tax Returns Along the Way

Because the demand can come at any time and cover the whole life of the trust, the trustee should keep, until the account is settled, every bank and brokerage statement, canceled check, closing statement, appraisal, invoice and distribution receipt, together with the trust’s fiduciary income tax returns (federal Form 1041 and New York IT-205) and the Schedules K-1 issued to the beneficiaries. The accounting and the tax returns must tell the same story. Trust property must be held in the trust’s name and never mixed with the trustee’s own (EPTL 11-1.6).

Annual statements to the beneficiaries are good practice even where the instrument does not require them, and they are required when the trustee takes annual commissions without a court order: SCPA 2309 obliges the trustee to give the beneficiaries a yearly statement showing the principal and income and how the commission was computed. Regular statements keep the beneficiaries informed and make the eventual accounting a matter of assembling what has already been reported. The duty to account itself does not expire; it continues until the account is settled by release or decree.

Pitfalls

• Keeping a single running balance with no separation of principal and income. Reconstructing the split after fifteen years is slow and expensive, and errors in it fall on the trustee.
• Paying principal to the income beneficiary, or income to the remaindermen, without authority in the instrument. An invasion of principal must be one the trust permits, and the account must show it as such.
• Taking annual commissions without the yearly statement SCPA 2309 requires, or computing them on the wrong base. See trustee commissions.
• Distributing the remainder on releases from the adult beneficiaries when minor or unborn remaindermen have an interest, and assuming the trust is closed.
• Waiting until the trust ends to think about any of this. A trustee who accounts at intervals finishes with a short final period instead of a decades-long reconstruction.

If you are a trustee deciding whether and how to account, or a beneficiary who wants to know whether you are entitled to one, we can look at the trust instrument and the history and tell you what is required and what it would take. Call 212-233-1233 or email [email protected].