A trust accounting is required in New York in one of the following three instances:
- When the trust relationship is terminated
- When a petition for compulsory accounting is filed; or
- When the trust agreement requires an accounting.
Even when not required, a New York trust accounting has become customary when trusts are managed over a lengthy period.
In Matter of Hunter, 4 N.Y.3d 260 (2005), the New York Court of Appeals said,
“Under article 22 of the Surrogate’s Court Procedure Act, fiduciaries such as executors and trustees have an obligation to account for their actions. Executors ordinarily account at the conclusion of estate administration while trustees account “when the trust is terminated or when they cease to serve” (Turano, Practice Commentaries, McKinney’s Cons Laws of NY, Book 58A, SCPA 2205, at 18). Although the SCPA does not require a fiduciary to give periodic or intermediate accountings, where trusts are managed over a lengthy period, trustees often account periodically.
A fiduciary may voluntarily proceed to obtain a formal judicial settlement of an account under SCPA 2208. Additionally, certain persons, including beneficiaries under a will or trust, may initiate a proceeding to compel a formal accounting ( see SCPA 2205). The court may also compel a judicial accounting on its own initiative ( see SCPA 2205).
A fiduciary may also account informally by obtaining receipts and releases from interested parties regarding the handling of the estate or trust (see 6 Warren’s Heaton, Surrogates’ Courts § 91.04 , at 91-17 [6th ed rev]; Turano, Practice Commentaries, McKinney’s Cons Laws of NY, Book 58A, SCPA 2202, at 7). The SCPA permits a fiduciary to file and record the receipt and release agreements with the Surrogate’s Court (see SCPA 2202) and authorizes Surrogate’s Court to issue a decree based on these filed agreements (see SCPA 2203).”
The trustee has a fiduciary duty to regularly communicate to the beneficiaries matters regarding the management of the trust.
This fiduciary duty includes the submission of periodic reports. The reports customarily follow an accounting format. which could be accounting reports. An accounting report is a detailed record of all the transactions relating to the trust. In fact, a grantor/settlor cannot waive the trustee’s right to render an accounting. EPTL §11-1.7.
Aside from providing regular periodic reports, an accounting is required at the end of the trust relationship, when a petition for compulsory accounting is filed, and in instances when the trust agreement states an accounting should be submitted.
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Types of New York trust accounting
New York trust accounting can be informal, formal or a hybrid.
Informal New York trust accounting
Informal accounting can contain only a simple summary of the trust funds, such as the principal received, income generated, expenses, and distributions to the beneficiaries. If all the beneficiaries agree on the informal accounting, then a document called receipt, release, and refunding agreement is executed by each beneficiary, where each beneficiary agrees to discharge the trustee or administrator from personal liability regarding the management of the estate and agrees to refund to the trustee or administrator any legitimate expense related to the estate that is spent after distribution is made to the beneficiary. These receipts and releases do not need to refer to final accounting reports of trustees but can refer to intermediate reports. Once beneficiaries sign on the intermediate reports, they may be precluded from further questioning it in the future.
The trustee may or may not file these receipt, release and refunding agreements with the court. If the trustee files these receipts and releases with the court, he can get a court order discharging him from liability. This is called the hybrid accounting, which is a mix of the informal receipt, release and refunding agreements, formally filed with the court.
Formal New York trust accounting
New York formal trust accounting, on the other hand, occurs in a number of ways. A beneficiary can compel the trustee to account, possibly because there is a disagreement on how trust funds were used. The court can also order a judicial accounting, especially when there is a minor beneficiary. The trustee may also initiate a petition to judicially account when not all beneficiaries execute receipt and release agreements, and the trustee would like to protect himself by getting the court to approve the accounting and fully discharge him from liabilities.
Formal New York trust accounting requires a detailed accounting report regarding the principal received, realized gains or decreases from the principal, funeral and administration expenses, unpaid administration expenses, distribution of principal, new investments, income collected, administration expenses charged to income, distribution of income, statement of principal and income on hand, interested parties, computation of commissions, estate taxes paid, and cash reconciliation, reported under a court-approved format.
The principal received must be detailed and should include date received, a description, and a value. If the principal received is not in cash, but in the form of property (such as real property), there must be an appraisal to determine its value at the time it was received. If the real property has been sold for a profit at a price higher than its appraised value (for example, a house appraised at $550,000 was sold for $600,000), the gain (of $50,000) is reported in a separate schedule under realized increase of principal. If property such as stock, for example, was sold at a price lower than the value it was received (for example, 100 shares valued at $10/share when received was sold at $8/share thereafter), the loss (of $2/share or $200) is reported in a separate schedule under realized decreases of principal.
Interests received, such as interest from a bank account or a certificate of deposit, is reported under a separate schedule under income collected. Administration expenses are categorized under administration expenses taken from principal and administration expenses taken from income. These expenses must be sufficiently described, justified, and supported by receipts. Distributions are also categorized as those taken from principal as opposed to those taken from income. At the end of the accounting summary, the remaining on hand should generally balance with your cash reconciliation, a separate schedule that provides the ending balances for all the bank accounts. The amount for unpaid administration expenses and commission for the trustee is also indicated, which should already include a contingency fund and a proposed distribution to the beneficiaries if it is a final accounting.
The differentiation between principal and income is more important in a trustee’s accounting because there are some trusts that require only a distribution of income to the lifetime beneficiary with the principal to the remainderman. There are some trusts that allow an invasion of the trust principal for the beneficiary under certain limited circumstances.
A judicial accounting for the trustee can be a complex activity. The attorney can do it for the trustee but the trustee must review it personally to ensure that all items are reported accurately.
Although informal accountings are more popular for small trusts, large trusts usually require a more formal accounting. If you are a trustee that is compelled to submit a judicial account or you are a beneficiary that would either like to compel a trustee to judicially account or need to review an accounting done by a trustee, we at the Law Offices of Albert Goodwin are here for you. We are located in New York, NY. You can call us at 212-233-1233 or send us an email at [email protected].