Trustee's Duty to Provide Information to Beneficiaries: Practical Advice

Introduction:

One client wrote, “She never cared about money or things until she inherited a little from our uncle…and I was appointed the trustee…then every time I saw her, she wanted to know every detail about the trust.  It was like she had become another person.”

It is an oddity that beneficiaries of an estate or trust may exhibit a desire for information and a degree of suspicion as to the trustee’s actions that are quite different than seen prior to the funding of the trust.  This reaction is so common that we advise all of our clients to simply expect it.  While professional trustees, such as banks, expect this reaction, when a family member is appointed trustee, it can come as a shock and a disappointment.  Some commentators have written it stems from getting something for free. We are distrustful that it will really happen and, as such, far more determined to make it happen. Some have said it stems from guilt at getting something without having to earn it.

Regardless, the wise trustee will realize that the beneficiaries now occupy a new role in his or her life: they are now people who will expect fast and fair performance of the trustee’s duties, including the provision of information. Some trustees become angry at the insistence of the beneficiaries or feel that it is an insult; that the beneficiaries should just “trust me.”  Some beneficiaries are trusting, but both the realities of the typical concerns of a beneficiary and the law require a degree of performance from the trustee that can not rely on passive acceptance of the trustee’s actions.

This article shall provide both the law and practical advice as to the information that the trustee must provide and should provide to the beneficiaries once appointed to the trust.

The Law:

DUTY TO ACCOUNT :

Cal Prob Code § 16062. Duty to account to beneficiaries

Except as otherwise provided in this section and Section 16064, the trustee shall account at least annually, at the termination of the trust, and upon a change of trustee, to each beneficiary to whom income or principal is required or authorized in the trustee's discretion to be currently distributed.

A trustee of a living trust created by an instrument executed before July 1, 1987, is not subject to the duty to account provided by subdivision (a).

A trustee of a trust created by a will executed before July 1, 1987, is not subject to the duty to account provided by subdivision (a), except that if the trust is removed from continuing court jurisdiction pursuant to Article 2 (commencing with Section 17350) of Chapter 4 of Part 5, the duty to account provided by subdivision (a) applies to the trustee.

Except as provided in Section 16064, the duty of a trustee to account pursuant to former Section 1120.1a of the Probate Code (as repealed by Chapter 820 of the Statutes of 1986), under a trust created by a will executed before July 1, 1977, which has been removed from continuing court jurisdiction pursuant to former Section 1120.1a, continues to apply after July 1, 1987. The duty to account under former Section 1120.1a may be satisfied by furnishing an account that satisfies the requirements of Section 16063.

Any limitation or waiver in a trust instrument of the obligation to account is against public policy and shall be void as to any sole trustee who is either of the following:

A disqualified person as defined in Section 21350.5.

Described in subdivision (a) of Section 21380, but not described in Section 21382.

Cal Prob Code § 16063. Contents of account; Presentation

An account furnished pursuant to Section 16062 shall contain the following information:

A statement of receipts and disbursements of principal and income that have occurred during the last complete fiscal year of the trust or since the last account.

A statement of the assets and liabilities of the trust as of the end of the last complete fiscal year of the trust or as of the end of the period covered by the account.

The trustee's compensation for the last complete fiscal year of the trust or since the last account.

The agents hired by the trustee, their relationship to the trustee, if any, and their compensation for the last complete fiscal year of the trust or since the last account.

A statement that the recipient of the account may petition the court pursuant to Section 17200 to obtain a court review of the account and of the acts of the trustee.

A statement that claims against the trustee for breach of trust may not be made after the expiration of three years from the date the beneficiary receives an account or report disclosing facts giving rise to the claim.

All accounts filed to be approved by a court shall be presented in the manner provided in Chapter 4 (commencing with Section 1060) of Part 1 of Division 3.

Cal Prob Code § 16069. Exceptions to duty to account, provide terms of the trust or requested information.

The trustee is not required to account to the beneficiary, provide the terms of the trust to a beneficiary, or provide requested information to the beneficiary pursuant to Section 16061, in any of the following circumstances:

In the case of a beneficiary of a revocable trust, as provided in Section 15800, for the period when the trust may be revoked.

If the beneficiary and the trustee are the same person.

REQUEST FOR INFORMATION:

Even if there is no requirement for an annual accounting (during the time the trust is revocable, for example), another probate code statute allows beneficiaries to get vital information even if not a full formal accounting. The beneficiaries still have legal rights.

California Probate Code §16060 provides as follows:

The trustee's general duty is to report information to beneficiaries. The trustee has a duty to keep the beneficiaries of the trust reasonably informed of the trust and its administration.

The courts have held that the duty to provide information is separate from any duty to provide an accounting. The concept is that beneficiaries are entitled to obtain information reasonably necessary to enable them to enforce their rights under the trust. Using that more general duty, a formal demand may be made upon the trustee and if ignored, a petition filed with the court.

Practical Considerations:

Benefits to the Trustee of Providing Accounting and Information:

1. Errors in keeping track of accounts and other actions can be quickly discovered and remedied.  Most formal accounting is performed by a CPA and that person can quickly determine if accounts are being recorded correctly and taxes paid as required.  Further, a close review of the investment performance of trust assets can be quickly accomplished by a review of the tax returns. A trustee is required to have the assets make money by proper investing (without undue risk) and failure to achieve that is quickly determined by an accounting so that different investments can be explored. Since trusts do have to pay taxes in any event, the CPA should already be on board and can be asked to provide additional analysis and reports as above.
2. As can be seen by the law cited above, accounting has one tremendous advantage for a trustee: it begins a statute of limitations for claims against the trustee. Three years after an accounting is received by a beneficiary, claims based on information in the accounting are barred.
3. One business client of our office put it well when speaking of dealing with minority shareholders in his company.  “I flood them with information.  Even if I don’t have to give it, I give it. The more you give, the less suspicious they are.  Sure, you sometimes get questions or grumblings, but what they don’t do is think you are engaged in some secret maneuvering to harm them.  Kill the fear before it begins, that’s my motto.”  The same can be true for trust beneficiaries.
4. It forces the trustee to keep a full and accurate set of records as to all actions that may become critical later if there are any challenges. Often a trustee is a surviving spouse who is required to partition the assets into a survivor’s trust and the decedent’s trust but many spouses, especially during a time of grieving, do not accomplish that.  By having a formal accounting, that danger is avoided. (One surviving spouse outlived her spouse by twenty-four years and kept no records. It took years to recreate the actual history of the assets, cost tens of thousands, and almost tore the children apart.)
5. Assuming the trustee gives out general information as to ongoing decisions in addition to the accounting, it allows feedback and involves the beneficiaries in the activities of the trustee…they “own” the decisions just as the trustee does. A trustee we represented did not want to keep running the family business that the trust controlled and felt that only the decedent really knew how to run it well.  The trustee made it clear that she would make the final decision but asked for input from the beneficiaries as to her actions, and that approach resulted in unanimous support for the decision.
6. It allows the trustee to recognize quickly if there are beneficiaries who are troublesome and likely to challenge actions in the future. This, in turn, allows you to take proactive protective steps, such as:
   1. Determining just how serious the beneficiary is about their concerns. Is it grumbling or do they have legitimate questions and demands?
   2. Determine who the hidden “advisors” to the beneficiary are.  Often, other relatives or friends who do not have any rights to the trust assets are giving advice and instruction to the beneficiary and you need to know who they are to address it. If the hidden advisor is an attorney, you need to bring your lawyer into the picture quickly.
   3. Alert your CPA and attorney as to who may be a problem and get immediate advice as to how to avoid it.
   4. If necessary and the beneficiary is challenging some decision, you can petition the court for instructions as to the matter. If the court supports you, you have full protection against later claims.  If the court does not, you know now, can adjust your plans, and there is no damage to you.
   5. Courts like to see open communication between the beneficiary and the trustee.  As stated in our articles on fiduciary duty, this is a one-sided relationship.  You have the highest duty known to law to protect them; they have no duty to you whatsoever.  The court will hold you to a higher standard and the more you are open and proactive with the beneficiary, the more the court will like it.

Detriments to the Trustee Providing Accounting and Information:

1. In terms of accounting, you often have little choice in the matter. It is required by law.  In terms of information, that is more within your control.  Often trustees fear that the beneficiary will pour over every detail, ask endless questions, challenge everything they see, and generally be a time-consuming problem that the trustee does not want.
2. The data provided may be grist for an attorney or CPA who is advising the beneficiary and may give them information they can use to further question actions.
3. It takes time and money to prepare the information and often one wishes to have the attorney and/or CPA review it, thus costing fees.
4. There is no legal requirement to provide information other than that, “…reasonably necessary to enable them to enforce their rights under the trust…”  That is a high barrier since beneficiaries may not have many rights to enforce under the trust language.

General Approach Recommended:

An elderly trustee we represented, long used to conflict and strife in his business, summed up our usual advice in a letter he once wrote. “If you are going have a problem with some opponent, find out as soon as you can and face it now.  Waiting doesn’t help. Confronting does.”

Providing information and accountings may flush out questions and challenges, but they are bound to come out sooner or later in any event and you are normally in a stronger position with the other beneficiaries and the court if you were freely providing information.  It puts suspicions to rest and, given the power granted to trustees to manage assets, if there is a real fight the beneficiary starts with two strikes against him or her.  Few courts will overrule a decision of a trustee absent conflict of interest or gross negligence.  Courts understand that the trustee was selected in the first place as someone to trust with the handling of the trust and will seldom act to undermine the trustee.

Do your accountings as required.  Provide appropriate periodic information to the beneficiaries, ask for their input for major decisions and if necessary, petition the court for instructions. Hold information back at your peril.