Apr. 24, 2023
Telling the story of a trust administration, in numbers: an introduction to trust accountings
The duty to account to named beneficiaries typically does not begin until the trust can no longer be revoked. (§ 16069(a).) A settlor of a trust may declare it irrevocable immediately, but generally, a trust is presumed to be revocable unless otherwise expressly declared. (§ 15400.)
In Christie v. Kimball, 202 Cal.App.4th 1407 (2012), Justice Arthur Gilbert of the Second District wrote that: "In probate court, nothing speaks more eloquently or provides more insight ... than an accounting." The obligation of a fiduciary to render an accounting exists across a wide number of contexts, including personal representatives of decedents' estates, guardianships, conservatorships, and crucially for this article, trustees of private express trusts. Trusts (for reasons beyond the scope of this article) are a commonly-used estate planning tool that allow a person to transfer property upon their death, without need for formal probate administration. Trust accountings are a critical safeguard to the rights of beneficiaries.
Bench officers and practitioners should be familiar with what accountings are, and the rules governing how and when litigants go about compelling their production, seeking judicial review of their content, advising a client to create a private express trust, accepting trusteeship thereof, and advising beneficiaries about their rights and duties. The objective of this article and self-study test is to review who is entitled an accounting from a trustee of a private express trust, as well as how to compel a trustee to render an accounting.
What is a trust accounting?
An accounting is a story, told in numbers, of how the assets of an estate have arrived at a given endpoint from their starting point. The basic requirements of an accounting are set forth in Probate Code § 1061 (all references are to this code unless otherwise specified), and consist of the charges and credits of the estate, which according to the statute, must be in balance. A trust is, at its core, a gift of property subject to the management of a trustee (Moeller v. Superior Court, 16 Cal.4th 1124 (1997).) Therefore, every trust will have a charge: its assets on hand at the beginning (§ 1061(a)(1)) and every trust will also have a credit: its assets on hand at the end of the accounting period (§ 1061(a)(10)). In the simplest case, where no property ever changes form, no income is received, and no payments are made, the charges and credits will be identical, and in balance (when scheduled at their carry value (Ibid.), even if the fair market value has changed. In any other case, the latter will differ from the former; and any transactions that took place in between will need to be described in sufficient detail, in a supporting schedule. (§ 1061(a)(2)-(9).) This collection of schedules showing how the charges and credits balance out thus also reveals all or substantially all of the material acts of the trustee with respect to the assets of the trust; having that information allows an interested person, or a reviewing court, to assess whether a trustee has complied with the trustee's fiduciary duty, by revealing, among other things: whether distributions to beneficiaries were made consistent with the terms of the trust; and whether expenses and compensation were reasonable or excessive, just to name a few. (§ 1061(a)(6), (9).)
Additional obligations on what level of detail must be provided with respect to certain types of transactions are set forth in §§ 1063-1064. These are the fundamental concepts of how the accounting tells the story of an estate, and are common to all accounts that are subject to judicial review under the probate code. (§ 1060.)
Further, § 16063 imposes additional requirements specific to trust accountings. Specifically, a trustee's accounting must include a statement for the last complete fiscal year of the trust, or since the last accounting of: (1) receipts and disbursements of principal and income; (2) the assets and liabilities of the trust; (3) the trustee's compensation; and (4) the agents hired by the trustee, their relationship to the trustee, if any, and their compensation. (§ 16063.) It also requires a legend concerning the right and limited time for judicial review, explained more fully below.
Who is entitled to an accounting from a trustee of a private express trust?
This accounting must be provided to each beneficiary to whom income and principal is required or authorized in the trustee's discretion to be currently distributed. (§ 16062(a).) As such, ascertaining who is entitled to an accounting is a fact-specific question that will depend on construction of the terms of the trust - which can vary in complexity depending on the nature of the assets - and the intentions of the settlor (as expressed by the settlor's drafting counsel, if applicable). Without delving into trust drafting, be aware that it is possible for a trust to divide an asset (or assets) into separate gifts of income and principal.
How often are accountings required?
If none of the exceptions apply, the general rule on when an accounting is required is as follows: (1) at least annually; (2) at the termination of the trust; and (3) on a change of trustee. (§ 16062(a).)
The duty to account to named beneficiaries typically does not begin until the trust can no longer be revoked. (§ 16069(a).) A settlor of a trust may declare it irrevocable immediately, but generally, a trust is presumed to be revocable unless otherwise expressly declared. (§ 15400.) To the extent that the trust is revocable and the person holding the power to revoke the trust is competent, the duties that the trustee owes are to the person holding the power to revoke, as opposed to the beneficiaries. (§ 15800.) This is true except to the extent that the operative trust instrument provides otherwise or where the joint action of the trustor and all beneficiaries is also required. (Ibid.) Similarly, an accounting is not required when the trustee is also the sole beneficiary. (§ 16069(a)(2).)
Can these requirements be waived?
(1) By a beneficiary: A beneficiary who is entitled to an accounting can waive the right. (§ 16064(b).) The waiver must be in writing, and a waiver made at one time can be withdrawn with respect to transactions that post-date the withdrawn waiver. (Ibid.)
(2) By the settlor: A settlor can alter the duty to account, but the Legislature has limited the ability to waive accountings in some instances for reasons of public policy. (§ 16064(a).) The Legislature codified a presumptive statutory disqualification of gifts to certain donees (generally interested drafters and caregivers, and their relatives, who are not close relatives of the settlor). (§ 21380; see also former § 21350.) No waiver of accounting is effective as to a trustee who is subject to these provisions. (See §§ 16062(e), 16064(a).) These disqualification statutes are and will continue to be the subject of other articles, and are not addressed in detail here; familiarity with them, however, is essential for any attorney practicing in the trust and estates field to any extent.
Is the accounting subject to judicial review?
After the accounting is rendered, either the trustee or beneficiary may seek judicial review, approval of the accounting, and state any objections thereto. (§ 17200(b)(5).) Unlike a personal representative's accounting in a formal probate of a decedent's estate, which always must be filed and approved by the court, court approval of a trust accounting is not required in all cases. (§ 17200(b)(5) [trustee may seek approval of accounts]; Cf. §§ 10954(a), 11640-11641 [in a probate estate, the personal representative shall petition to close the estate, which requires submission of an accounting, absent a waiver by all beneficiaries]); accord, § 16064 [accounting is owed to beneficiary, not court].) Trust accountings are not optional for trusts that are placed or created under the continuing jurisdiction of the court. (Cal. Rules of Court, rule 7.903(a)(3).) The trustees of those trusts are treated similarly as guardians or conservators of the estate, and must render annual accountings. (Ibid.) A petition to subject an account to judicial review, or an objection thereto, without more, typically should not trigger a no-contest clause. (See §§ 21310-21315 [generally excluding accounting disputes from the definition of a contest].)
How long does the beneficiary have to contest the accounting?
Actions for breach of trust generally have a three-year statute of limitations. (§ 16460; accord, Cal. Code Civ. Proc., § 338(a).) With respect to any act that is adequately disclosed in an accounting and report, the statute of limitation begins to run when the accounting is received by the beneficiary (§ 16460(a)(1)), otherwise, it does not start until the beneficiary knows or reasonably should have known of the accounting. (§ 16460(a)(2).)
As referenced above, § 16063 also requires that the accounting include a legend or warning that the recipient "may petition the court pursuant to [§] 17200 to obtain a court review of the account and of the acts of the trustee" and 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."
What options exist when a trustee fails to render an accounting?
The superior courts have jurisdiction to hear petitions regarding the internal affairs of trusts, even if those trusts were never previously under court supervision. (§ 17200; see Schwartz v. Labow, 164 Cal.App.4th 417 (2008).) Subdivision (b)(7) of § 17200 specifically contemplates orders to compel trustees to provide information, upon reasonable request, or compel an accounting, pursuant to § 16064.
There are two prerequisites before a court can compel a trustee's accounting. First, the beneficiary must make an express written request no less than 60 days prior to bringing the petition; Second, the request must be made no sooner than six months after the most recent prior accounting. (§ 17200(b)(7)(C).) Standing to bring actions under § 17200(b) is generally restricted to beneficiaries and trustees. (§§ 17200(a), 17200(b)(20).) However, a party does have standing to seek a judicial determination of whether the party is a beneficiary entitled to an accounting. (§§ 17200(b)(4), 17206; see Barefoot v. Jennings, 8 Cal.5th 822 (2020) [discussing application of standing rules to § 17200 petitions].)
Further, failure to provide an accounting may also give rise to a beneficiary's request to remove the trustee for cause, as provided in § 15642(b). The failure to render the accounting is more grave if it violates a prior court order granting a petition to compel, but even in the absence of a prior order, a trustee who is not substantially compliant could be accused of having breached the trust (§ 15642(b)(1)), or of being unfit-to-act (§ 15642(b)(2)). If a trustee is determined to have breached the trust - either because of failure to account, or having committed a misdeed revealed through the accounting, the court may impose any number of remedies codified (in a non-exclusive list) in § 16420, which includes removal, reduction of compensation, and other specific relief (such as setting-aside of acts, return of property, or other instructions).
What are the procedural requirements of a § 17200 Petition?
Any petition brought under § 17200 must be presented in a verified writing setting forth the material facts, the grounds for the petition, and the names and addresses of all persons entitled to notice. (§ 17201.) At least 30 days' written notice must be given by mail to all trustees and beneficiaries, and, in the case of charitable trusts, the Attorney General (§ 17203(a)) and any person who has requested or been granted special notice (§ 17204). Notice must be personally served on any person who is not a beneficiary or trustee, but whose right and title or interest would be affected by the petition. (§ 17203(b).)
The Probate Code also has specific venue requirements for § 17200 petitions; in short summary, the proper venue is the county that is the principal place of administration of the trust within the state, which, in turn, is generally the place of residence of the sole trustee, if there is a sole trustee. (See §§ 17002, 17005.) If there are multiple trustees, venue is proper in the county of the residence or usual place of business of any of the trustees as agreed upon, or in the absence of an agreement, the residence or usual place of business of any of the co-trustees. (See § 17002.)
Is discovery permitted?
Once a petition is filed, the petitioner, as well as any objector who has appeared in the action, may lawfully employ the procedures of the civil discovery act. (Forthmann v. Boyer, 97 Cal.App.4th 977 (2002).) A party who has not made an appearance (by filing a pleading) is not entitled to conduct discovery in trust proceedings. (Ibid.) But, there are other duties imposed on a trustee that may require a trustee to provide information to a beneficiary upon reasonable request (See §§ 16060-16061 [codifying duties to keep beneficiaries informed, and respond to requests for information]); § 17200(b)(7)(B) [petition to enforce demand for information].)
Can a court make a sua sponte order compelling an accounting?
The mandate of the superior court to provide a venue for resolution of trust disputes, and to supervise the internal affairs of trusts, is sufficiently strong as to allow a court to order a trustee to render an accounting, even when no petition is brought by a party with proper standing. (Christie v. Kimball.) In Christie, the trial court had before it a petition for an accounting by a contingent beneficiary who did not yet meet the requirements of § 16064. Nevertheless, presented with factual good cause that there was potential wrongdoing, the trial court made a sua sponte order compelling the trustee to render an account. The Court of Appeal affirmed, holding that it was within the discretion of the trial court to order an accounting under the circumstances. Because the Christie order was affirmed on discretionary grounds, practitioners should be wary that while a trial court may order an accounting despite the potential absence of a proper party, it does not have to do so in all cases. The trial court also has discretion to dismiss a trust petition that does not benefit the trust. (§ 17202.) In Christie, the trial court was apprised of specific facts that indicated potential wrongdoing, namely undisputed facts that revealed a potential defalcation. Therefore, a party seeking to compel an accounting who knows that the party's standing may be in question must be sure to allege specific facts that would constitute good cause, if that party intends to, or may need to, rely on the court's discretionary power rather than the party's own entitlement to an accounting as a matter-of-right.
What are the consequences for bad faith actions in presenting or objecting to an accounting?
A beneficiary whose objections are overruled may be liable for the attorney fees incurred by a trustee if the objections were determined to have been made "without reasonable cause and in bad faith." (§ 17211(a).) The court may also award attorney fees to the beneficiary if the trustee's defense of the accounting meets the same standard. (§ 17211(b).) Normally, there is no right to fee-shifting for a petition to compel an accounting, unless the court finds that the failure to account was a breach of trust, in which case fee-shifting may be possible based on the breadth of remedies possible under §§ 16420-16421, and the "broad equitable powers" of the court in its trust jurisdiction. (In addition, pursuant to § 1000, Cal. Code Civ. Proc, §§ 128.5 and 128.7 [sanctions for frivolous actions and failing to properly certify matters] apply in probate cases.)
Accountings are a crucial safeguard to the rights of trust beneficiaries. Before using a trust as part of an estate plan, and before accepting trusteeship of a trust, individuals should understand what this obligation entails. Individuals who have an interest in a trust should understand when they are entitled to an accounting, how to obtain one, and how to obtain judicial review, if necessary.
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