Why Is an Accounting Needed to Distribute a Trust in Certain Cases?
When someone passes away and leaves a trust, the process of distributing assets to beneficiaries should be smooth and transparent. However, that is not always the case. In some situations, a formal trust accounting is necessary to ensure that everything is handled properly. An accounting serves as a financial report detailing the trust’s assets, income, expenses, and distributions. It helps beneficiaries understand where the money is going, confirms that the trustee is fulfilling their duties, and uncovers any potential mismanagement or wrongdoing.
Not all trusts require a formal accounting before distributions are made, but in many cases, it becomes a crucial tool for protecting beneficiaries’ interests and ensuring fairness in how the trust is administered. If a trustee refuses to provide financial transparency, delays distributions, or mismanages assets, an accounting can help uncover the truth and prevent further financial harm. A trust litigation attorney can assist beneficiaries in obtaining a proper trust accounting and taking legal action if necessary.
What Is a Trust Accounting?
A trust accounting is a detailed financial statement that tracks the management of the trust’s assets. It provides beneficiaries with a clear picture of how the trustee has handled the estate’s finances. The report typically includes:
- A starting balance showing what was in the trust at the time of the grantor’s passing.
- A list of income received, such as rental income, interest, or dividends from
- investments.
- A breakdown of all expenses, including taxes, legal fees, and trust administration
- costs.
- A record of distributions made to beneficiaries, including when and how they were
- paid.
- A final balance showing what remains in the trust.
In California, trustees are required to provide accountings to beneficiaries at least once a year, when a beneficiary requests it, or when a trustee is replaced. This legal requirement ensures that trustees remain accountable for their actions and cannot misuse funds without detection.
Why Would a Trust Accounting Be Required?
In many cases, beneficiaries receive their distributions without any issues, and an accounting is not necessary. However, there are situations where an accounting is essential to protect beneficiaries’ rights and ensure the trust is being handled properly.
One of the most common reasons for requesting an accounting is concerns about financial mismanagement. If a trustee is delaying distributions, refusing to share financial records, or making questionable financial decisions, a formal accounting can help determine whether assets have been misused. Beneficiaries have the right to know how the trust’s funds are being spent and whether the trustee is fulfilling their fiduciary duties.
Another reason an accounting may be needed is suspicions of self-dealing. Trustees are legally required to act in the best interests of all beneficiaries and cannot use trust funds for personal gain. However, some trustees abuse their authority, using trust money for personal expenses or making financial decisions that benefit themselves rather than the beneficiaries. Examples of self-dealing include:
- Paying themselves excessive trustee fees without justification.
- Using trust funds for personal travel, luxury purchases, or entertainment.
- Loaning money to themselves or their family members instead of distributing assets according to the trust’s terms.
- Selling trust assets at a discount to themselves or close associates.
A trust accounting helps reveal these types of abuses by providing a clear financial record that beneficiaries can examine. If there are unexplained expenses or missing assets, further legal action may be required.
Disputes Over Unequal Distributions
A trust accounting can also be necessary when beneficiaries dispute the distribution of assets. If one beneficiary believes another has received an unfair share of the estate, an accounting can clarify exactly how funds were allocated. Sometimes, trusts contain unequal distribution provisions, which may seem unfair at first glance. However, if these provisions were established properly, they are legally enforceable.
The issue arises when a trustee fails to follow the instructions in the trust or distributes assets improperly. A trustee may delay payments to some beneficiaries while favoring others, or they may distribute funds in a way that conflicts with the grantor’s wishes. In these situations, an accounting can provide the necessary proof to challenge improper distributions.
Failure to Maintain Trust Property
Trustees are responsible for preserving and managing trust assets, which often include real estate, stocks, and other investments. If a trustee fails to maintain these assets properly, beneficiaries could suffer financial losses. For example, if a trust includes rental properties, the trustee has a duty to ensure they are maintained and generating income. If a trustee neglects necessary repairs, allows tenants to damage the property, or sells real estate below market value, it could reduce the overall value of the trust. A trust accounting can help determine whether a trustee has failed in their responsibilities and whether legal action is needed to prevent further damage.
Similarly, if the trust holds investments, the trustee must make sound financial decisions. If they invest in high-risk ventures that lose money or fail to diversify assets, beneficiaries may have grounds to challenge their actions.
How to Request a Trust Accounting in California
In California, beneficiaries have the right to demand a trust accounting if they suspect financial mismanagement or simply want to ensure transparency. Under California Probate Code §16062, trustees must provide an accounting:
- At least once every year.
- Whenever a beneficiary requests one.
- When there is a change in trustee.
If a trustee refuses to provide an accounting, beneficiaries can file a petition in probate court to compel them to do so. The petition must explain why an accounting is necessary and present any concerns about mismanagement or lack of transparency. Once the court orders an accounting, the trustee must submit detailed financial records that explain how the trust has been managed. If the accounting reveals missing funds, suspicious expenses, or violations of fiduciary duty, beneficiaries may have grounds to sue the trustee for damages or request their removal.
What Happens If a Trustee Refuses to Comply?
Some trustees actively resist providing financial records because they know they have mismanaged the trust. If a trustee refuses to comply with a court order for an accounting, they can face serious legal consequences. A judge may:
- Remove the trustee and appoint a new one.
- Freeze trust assets to prevent further financial harm.
- Order a forensic accounting to investigate missing funds.
- Impose financial penalties or require the trustee to personally reimburse the trust.
In cases where the trustee’s actions amount to fraud or financial abuse, they may face criminal charges in addition to civil penalties.
How Beneficiaries Can Protect Themselves
The best way for beneficiaries to protect themselves is to stay informed about the trust’s management. If a trustee is acting suspiciously, delaying distributions, or refusing to provide financial information, beneficiaries should act quickly to demand an accounting. The longer misconduct goes unchecked, the harder it can be to recover lost assets.
If there are signs of financial mismanagement, working with an experienced trust litigation attorney can help. An attorney can review financial records, demand a formal accounting, and take legal action if the trustee is not fulfilling their responsibilities.
At Trust Law Partners, LLP, we specialize in trust disputes and help beneficiaries recover mismanaged assets. If you believe a trustee is withholding financial information or mishandling a trust, we can help you demand an accounting and hold them accountable. Call Trust Law Partners, LLP at 626-956-3500 for a free consultation today.
