Margaret M. Hand on California Trustee's Duty to Account

Margaret M. Hand on California Trustee's Duty to Account

A trustee's duty extends beyond liability for breach of a fiduciary duty. One of the trustee's primary responsibilities is to provide information and account to the trust's beneficiaries. Discharging this duty to account benefits the trustee as well as the beneficiaries. The Probate Code governs the trustee's actions in California. In this Analysis, Margaret M. Hand discusses a trustee's duty to account. She writes:

[2] Aid to Performance of Other Duties

     In some circumstances, the trustee may be absolved of his or her duty to account, yet nevertheless find accounting an unavoidable necessity. Consider, for example, the surviving spouse who serves as trustee of a QTIP Trust from which the trustee may distribute only net income and no principal. Assume the trust instrument does not define "net income," which is therefore defined by California's Uniform Principal and Income Act. As trustee, the surviving spouse would be required to distribute to herself all the trust's income, but because she is both trustee and the sole person entitled to current distributions of income, she would not be required to account. Yet she could not simply subtract her disbursements from her receipts and pocket the difference. To calculate the net income to which she is entitled, she must subtract from "receipts allocated to income" those "disbursements made from income" during the "accounting period." Each of these three terms is defined by California's Principal and Income Act (hereafter, the Act) apportions receipts and disbursements between principal and income. This hypothetical, but common, trustee could determine the amounts to which she is entitled only by preparing schedules of receipts, gains on sales, disbursements, losses on sales and distributions. Essentially, this trustee must prepare an account or risk distributing too much or too little.

     The trustee considering adjustments under the Uniform Principal and Income Act may not exercise the power to adjust without first computing the trust's fiduciary accounting income and comparing that amount with the total return on investment. This comparison requires the preparation of detailed schedules of receipts, gains, losses and disbursements, which schedules constitute the bulk of the trustee's account.

[3] Accounting Protects the Trustee

[a] Three-Year Statute of Limitations

     There is a three-year statute of limitations on actions by beneficiaries against trustees for breach of trust. This statute begins running either when the beneficiary receives the trustee's account that "adequately discloses the existence of a claim against the trustee for breach of trust," or when the beneficiary discovers or reasonably should discover the "subject" of the claim. This statute of limitations is an absolute bar to claims against the trustee and nothing provides the trustee with greater protection, certainly not waivers of account.

(footnotes and citations omitted)

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