Recordkeeping Practices for Trustees
A trustee is required to keep
complete and adequate records for both tax and non tax reasons under California
and federal laws. First, a trustee has a duty to account to beneficiaries, and
to report information about trust assets, liabilities and finances when
requested by a beneficiary with a current vested interest. Second, a trustee has duties to pay required
taxes and report to federal, state, and local taxing authorities. [California charitable trusts also must notify
and report to the California Attorney General.]
Records to maintain fall into three broad categories: (1) Legal documents; (2) a Trustee’s Log
(diary); and (3) financial, asset and tax documents. Let us consider each category.
A trustee should keep all original legal
documents and correspondences. The
record keeping system entails document folders and an index. The original trust document and all its
amendments and any restatements should be preserved. Likewise any other legal documents pertinent
to settling the trust–like promissory notes, court orders, tax documents, accountings
and correspondences to beneficiaries, attorneys, accountants and others –
should be kept.
The foregoing only works to the extent that matters are
documented. Hence trustee, or his or her
attorney, will not rely simply on oral communications with beneficiaries but
will follow up in writing to document oral communications.
A trustee should keep a
chronological trustee log (diary) from the very outset. Entries should detail all time spent (on a
daily basis), discretionary decisions, meetings, travel and out of pocket
expenses in furtherance of trustee duties.
A detailed log will show the basis for all discretionary trustee
decisions: The legal authority relied upon;
the professional advice that was obtained; and the critical information and
documents that were considered in making the judgment.
For example, consider a trustee with discretionary authority
over whether or not to keep paying a beneficiary’s college tuition. The trustee will diary his or her
consideration of the beneficiary’s academic performance, extenuating
circumstances, and any other factors relevant to deciding whether the
beneficiary is likely to complete a degree.
The importance of a detailed trustee log becomes all too
apparent if and when a beneficiary ever challenges a trustee’s actions or
objects to the amount of trustee’s fees.
The reasonableness of trustee fees depends in part on the time, effort
and complexity involved. The trustee diary
should document such factors.
A formal trust accounting to
beneficiaries discloses all trust assets and transactions (i.e., receipts of
income, payment of expenses, disposition of assets, and distributions to
beneficiaries). In order to have the information
necessary to prepare an accounting that meets California legal requirements, a
trustee will need to keep all inventories, appraisals, invoices, income receipts,
bank statements, cancelled checks, check ledger, tax returns, a trustee log, any
prior accountings, and anything else with relevant information.
For example, take a payment to a contractor for a repair to a
residence owned by the trust to get it ready for sale. The accounting will need to say what repairs were
made, to what residence and whether or not the contractor is related to the
trustee; in addition to showing the amount and date of the payment. A contractor’s invoice, with this
information, is, therefore, a necessary document to keep.
How long a trustee preserves the
records varies. For tax reasons records
are usually kept 3 years after the filing of a tax return, but some records must
be kept for up to 7 years. For non tax
reasons, beneficiaries have three years from receipt of an accounting to file objections;
this can be reduced to 180 days by the trust instrument (with a special warning
notice provided with the accounting).
“Serving Lake and Mendocino Counties for nineteen years, the Law Office of Dennis Fordham focuses on legacy and estate planning, trust and probate administration, and special needs planning. We are here for you. 870 South Main Street Lakeport, California 95453-4801. Phone: 707-263-3235.”