The Importance of Organization
Track Every. Single. Transaction.
The CA probate code requires a trustee to provide the date, amount, payor/payee, and a description/purpose for every transaction. Let's repeat that - the CA probate code requires a trustee to provide the date, amount, payor/payee, and a description or purpose for every transaction. Most people have a difficult time understanding how to apply this idea to their actions as trustee. In this and future blog posts, we hope to demystify all that is needed to properly account to beneficiaries.
The probate code also requires accountings to track every transaction down to the penny, meaning you cannot round transactions. Even trustees with accounting backgrounds sometimes struggle with this concept, as they are used to doing taxes or corporate accounting where certain allowable balances can be rounded. Not in probate accounting. Remember - all transactions need to be recorded to the penny.
Here are some thoughts on how to keep proper records:
Create a system for tracking every transaction. Use a spreadsheet or some type of accounting software that lets you export PDFs and spreadsheets that you can give to your fiduciary accountant documenting what occurred throughout your administration. For any expenses that are inexplainable, the trustee may be required to reimburse the estate out of their own pocket.
Make sure to provide descriptions of transactions. For an expense, who received the funds and what was the money used for? Descriptions do not need to be highly detailed, but they do need to provide the reviewer with a basic understanding of why those funds left the estate. As an example, purchases made from Amazon simply show up as “amazon” on a bank statement. Because Amazon sells a wide variety of products, further detail is required, such as "towels for Mom" or "purchase of scanner for trust administration."
Make sure to provide descriptions of all transactions. If funds received, who provided the funds and why did that entity give those funds? For example, suppose a security provided a dividend - what was the amount, name of security, and date (stating that a transaction is a dividend provides the "why")?
ALL assets are required to have expenses and income grouped by asset. What this means is that if there are multiple properties belonging to an estate, all rental income, expenses for maintenance, expenses for upgrades, and utility bills all need to be associated with a specific asset, in this case a property (this is not an exhaustive list). If you own 3 houses in California, all receiving utilities from PG&E, you will need to be able to distinguish which property is generating which energy bill. If there are multiple units in 1 property, every expense needs to be tracked by the individual unit.
Unless waived, trustees are supposed to account for the performance of the trust on an annual basis. If you routinely manage your data, download monthly bank statements as they become available, and digitize bills and documents you receive, then all your information will be organized and handy when the need to account arises. Not only is data management and organization a good practice in terms of accounting, it will also save you in the event a beneficiary (or other relevant party) questions your management. The last thing you want is to have a beneficiary demand an accounting when you don’t have the data prepared.
FOP We’ve seen instances where first time trustees did not know about their duty to account and were sent into a panic attempting to track down values and obtain statements. We’ve seen trustees be ordered to reimburse a trust because they couldn’t explain who received specific payments and what the purpose was. Recently, we worked with a client who suspected that the beneficiaries of the trust (family members) may sue and demand an accounting. As a preemptive measure, this trustee took the advice of counsel and sought a trust accounting. Sure enough, the day the accounting was completed our client received a letter from the beneficiaries demanding an accounting and alleging breach of fiduciary duties. Because this client was already prepared, had the relevant data organized and available, we were able to complete the accounting in a matter of days, and our client was able to provide it to counsel in their response to the opposing parties. Our client was able to get the trust’s affairs and documentation in order well before it was needed and save future headaches.