Accounting Is Not Only Important - It's Mandatory

by Chambliss, Bahner & Stophel, P.C.

Imagine how you would feel if you walked into your bank, asked for a summary of your account activity and the bank told you that it had no idea how much money was in your account or how it had been spent.  Of course, this doesn't normally happen because the bank has a fiduciary duty to account for your money and it takes that job very seriously.  Unfortunately, too many trustees of special needs trusts or those who oversee funds for people with special needs don't even know that they have a duty to account for the funds they manage, let alone perform that duty correctly.

All trustees, representative payees and guardians and conservators are required by law to keep track of funds under their control.  Sometimes a court requires people serving in these positions to provide these accounts directly to the court for approval, especially in cases where the court established the guardianship or trust.  Likewise, the Social Security Administration mandates yearly accounting by representative payees handling other people's funds.  In some cases, typically when a trust is not established by a court, the trustee has a duty to account that is spelled out in the document or by state law.  But in all cases, the person with the fiduciary duty has to keep track of the money under her control, just like a bank.

Trust and guardianship accounting does not have to be difficult since, in quite a few cases, the trustee or guardian only has to worry about one or two bank accounts.  This type of cash accounting is basically the same as keeping a balanced check book.  The trustee or guardian simply records all transactions and makes sure that they match the monthly bank statement.  Typically once a year, the trustee or guardian itemizes all of the transactions and provides a report to the beneficiary and possibly the court explaining how the funds were spent and how much money remains.  If court approval is required, the court may name a third party to review the account and tell the court if there are any problems.  If court approval is not required, the trust beneficiary or his guardian typically has a certain period of time to object to the account before it becomes final.

The same principles apply to trustees accounting for larger pools of money, although in those cases the trustee usually has to account for investment gains and losses as well as typical expenditures.  If the trust is large, it makes sense to hire an attorney or accountant to make sure that the accounts are properly prepared because they can get tricky if multiple investments are involved.  

Although the accounting process is simple, it is surprising how few non-professional fiduciaries actually do it correctly (and even some professionals fall down on the job).  Every year there are dozens of cases from across the country where trustees and guardians are removed from their positions because they can't explain what happened to the funds under their control.  In some cases, this is because the trustee or guardian actually looted the trust or guardianship account, but in many cases the person in the position of responsibility simply didn't keep track of what was going on, either because he was too busy or he didn't know that he needed to account for the funds under his control.  When this happens, the trustee could possibly be sued or even go to jail.

Aside from the fact that a trustee or guardian has a duty to the person with special needs to account for his money, accounting also protects the trustee or guardian.  Once an account becomes final due to court approval or the passage of time without objection by the beneficiary, no one can come back and sue the trustee for mishandling the funds that were accounted for, so long as the account was not fraudulent.  If the trustee doesn't file an account, she doesn't get that important peace of mind.

If you've been named as the trustee of a special needs trust or as the representative payee, guardian or conservator of a person with special needs, you need to talk with your special needs planner immediately about accounting.  It's one of the most important duties you have.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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