It is important to understand that there are three distinct duties with respect to providing information to beneficiaries pertaining to the affairs (administration) of a trust.
1. Duty to Keep Beneficiaries Reasonably Informed
A trustee must generally keep the beneficiaries reasonably informed of the trust and its administration. Complying with this duty means providing information reasonably necessary to enable a beneficiary to enforce his/her rights under the trust or to prevent or remedy a breach of trust. The duty to keep beneficiaries reasonably informed cannot be waived (either by the trust instrument or by a beneficiary).
During the time the trust is revocable (meaning that it can be modified or even cancelled), the trustee owes this duty only to the settlor (the person who created the trust) or other person having power to revoke the trust. This can include a person to whom the settlor granted the power to revoke or to someone who has been appointed to take care of the affairs of the settlor (such as a conservator).
Once the trust becomes irrevocable, the trustee owes this general duty to all beneficiaries, including current, contingent, and remainder beneficiaries.
2. Duty to Provide a Report of Information
A trustee must provide a report to beneficiaries, upon reasonable request, relating to the administration of the trust relevant to the beneficiary’s interest. Complying with this duty means providing requested information to a beneficiary entitled to receive the information requested. The report typically includes information pertaining to the assets, liabilities, receipts, and disbursements of the trust as well as the acts of the trustee. This type of report can be much more helpful than a formal accounting because it generally contains more detailed and more easily understandable information than a formal accounting.
During the time the trust is revocable, only the settlor (or other person having power to revoke the trust) has the right to request a report of information.
Once the trust becomes irrevocable, the trustee owes this general duty to all beneficiaries, and any beneficiary – whether current, contingent, or remainder – has the right to request and receive a report.
The duty to provide requested information to beneficiaries cannot be waived by a provision in the trust. However, a beneficiary can waive his/her right to a report. The waiver must be in writing and is only effective as to that beneficiary. In other words, if there are multiple beneficiaries and only one waives the duty, the duty is still owed to the other non-waiving beneficiaries. Such a waiver can be withdrawn, requiring the trustee to provide a current report and reports going forward.
3. Duty to Formally Account
A trustee must generally provide a formal accounting at least annually, at termination of the trust, and when there is a change of trustee. A formal accounting is one that complies with the requirements set forth in the Probate Code. It includes statements detailing receipts and disbursements, assets and liabilities, the trustee’s compensation, agents hired and their compensation, and certain disclosures regarding the right to object to the accounting and the three year statute of limitations.
During the time the trust is revocable, this duty is only owed to the settlor (or other person having power to revoke the trust), unless the trustee and the settlor are the same person, which is often the case. In that circumstance, no accounting is required (ie a settlor does not have to account to him/herself).
Once the trust becomes irrevocable, the duty to formally account is owed to each “current” beneficiary, which is a beneficiary to whom income or principal is required or authorized to be currently distributed in the trustee’s discretion. This means that contingent or remainder beneficiaries are generally not entitled to a formal accounting until they become current beneficiaries.
Unlike the duties to keep beneficiaries reasonably informed and to provide a report of information, the duty to formally account can be modified or even eliminated by the trust terms.
A beneficiary can also waive the duty to account. The waiver must be in writing and is only effective as to that beneficiary. Again, this means that if there are multiple beneficiaries entitled to a formal accounting and only one waives the duty, a formal accounting must still be prepared and provided to the non-waiving beneficiaries.
The waiver of a duty to formally account can be revoked in writing at any time, which would obligate the trustee to formally account for all transactions going forward. Also, even if waived, the court can nevertheless order the trustee to account on a showing that it is reasonably likely that a material breach of the trust has occurred.
The Take Away?
It is important for a trustee to keep good, detailed records of the trust and its assets. Among those records a trustee should maintain are those pertaining to assets, liabilities, income, expenses, disbursements, discretionary actions, and adjustments. These records are imperative to a trustee’s ability to comply with his/her duties described above, whichever apply. Maintaining these types of records is also important in the event that a beneficiary questions or challenges an act taken by the trustee.