Fiduciary Disputes

Handling Disputes to Fiduciary Accountings

By Ryan J. Szczepanik
A fiduciary account is a detailed report of the fiduciary’s activity. The type of accounting to which CPAs are accustomed to preparing consists of an income statement, a balance sheet and a cash flow statement. A fiduciary account is fundamentally different.

California Probate Code (CPC) Sec. 16063 identifies the required contents for a trustee’s account:

• A statement of receipts and disbursements that have occurred during the period;
• A statement of the assets and liabilities of the trust as of the end of the period;
• The trustee’s compensation during the period;
• The agents hired by the trustee and their compensation;
• A statement that the recipient of the account may petition the court for review of the account and of the acts of the trustee; and 
• A statement that claims against the trustee may not be made after the expiration of three years from the date the beneficiary receives an account or report disclosing facts giving rise to the claim.

CPC sec. 1061 to 1064 identifies the requirements for an account that a trustee or personal administrator of an estate files with the court. The account’s schedules must show:

• The property on hand at the beginning of the period; 
• The value of any assets received during the period; 
• Receipts, disbursements, net income or loss from a trade or business; 
• Gains and losses on sales; 
• Net loss from trade or business; 
• Distributions to beneficiaries; 
• Changes in the form of assets, allocation of receipts and disbursements between principal and income if the estate or trust will be distributed to an income beneficiary; 
• Liabilities;
• Real property in a foreign jurisdiction; and 
• Property on hand at the end of the period. 

The total charges during the period must equal the total credits. The account must identify any proposed distribution. A petition for approval of the account must accompany an account filed with the court and must:

• Describe the transactions during the period that are not readily understandable from the account; 
• Explain unusual items in the account;
• State all compensation paid from the assets that are subject to the account to the fiduciary or to the fiduciary’s attorneys;
• Disclose any family or affiliate relationship between the fiduciary and any agent the fiduciary hired; and 
• Disclose whether the cash has been invested and maintained in interest bearing accounts or in investments authorized by law or the governing instrument.

When Is a Fiduciary Account Due?
The deadline to submit a fiduciary account varies depending on the type of fiduciary. A trustee must account at least annually, at the termination of the trust and upon a change of trustee, to each beneficiary to whom income or principal is required or authorized in the trustee’s discretion to be currently distributed (CPC Sec. 16062).

The trust instrument may waive the accounting requirement. The court may order an account notwithstanding the waiver upon a showing that it is reasonably likely that the trustee committed a material breach of the trust (Sec. 16064). A personal administrator of an estate, such as an executor under a will, must account upon court order (Sec. 10950), and with a petition for final distribution and discharge (Sec. 10951). A conservator and guardian must account one year after appointment, and every two years thereafter (Sec. 2620).

Court Approval of a Fiduciary Account? 
Court approval after a noticed hearing is required for an account of a personal administrator of an estate, a conservator and a guardian. A trustee need not obtain court approval of an account unless the court orders it. If a trustee submits an account to the beneficiaries but does not seek its court approval, the beneficiary’s deadline to contest the account expires upon the earlier of:

1. Three years from the date the beneficiary received the account or a report disclosing facts giving rise to the claim;
2. The beneficiary’s consent; or
3. The time period identified in the trust instrument (but not less than 180 days) if the trustee sent the beneficiary notice of that time period.

A beneficiary may petition the court to compel an account if the beneficiary made a written request for an account and 60 days have lapsed from the date of that request, and the trustee has not accounted within the past six months [CPC Sec. 17200(b)(7)(C)]. If the trustee petitions for court approval of the account, the order granting the petition likely will preclude the beneficiaries from challenging any act the trustee performed during the period of the account. 

What Is the Accountant’s Role in a Dispute Over a Fiduciary Account?
The fiduciary has the burden to maintain records for the account, and to prove charges and credits in the account. The accountant should obtain records in the fiduciary’s possession needed to prepare the account and maintain the source materials in an organized manner. If the fiduciary is missing account records, the accountant may assist the fiduciary with requesting the records from the financial institution. 

A dispute over a fiduciary account commences when a beneficiary submits a written objection to entries in the account, such as disbursements the fiduciary made. The fiduciary may ask the accountant to review the objection to determine whether the account is accurate. The accountant should review the source materials. If the account is inaccurate, the accountant should revise it. 

The beneficiary may subpoena the accountant to obtain the source materials that are in the accountant’s possession or to appear for a deposition or trial. If the accountant receives a subpoena, the accountant should consider retaining a lawyer to assess how to respond. 

A written objection to a subpoena for records under Code of Civil Procedure (CCP) Sec. 1985.3(g) may be appropriate, for example, because the subpoena requests information that is privileged, not relevant, or subject to the right to privacy. A motion to quash a subpoena for appearance at deposition or trial under CCP Sec. 1987.1 may be appropriate.

Alternatively, the accountant may confer with the fiduciary’s counsel about the subpoena. The fiduciary’s counsel, however, may have a conflict of interest representing both the fiduciary and the accountant.

The accountant should not communicate directly with the beneficiary or the beneficiary’s counsel. If the fiduciary’s counsel retained the accountant, the accountant should communicate with the fiduciary’s counsel to maintain the attorney-client or work-product privileges between counsel and accountant. Otherwise, the accountant should communicate only with the fiduciary. 

The accountant’s objective is to reduce the likelihood of being a witness in a court proceeding. If the accountant’s participation is limited to obtaining the source materials and inputting the data from those source materials into the schedules for the account, being a witness is not very likely. If the accountant communicates any characterization, opinion or conclusion about the data or account, the likelihood of being a witness will increase.  
Ryan J. Szczepanik is a principal with Hartog, Baer & Hand.