Trustee's Duty to Report
Because the beneficiaries are the equitable owners of the trust property they have the right to know the terms of the trust and they are entitled to receive complete and accurate information about the trust property and transactions, including trust records and accounts. Even if the settlor authorizes withholding the information, the beneficiaries generally are entitled to records pertaining to their interest in the trust. Otherwise, how can they enforce the terms of the trust or protect their interests?
Specifically, UTC §813 requires that:
- the trustee must provide a copy of the trust instrument upon request;
- within 60 days after accepting the trusteeship, the trustee shall notify the qualified beneficiaries of the acceptance of the trusteeship along with the trustee's name address and telephone number;
- within 60 days after the date the trustee acquires knowledge of the creation of an irrevocable trust or the date the trustee acquires knowledge that a formally revocable trust is to become irrevocable, whether by the death of the settlor or otherwise, shall notify the qualified beneficiaries of the trust's existence and their rights to receive a copy of the trust instrument and trust report. The trustee must also send annual reports to the distributees of income or principal and at the termination of the trust.
The contents of the report should include trust property, liabilities, receipts, and disbursements, including the source and amount of the trustee's compensation, a list of the trust assets and, if feasible, their respective market values. A former trustee must also send a report when his trusteeship is terminated, unless there are co-trustees. UTC §813(c)
The trustee also has a duty to give advance notice to the trust beneficiaries if the trustee's method or rate of compensation changes and if the trustee proposes to sell a significant portion of the trust assets unless the value of the assets are readily ascertainable or disclosure is detrimental to the beneficiaries' interest.
UTC §105(b) authorizes the settlor to waive the trustee's duty to report regularly to the beneficiaries. However, the settlor cannot waive the right of the beneficiaries to receive a report or a copy of the trust document upon request, since the beneficiaries enforce the terms of the trust and would unable to do so with such information. Likewise, beneficiaries may waive their right to reports or other information, which is usually done to lower costs or if the trustee is a close relative. However, such waiver does not relieve the trustee for liability for misconduct and the beneficiaries can terminate the waiver at any time.
Court Supervision of Testamentary Trusts
Generally the trustee must report to the probate court for testamentary trusts, so that the court can assess the trustee's performance.
Some jurisdictions allow the trust to have a provision releasing the trustee from the duty to report to the probate court since it is time-consuming and expensive, as long as the trustee accounts directly to beneficiaries, especially the income beneficiaries, since the remainderman may not even be alive yet. Consequently some have argued that allowing no judicial accounting violates public policy because it fails to protect the interests of the remaindermen. However, courts do not supervise inter vivos trusts, since they were created while the settlor was alive, and yet, they seem to operate effectively without court supervision.
Nonetheless, no-judicial-accounting clauses are generally held to be valid and clauses that give complete immunity to the trustee based on the accounting to the life beneficiaries have been universally accepted.
Neither beneficiaries nor the court can monitor the trustee without accurate reporting. If the trustee intends to commit fraud or breach of trust, he would alter the reports to hide his breach of fiduciary duty.
Constructive fraud (aka technical fraud) is where the trustee makes representations without undertaking reasonable efforts to ascertain their accuracy. Fraud constitutes grounds for reopening an otherwise properly allowed accounting. However, the trustee has protection if the factual representations are the result of good faith and reasonable efforts were made to ascertain their veracity. Statements of judgment or discretion are not factual representations.
Either the court or the trust beneficiaries have a duty to check the trustee's reports shortly after receiving them; failure to do so may bar them from taking any remedial action later. However, if the trustee filed a fraudulent report, then the beneficiaries are not barred from re-opening the accounting upon discovering the fraud.
It is not constructive fraud, however, if the falsity of the trustee's reports would be discoverable from the trust documents or the will, since the beneficiaries have access to all those documents and have a duty to inspect them.
However, the trustee is protected from liability if the report was filed with the court, notice of the accounting was properly served and the beneficiaries did not timely object to the accounting.
Generally, UTC §1005 requires that a beneficiary file a claim against a trustee within 1 year of being issued a report where the breach was evident or if there was information that the beneficiary should have inquired about. However, if a breach was not evident from any report, a beneficiary must bring a claim within 5 years of the sooner of:
- the removal, resignation, or death of the trustee;
- the termination of the beneficiary's interest in the trust;
- or the termination of the trust.