Trustees have a duty of loyalty – first and foremost to the beneficiaries of a trust. When a trustee breaches their fiduciary duty, they are violating beneficiary rights and endangering trust assets. Abused beneficiaries can respond by petitioning for a trust accounting and then the eventual removal of the trustee.
While trust accountings can be an everyday occurrence in estate law, trustee fraud and embezzlement are just some of the startling discoveries that can be uncovered. Fraudulently appropriating property that belongs to someone else, also known as embezzlement, is a serious crime. Law enforcement agencies can prosecute the theft of a property with a value of more than $950 as a felony, and civil wrongs arising from the same acts may be litigated in civil courts.
The fiduciary relationship between the trust’s beneficiaries and the trustee is fundamentally built on the duty of the trustee to account. The duty to account is not optional: it can be enforced by a petition to the California Superior Court by a beneficiary having “exclusive jurisdiction of proceedings concerning the internal affairs of trusts.” Court accounting required schedules are found in California Probate Code § 1061. This statute provides:
(a) All accounts shall state the period covered by the account and contain a summary showing all of the following, to the extent applicable:
(1) The property on hand at the beginning of the period covered by the account, which shall be the value of the property initially received by the fiduciary if this is the first account, and shall be the property on hand at the end of the prior account if this is a subsequent account.
(2) The value of any assets received during the period of the accounting which are not assets on hand as of the commencement of the administration of an estate.
(3) The amount of any receipts of income or principal, excluding items listed under paragraphs (1) and (2) or receipts from a trade or business.
(4) Net income from a trade or business.
(5) Gains on sales.
(6) The amount of disbursements, excluding disbursements for a trade or business or distributions.
(7) Loss on sales.
(8) Net loss from trade or business.
(9) Distributions to beneficiaries, the ward or conservatee.
(10) Property on hand at the end of the accounting period, stated at its carry value.
(b) The summary shall be in a format substantially the same as the following, except that inapplicable categories need not be shown:
(c) Total charges shall equal total credits.
(d) For purposes of this section, the terms “net income” and “net loss” shall be utilized in accordance with general accounting principles. Nothing in this section is intended to require that the preparation of the summary must include “net income” and “net loss” as reflected in the tax returns governing the period of the account.
Additional requirements for a court accounting are listed under California Probate Code § 1063. There is a mandate (among other requirements) in the statute that there be a “schedule of the estimated market value of the assets as of the beginning of the accounting period for all accounts subsequent to the initial account,” often the “weak link” for a trustee engaged in any wrongdoing. Trustees who do not make an accounting are subject to legal action. In California, the three-year statute of limitations for trustee breach of duty becomes active only when the beneficiary receives a trustee accounting that “adequately disclose the existence of a claim against the trustee for breach of trust” or the beneficiary becomes aware of wrongdoing. If a trustee has committed wrongdoing, that liability can reach back decades.
The beneficiary often employs trust and estate litigation counsel to sue Trustees who choose to violate the duty to account. Laws requiring trustee accountings keep trustees from putting the assets of trust beneficiaries at risk. Whether the trustee is a trust company, bank, or individual, they must abide by these laws.
How to Determine Trust Accounting Fraud in California has Occurred
The odds that there has been a breach of fiduciary duty soar when a trustee does not provide an accounting. In order to determine if this conclusion is correct, forensic accountants are called in. When trustees violate this rule, beneficiaries are exposed to partial, or even complete loss of assets that a deceased parent or relative wanted them to have.
Examples of breach of fiduciary duty by a trustee include:
- Failure to account for trust expenses in and income
- Failure to maintain written records of all trustee activity
- Self-dealing by the trustee
- Misappropriation of trust assets to make loans to business associates or others
- Failure to maintain trust assets
- Failure to charge rent to tenants living in a residence under the trust
- Failure to fund the trust
Breaches uncovered by a trust accounting will most likely provide cause for removal of the trustee. A trustee is called upon to be honest and loyal in administering a trust. If they breach their fiduciary obligations to beneficiaries, the beneficiaries have every right to petition for trust accounting and removal of the bad trustee.
Hackard Law represents abused beneficiaries who, because of trustee inaction, must file a petition to the probate court for a trust accounting. Any petition for a trust accounting in a California Superior Court must follow the specific rules of the probate code.
Once the trustee has made an accounting, the beneficiary and their attorneys will closely examine all documents. Should the trustee fail to keep accurate records, they are presumed to have violated their fiduciary duties.
A standard of satisfactory evidence requires the trustee to prove every item or asset in their accounting. If there are suspicions or doubts as to whether the trustee has kept accurate records, those doubts are resolved against the trustee in an accounting. The trustee who is found to have violated beneficiary rights will be subject to a petition for removal of trustee.