One of the biggest responsibilities that any executor or trustee has is to account to the beneficiaries of the estate or the trust. Executors and Trustees are fiduciaries, meaning that they owe the utmost duty of care to the beneficiaries of the estate or trust. A fiduciary must invest the assets prudently and must distribute the assets according to the terms of the last will and testament or trust.
A fiduciary’s accounting must follow a certain format. That format provides the beneficiaries with a detailed understanding of how the fiduciary has handled the assets of the estate.
In return for his accounting, the fiduciary requests that the beneficiaries of the estate sign a release. The release, as the name implies, releases the executor from any liability he may have for mishandling the affairs of the estate.
For this reason, the accounting is one of the most important tasks that a fiduciary performs, because the role of a fiduciary is chock full of liability. All fiduciaries should insist upon being release from liability. Otherwise, the fiduciary remains subject to lawsuits.
So, what does an accounting entail? Through an accounting, the executor informs the beneficiaries what assets came into his hands. For instance, if Mrs. Smith dies owning a home, a car, five bank accounts, and a brokerage account, all of those assets go on the accounting providing date of death values for each of those assets.
But not all assets that Mrs. Smith owned go on her executor’s accounting. If Mrs. Smith’s brokerage account named a beneficiary, for instance, the brokerage account would not be listed on the accounting, because the brokerage account would pass outside the control of the executor according to the beneficiary designation. The same would be true if Mrs. Smith owned a life insurance policy that named a beneficiary.
Furthermore, if one of Mrs. Smith’s bank accounts were jointly owned with another individual, the bank account would pass to the surviving account holder upon Mrs. Smith’s death. As with the accounts that have beneficiary designations, a jointly-held bank account passes outside the control of the executor.
Passing outside the control of the executor is not a good thing by the way. It doesn’t, for instance, mean that the assets aren’t subject to death tax. It just means that the executor lacks control of the assets, which could be a bad thing.
Another major aspect of the accounting is what debts the executor paid. When he paid the debt, from what account he paid the debts, and what the nature of the debt was.
The accounting must also show what income the assets of the estate have earned. For instance, did the bank accounts earn interest income, and if so, how much.
The accounting must show what changes have occurred in the assets of the estate. For instance, Mrs. Smith’s brokerage account may have gone up or down in value. That gain or loss in value must be reflected on the accounting.
Furthermore, if a bank account were closed and the proceeds were transferred to another account, the accounting should reflect that fact. Perhaps the executor closed four of the five bank accounts and moved those accounts to an estate account.
Finally, the accounting should show the current nature of the estate’s assets.
In return for faithfully carrying out his duties and providing a comprehensive accounting, the beneficiaries should release the executor from his duties. If a beneficiary refuses to sign the accounting, then the executor will have to file his accounting “formally,” which means he files it with the court. The court will then review the accounting and pass final judgment on it.