In a recent Florida Appeals decision, Landau v. Landau, a trustee who failed to file proper and complete trust accountings for two years, and to file trust income tax returns for the same two years, was hit with a freeze of the trust assets by the Court. Because the trustee was also the lifetime income beneficiary of the trust, this freeze effectually prevented the trustee from using the trust for his own support.
Florida trust law requires that a trustee file annual trust accountings. This is true whether the trustee is a bank or trust company, or, as here, was the surviving spouse of the decedent who had created the trust for his lifetime benefit.
There were several issues caused by the trustee’s administration of the trust following his wife’s death. First, the spouse failed to transfer some valuable assets from his wife’s estate to the trust, despite Orders entered in the late spouse’s probate case to make such transfers. One of the decedent’s three children became concerned about the failure of these transfers to be made, and requested copies of the trust accountings for two years. The trustee did submit an unsigned accounting for the first year in question, 2015. However, this accounting did not reflect the receipt of a $1 million asset from the estate of the late wife who created the trust, as should have been the case. Further, the accounting showed distributions to the husband-trustee in amounts far exceeding the trust’s net income, without explanation. The trust terms did permit the trustee to distribute trust principal to himself for his health, support and maintenance, and to withdraw 5% of the trust value without regard to his need, but the trust accounting failed to explain whether the principal distributions made were pursuant to either or both of these distribution provisions.
Subsequent to the receipt of this unsigned and incorrect 2015 accounting, the beneficiary daughter amended her complaint to add counts of breach of trust, removal of the trustee and a temporary injunction to freeze the trust assets, based on the trustee’s alleged fiduciary breaches. In a hearing on her pleadings, the daughter contended that the trustee had made excessive principal distributions to himself, had failed to submit proper 2015 and 2016 trust accountings, and had failed to file 2015 and 2016 trust income tax returns. During that hearing, the trustee’s counsel was directed to advise the trustee to comply with all trust accounting and trust tax return filing obligations. However, when the next Court hearing was held three months later, the trustee still had not filed or served the 2016 accounting, nor amended the deficient 2015 trust accounting to remedy the errors. Nor had the trustee filed trust income tax returns for 2015 or 2016, or even attempted to reopen his late wife’s estate so that the significant estate assets due to the trust could be transferred to it.
The Appeals Court concluded that the trustee’s admitted failure to file timely and accurate annual accountings and tax returns constituted a breach of trust. This was a valid basis for the trial court freezing the assets of the trust, to protect them for the ultimate beneficiaries.
Trust accountings are not required to be filed under every state’s law. For instance, in Kentucky, a trustee has no obligation to submit annual accountings to the beneficiaries unless they request them, and the trust terms can limit the beneficiaries who can request an accounting. In Ohio, trust accountings are required unless waived by the trust’s terms.
If you serve as a trustee for a trust, it is important that you be aware of your fiduciary legal obligations in collecting the trust assets, administering the trust, and performing your accounting and tax return filing duties on a timely basis. If you are considering who to name as trustee of a trust for your own beneficiaries, it is important to choose individuals or institutions which will take the fiduciary duties seriously, and which will be willing and able to perform them on a timely basis. Also, if you would prefer to limit or eliminate trust accounting requirements, you need to check with your estate planner to see if your state's trust law permits it.