Accountings by Testamentary Trustees
What is an Account?
An account is a report of the actions of the trustee in regard to the financial matters of the trust, item by item. Since it is an item by item accounting in chronological order, the trustee should keep meticulous records of all income, other receipts, disbursements for debts and obligations of the trust and distributions to or for the benefit of the beneficiaries of the trust. The account is Form CC-1684 and is required to have, as attachments, itemized line item listings showing the specific details of each transaction which is summarized by the trustee on Form CC-1684. The filing of only the Trust Account Summary page is totally unacceptable. The trustee is obligated to itemize individual receipts by date, payor and amount, itemize individual disbursements by date, payee and amount, itemize all gains or losses on sales as well as itemize all distributions by date, distributee and amount.
Where is the Account Filed?
The account is filed with the office of the Commissioner of Accounts, 8500 Mayland Drive, Henrico, VA 23294.
When is the Account Filed?
The first account of a trustee is filed for the period ending December 31 after the initial funding of the trust, and is filed by May 1st of the succeeding year. For example, if the trust is funded ( first receives assets) August 1, 2010, the first account is due May 1, 2011, for the period from August 1, 2010 through December 31, 2010.
Second and subsequent accounts of trustees for each calendar year ending on December 31st are filed on or before May 1st of the following calendar year. Note that there are exceptions for trusts permitted by the Internal Revenue Code to file income returns on a fiscal year basis. If a fiscal year has been elected, the accounting should be filed on a fiscal year basis determined by the trust for income tax purposes.
NOTE: A testamentary trustee may not be required to file accounts if the testator has so provided by specific language in the will or for wills probated on or after July 1, 2010, when the written consent of the beneficiaries is obtained. The trustee must comply with Section 64.2-1307, Code of Virginia (1950), as amended, in order for the waiver to be effective. Trustees should refer to that code section for the manner of compliance.
The Commissioner of Accounts' office does not advise on compliance with the trust waiver section of the code and will not prepare or pre-approve proposed waiver documents. Compliance with the waiver section will be reviewed upon submission of the proper signed documents and a check for $25.00 for each trust to the Commissioner's office.
What must be filed with an account?
- Accounts shall be itemized by line items shown on the trust account summary and such itemization shall accompany the one page trust account summary (Form CC-1684);
- Receipts shall be individually itemized by date, payor and amount;
- Disbursements shall be individually itemized by date, payee, reason for the disbursement and amount, and in support of such disbursements, the trustee is obligated to provide documentary evidence for the disbursement consisting of the invoice (bill), the payment by a copy of the check included with the monthly bank statement or a receipt signed by the payee. All bank statements for the period of the trust shall be provided along with monthly stock brokerage statements;
- All distributions from the trust shall be consistent with the terms of the trust and shall be individually itemized on an attached supplement to the account summary. Accompanying the account shall be a signed notarized receipt or a copy of the cancelled check returned with the bank statement showing payment to and receipt by the trust beneficiary;
- A Certificate of Trust will be required if a trust under agreement is a beneficiary. This certificate is in lieu of providing a copy of the trust agreement and certifies that the trust is still in effect, who the trustee is and acknowledges receipt by the trustee of the distribution received from the estate.
Virginia Code Section 64.2-1311(d) allows a corporate trustee to file an affidavit in lieu of original vouchers for the payments of debts, taxes and expenses. That affidavit must be signed by the corporate trust officer familiar with the facts of the trust and must describe each payment by date, payee, purpose and amount.
Please note that distributions to beneficiaries may not be shown by affidavit in lieu of actual receipts. Notorized receipts or copies of canceled checks are required.
Preparation and Filing of the Trust Account
Every trustee who is obligated to file accounts shall file the first trust account by May 1 of the year following first funding of the trust, for the period ending on December 31 of the prior year. If you received assets as trustee on August 1, 2010, your first account is due in the Commissioner’s office on or before May 1, 2011, for the accounting period ending December 31, 2010.
Annual accounts are required thereafter by May 1 of each succeeding year for the preceeding calendar year ending December 31, until such time as the trust terminates according to its terms (as set forth in the decedent’s Will), at which time a final account shall be filed.
The period of the second and subsequent accounts may not be extended beyond the 12 month period due to the workload demands of the Commissioner's Office. Extension of the accounting period without the prior written consent of the Commissioner is not allowed, and an account which extends the account period may be returned for modification to the proper reporting period. Request for the extension of the accounting period will be rarely granted, and then only for extraordinary circumstances.
The trust account must be signed by all trustees and must be filed in triplicate, with all proper supporting documentation.
Proper supporting documentation includes monthly bank statements for all trust bank accounts, monthly brokerage statements for stock assets, copies of the front and back of cancelled checks or the front of the check only if it was returned by the bank as part of the monthly bank statement. Invoices (vouchers) or notarized receipts for all disbursements for expenses of the trust shall be provided. Copies of the front and back of cancelled checks, or copies of the front of checks if included in the monthly bank statement, shall be provided for all distributions to beneficiaries of the trust. If there is no cancelled check, as in the case of a transfer of personal property, wire transfer, payment by cashiers or bank check, a notarized receipt is required from the beneficiary. NOTE: Electronic data is not acceptable as proper documentation.
Corporate trustees may file an affidavit of payment of expenses, debts and taxes pursuant to Section 64.2-1311 D., Code of Virginia (1950), as amended. The expense shall be described on the affidavit by date, payee, purpose and the amount of payment. Note: An affidavit of a corporate trustee may not be submitted for distributions to beneficiaries. Cancelled checks or notarized receipts are required for distributions.
Form CC-1684, the trust account summary, shall be used as part of the account filing. This trust account summary shall be supported by attached listings for each line item for which a total is shown on the account summary. The listing shall show by date, payee, purpose and amount each individual transaction making up the total amount shown on every line item. You should refer to the sample trust account provided to you at the time of qualification as trustee. (Form CC-1684 (SAMP)).
In addition to the following instructions for completion of the trust account a trustee should review the Instructions for a trust account which were provided at qualification (Form CC-1684 (INST)).
The beginning assets shown on the inventory are to be shown on line 1 of the account summary, and individually listed by date, type of asset, and amount on a schedule prepared by you. These are the same assets listed by you on the inventory for the trust, or the ending assets from a prior account.
The listing you prepare for line 1 of the trust account will include assets shown in Parts 1, 2, 3 and 4 of the trust inventory.
If after filing the trust inventory you receive additional assets by distribution from the executor of the estate, these assets are to be shown on line 5 not on line 1. Line 1 includes only the assets reported on the inventory or the ending assets from the prior account. For example, you may receive, as trustee, a partial distribution from the executor of the decedent’s estate and months later another partial distribution or final distribution. If you received $50,000.00 as an initial distribution your inventory is due four (4) months from that initial funding of the trust. An additional distribution from the executor received after the filing of the inventory is not to be included on line 1, but would be reported on line 5 as an adjustment showing the additional principal received.
Principal and income receipts are reported separately on the account. The Uniform Principal and Income Act, Section 64,2-1000, and following sections, Code of Virginia (1950), as amended, should be consulted, however generally, unless the terms of the trust provide otherwise, long and short term capital gains are allocated to principal. Interest and dividends are allocated to income.
Total principal receipts are shown on line 2 of the account summary. As with each line item entry on the trust account summary, an additional page must be prepared listing each individual principal receipt by date, payor and amount and the total amounts shown on line 2 of the account summary. If it is a capital gain distribution from stock held by the trust the line item listing should show the name of the stock on which the capital gain was paid.
If you received capital gains which were automatically reinvested under a reinvestment plan, the capital gains will be shown as principal income on Line 2 and the amount of added shares purchased with the capital gains distribution will be shown on Line 12 as additional shares owned, with the value being the purchase value. For example: If $1000.00 in capital gains are paid and shown as principal income to the trust on Line 2 and the gains were reinvested in the same stock at $10.00 per share, you would also add to your asset holdings on Line 12 the additional 100 shares at a carrying value of $10.00 per share. Your schedule of assets on hand will then show different carrying values for shares of the same company purchased at different times.
Additional distributions received from the estate and not reported on the trust inventory may be shown as principal receipts, but it is preferable that they be shown as adjustments on line 5.
CHANGES IN MARKET VALUE OF RETAINED ASSETS ARE NOT REFLECTED AS INCOME OR ADJUSTMENTS. THE INITIAL VALUE OF THE ASSET WHEN BROUGHT INTO THE TRUST REMAINS THE "CARRYING VALUE" UNTIL THE ASSET IS SOLD, AT WHICH TIME A GAIN OR LOSS WILL BE REPORTED.
Total income receipts, including interest and dividends, are reported on line 3 of the account summary with an individual listing of each income receipt shown on an attached listing prepared by you just as you have done for principal receipts.
If dividends are received and were reinvested under a dividend reinvestment plan, the dividend will be shown on Line 3 as an income receipt and the added shares shown under Line 12 as additional assets on hand at the end of the account. See the example in the instructions for Line 2 above.
Total gains realized on the sale of trust assets are shown on line 4 of the account summary and an individual listing of each gain is shown on an attached schedule.
Changes in market value of assets during the account period are not shown on the trust account (except following line 13 where total market value is reported and the listing for line 12 where the assets on hand should show carrying value for the account, and current market value for informational purposes).
Gains should be reflected as follows:
Sale proceeds from sale on 7/1/10 of 200 shares at $20.00/share $4,000.00
Inventory value 200 shares Exxon Mobil at $10.00/share $2,000.00
Gain on sale (Trade) $2,000.00
Line 5 “adjustments” is to be used for the reporting of assets received by the trustee from the decedent’s estate after the inventory was filed, or on rare occasions for reporting the removal of assets from the trust that should not have been reported. If, after filing the inventory, the trustee receives an additional distribution from the executor of the estate, that distribution is shown on an attached schedule and the total adjustments are shown on line 5.
If the value of an asset was incorrectly reported on the inventory it should be corrected on line 5 (and an attached schedule explaining the adjustment). Changes in market value are not reflected on the account, except for the market value of all trust assets shown on the schedule for line 12 and after line 13 showing the full market value of the entire trust.
Line 6 is the total of lines 1-5 and represents all assets received by, and under the control of, the trustee during the accounting period.
Just as principal and income receipts are reported separately, principal and income disbursements are likewise reported separately. Line 7 reports all principal disbursements and an attached schedule itemizes such disbursements by date, payee, purpose and amount.
The Uniform Principal and Income Act, Sections 64.2-1024 through 64.2-1029, Code of Virginia (1950), as amended, should be consulted for proper allocation of disbursements between principal and income.
The trust instrument should also be consulted to determine if there is direction as to the charging of expenses. A specific provision in the Will (trust) controls over statutory language.
Unless stated otherwise in the trust, investment fees, trustee’s fees, accounting and tax return preparation fees and Court filing fees are charged one-half to principal and one-half to income.
Legal fees and taxes owed by the trust are generally charged to principal.
The disbursements charged to income are summarized on line 8 and individually listed on an attached schedule by date, payee, purpose and amount. Refer to the Uniform Principal and Income Act, Sections 64.2-1024 through 64.2-1029, Code of Virginia (1950), as amended, for assistance in the proper allocation of income to disbursements from the trust.
Remember that a proper voucher (invoice), paid receipt, cancelled check and monthly bank statements must be provided for all principal and income disbursements.
Losses incurred at the time of the sale of a trust asset are shown on line 9 and itemized on a schedule prepared by the trustee. Losses should be reflected on the listing accompanying the account summary as follows:
Inventory value 200 shares Exxon Mobil at $20.00/share $4,000.00
Sale proceeds from 7/1/10 trade of 200 shares at $10.00/share $2,000.00
Loss on asset sale $2,000.00
Documentation (brokerage statements) must be presented supporting such losses.
Lines 10 and 11:
Principal and income distributions to beneficiaries of the trust must be reported separately on Lines 10 and 11 of the account summary and an itemized schedule for each included with the account summary.
The trust (Will) specifies who, if anyone, is entitled to distributions of income earned by the trust. Payment of income should be paid as specified in the trust. Often distributions of income are required on a specified schedule or on specified conditions. These directions as stated in the trust must be followed.
Income distributions are shown on Line11.
If distributions of principal may by the terms of the trust be made "for any reason in the sole discretion of the trustee" no necessity for the distribution need be shown to the Commissioner. This unrestricted discretion is not normally granted by the trust language.
If a standard was established by the decedent for distribution of principal for specific purposes, those purposes are controlling. A direction that principal be used for "education and medical expenses" would prohibit the purchase of a car from principal assets and such a distribution will not be approved by the Commissioner of Accounts.
A standard for use of principal for the beneficiary’s “support, maintenance and education” is a broader standard and may support a distribution to purchase an automobile, but great care and judgment should be used in making principal distributions.
Often a trustee is directed to “consider all other sources of income” in determining the need for a principal distribution. Such a directive should be properly evaluated and evidence of what was considered presented to the Commissioner with the account.
Principal distributions are shown on Line10.
All distributions must be documented by a properly notarized receipt or cancelled check.
Enter on the trust account summary the total of all assets on hand at the ending date of the account and provide an individual listing of all assets showing the carrying values and market values of each asset in separate columns.
Evidence of the existence of the assets listed as assets on hand at the end of the accounting period must be demonstrated to the Commissioner by copy of the bank statement, brokerage statement, stock certificates, notes or other evidence of current ownership.
Line 13 shows the total of line 7-12.
Line 13 must equal line 6 or the account does not balance.
The total fair market value of all trust assets must be shown following line 13. This market value is used to determine the trustee’s commission and the Commissioner of Accounts' fees.
NOTE: The Uniform Trust Code (UTC) contains provisions which, under certain circumstances, allow for the termination of a testamentary trust prior to the date scheduled for termination under the trust language. In some circumstances, the approval and order of the Court is required.
One provision of the UTC allows for the termination of an "uneconomical trust", in the discretion of the trustee, after notice of intent to terminate to the beneficiary(ies). In this instance, it is the policy of the Commissioner of Accounts that prior discussion, and approval of the early termination of the trust, is required. Of course, an order of the Court allowing the early termination is honored by the Commissioner.
The reason for this policy is to allow for the examination of the reasonableness of the trustee's exercise of discretion, analysis of the value of the trust assets to determined if the trust is "uneconomical", but more importantly, that, as the Uniform Trust Code requires, the distribution to be made following such a termination is made "in a manner consistent with the purposes of the trust".
Consider the instance of a testamentary trust containing $75,000.00 in assets, which requires the income and so much of the principal as is necessary for his education, to be payable to a 21 year old beneficiary until he is 30, with distribution at age 30 to the beneficiary, free of trust. The trust further provides that if he dies before age 30, everything is to be distributed to the Red Cross. Trustee wishes to terminate as uneconomical at age 21 under the UTC, distributing all assets to the 21 year old. How can distribution be made "in a manner consistent with the purposes of the trust?
This dilemma presents quite frequently where the trust contains age restrictions before a beneficviary can enjoy the assets free of trust. How can a trust for a minor, stated in the will to be held for his college education until age 25, be distributed "in a manner consistent with the purposes of the trust" by terminating the trust as uneconomical and distributing to the beneficiary at age 21?
Any decision to terminate the trust as uneconomical must be reviewed in advance with the Commissioner unless the Court has approved the termination by order.