Feeding the Wolves: Building Trust in a Trust

THE CHALLENGES

Managing a trust is challenging, to say the least. In fact, managing a trust is just about the closest one can get to feeding a pack of hungry wolves. Only these wolves have legal recourse if you don’t feed them the right amount. And you are probably related to them.

Apart from routine family drama, administering a trust is tough because it requires an extreme level of financial accountability.  Trustees who have been sentenced—you know, like prison—to managing the trust are usually normal people with their own lives and responsibilities.  Accounting for trusts is complicated and keeping perfect books and records can be tedious.  This makes maintaining a healthy and fiscally responsible trust about as easy as keeping wolves well-fed.

Further, Fiduciary expectations for trustees are high. Family members and friends who designate a trustee to administer their trust after they’re gone often have no idea the years of stress they are inflicting on the person managing their affairs.  Trustees are considered fiduciaries, meaning they are legally entrusted to hold and manage trust assets on behalf of designated beneficiaries.  As part of their legal duties, trustees have an obligation to maintain accurate and timely accounting records and must be able to produce reliable financial reports for beneficiaries.  If trust accounting is done poorly, trustees could be in breach of their fiduciary duty and face legal action for negligence.

POTENTIAL PITFALLS

Needless to say, properly administering a trust is serious business.

Many things can and do go wrong in trust accounting. To begin with, the rules surrounding bookkeeping and reporting for trusts are ill-defined. Trustees are navigating murky regulatory waters.  When trustees are using manual accounting systems such as Excel to track trust assets, liabilities, income, and expenses, problems inevitably arise.  Trust funds can be combined and confused with non-trust funds, bank accounts can be overdrafted and go unreconciled, uncleared payments can be left unaddressed, financial data can be lost due to a lack of electronic backups, and inaccurate reports can be given to beneficiaries.  Moreover, trusts usually suffer from inadequate internal controls, making it difficult to follow and track activity.

Let’s not even discuss trustee compensation… disagreements over how much trustees get paid for their hard work is common.  Even more common is mistrust and misinformation, leading beneficiaries to think (sometimes wrongly) that trustees have been hiding funds or personal spending. The irony of the trustee is that he or she has been put in this position—usually because they have demonstrated responsibility and some capacity to manage finances well—which automatically invokes mistrust in him or her as if they were someone convicted of grand theft.

THE SIMPLE SOLUTION

But there is a better way! All of these problems are avoided or helped through proper accounting.  If you’re a trustee, you need a dedicated bookkeeper.  But wait, you’re thinking, “I already have a CPA and an attorney… why do I need a bookkeeper?” CPA’s and attorneys are necessary and vital resources, but they are expensive, and their services are not oriented toward day-to-day accounting. In short, you need a bookkeeper because CPA’s and attorneys are not bookkeepers. You need someone in the nitty-gritty, focused on getting things reconciled and balanced out.

Let your bookkeeper focus on:

1. keeping trust funds organized and separate from non-trust assets,
2. monitoring and reconciling bank accounts,
3. paying regular trust bills and tracking beneficiary distributions,
4. maintaining detailed supporting documentation for all trust transactions,
5. ensuring accounting records are backed up securely,
6. producing accurate reporting for beneficiaries when they need it.

In addition, a good bookkeeper can work with your existing CPA and attorney to ensure that the overall estate planning objectives are met. Attorneys who have set up complicated estate planning structures involving multiple trusts have done so in order to make the transition of assets to beneficiaries as smooth as possible, while minimizing tax liability.  Accordingly, it is critical that the accounting of each trust be accurate so that the estate planning vision is executed properly, and the intended benefits are realized.  No one wants to spend thousands of dollars developing the perfect estate planning strategy, only to lose out on benefits through poor fiscal management.

If you’re a trustee with concerns about the quality of your accounting, or perhaps you are under pressure from beneficiaries; you need professional help—but the right kind of help. You need accounting help. Proper accounting is a priceless investment, and it often prevents costly litigation caused by “trust mistrust” and misinformation.

Listen… if your family is crazy, we can’t help you there.  But you can at least prove them wrong (and protect yourself) with accurate and impartial accounting. You can’t change how hungry the wolves are. But you can get your stuff together so they can’t bite you.