Duties of a Michigan Trustee: Trustee's Duty to Account
Overseeing the administration of a trust requires diligent attention to various details and duties, one of the most critical being the trustee's duty to account. A common oversight by trustees is to fail to provide a clear and comprehensive overview of the trust's financial activities to qualified trust beneficiaries, as mandated by Michigan law. In this legal insight article, the Michigan Trust and Probate Attorneys of Thompson Legal will delve into the specifics of a trustee's duty to account under Michigan law, highlighting the essential information that must be included in these reports.
Please note that this post is not exhaustive, and every situation is unique. In the event that you have legal questions it is advisable to speak with a licensed attorney. Contact Thompson Legal to speak with a Michigan Probate Attorney today.
A Trustee’s Duty to Report
Michigan law, specifically MCL 700.7814(3), specifically states that a trustee has a duty to provide an annual trust accounting to the qualified trust beneficiaries. This obligation is so fundamental that it cannot be waived by the grantor of the trust document itself, although a beneficiary can individually choose to waive their right to receive these accountings. Failing to provide regular accountings can lead to significant complications, particularly if a beneficiary later demands years of retroactive reports, potentially resulting in overwhelming work for the trustee and even litigation.
Maintaining meticulous and well-organized records is paramount for a trustee to accurately fulfill their duty to account. Diligent record-keeping forms the bedrock for generating accurate trustee reports, ensuring transparency and facilitating smooth trust administration. Key aspects of trustee record-keeping should include:
Maintaining distinct financial boundaries between personal and trust assets through separate accounts.
Thorough documentation of all financial transactions, including income, expenses, and distributions, with supporting records.
Detailed tracking of trustee activities, including the time and effort dedicated to trust administration tasks.
Understanding Trust Accounting Methods
Most trusts operate using the cash method of accounting. This means that income is reported when it is actually received, and expenses and distributions are reported when they are paid.
Furthermore, trustees must be aware of Michigan’s Uniform Principal and Income Act (UPIA), MCL 555.501 et seq. This act provides default rules for allocating receipts and disbursements between the principal (the original assets of the trust) and income (earnings generated by those assets).
If the terms of the trust explicitly provide instructions on how to allocate these items, those terms will govern (See MCL 555.503(1)(a)). The UPIA defines "terms of a trust" broadly, encompassing the settlor's intent as expressed in writing, spoken words, or conduct (MCL 555.502(l)).
If the trust document is silent on these allocation matters, the trustee must adhere to the rules outlined in the UPIA (MCL 555.503(1)(b)).
In situations where neither the trust terms nor the UPIA provide specific guidance, the trustee should allocate the receipt or disbursement to principal (MCL 555.503(1)(c)).
Familiarity with the UPIA is crucial for trustees in preparing accurate and legally sound reports when the trust document does not provide specific allocation instructions.
Essential Components of a Trustee's Report
At a minimum, a trustee's report, as required by MCL 700.7814(3), must include the following:
A comprehensive report of the trust property.
A listing of all liabilities of the trust.
A detailed account of all receipts, including their sources and amounts.
A detailed account of all disbursements, including their amounts and to whom they were paid.
The source and amount of the trustee's compensation.
A listing of the trust property and, if reasonably feasible, their respective market values.
If applicable, any disclosures required under MCL 700.7802(5).
In addition to these legal requirements, it is highly advisable for trustees to also include the cost basis of the trust assets, if available. When reporting receipts and disbursements, the trustee should clearly indicate which items were allocated to income and which to principal. Contributions to the trust and distributions to beneficiaries should also be explicitly included in the report. Furthermore, any deductions to principal, such as capital losses from the sale of assets or casualty losses, should be reported.
The overarching goal of the trustee's report is to keep the qualified trust beneficiaries reasonably informed about the trust's administration and provide them with the essential information needed to protect their interests. Transparency in the trust's affairs minimizes the likelihood of disputes with beneficiaries or issues with the court.
To potentially benefit from a shortened one-year statute of limitations for breach of trust claims under MCL 700.7905(1)(a)), trustees should consider including the following statement in their reports: "The time for commencing a proceeding against the trustee for breach of trust is 1 year after the trustee sent this report."
Conclusion
The duty to account is a cornerstone of responsible trust administration in Michigan. By understanding the legal requirements, maintaining meticulous records, and providing clear and comprehensive annual accountings, trustees can fulfill their obligations, foster positive relationships with beneficiaries, and mitigate the risk of future disputes and probate litigation. If you require assistance navigating your duties as a trustee, or if you are a beneficiary with questions about trust administration, we encourage you to Contact Thompson Legal today for a consultation.
This article is for informational purposes only. It is not intended as legal advice. In the event you would like to speak with a Trust and Probate Attorney, please Contact Thompson Legal at (734) 743-1646 to schedule a consultation.
