Making Sense of Estate Accountings

Informal Accounting vs. Formal Accounting

Accountings report specific details about the condition and value of estate assets and debts before or after the decedent’s death. Fiduciaries may perform estate accountings in two ways—formal and informal accountings.

Formal Accountings. Fiduciaries generally send formal accountings to trust beneficiaries each year or to probate judges for review before settling estate debts; they submit similar judicial accountings to the courts before distributing probate assets as well. During probate litigation discovery, interested parties may likewise pursue court orders to compel formal accountings when gathering evidence of alleged wrongdoings.

Informal Estate Accountings. Interested parties may alternatively request informal or unofficial reports of estate assets or debts from fiduciaries of which often target solitary assets (bank accounts) or individual expenses (fiduciary fees or debts paid).

Estate Accounting Preparation

The law compels executors, administrators and trustees in Iowa to prepare and present estate accountings during probate proceedings, at the end of each year, or upon the request from interested parties or the courts.

Estate accounting preparation includes taking asset inventory; keeping records of income earned and expenses paid; and documenting disbursements to beneficiaries set forth in the terms of controlling testamentary documents.

Fiduciaries are also responsible for producing comprehensive final accountings when settling estates at the end of probate. Formal accountings are moreover extremely complex, and they must follow certain legal rules.

Since probate courts will reject ill-prepared accountings, the Smith Law Firm advises fiduciaries to have a professional estate planning attorney prepare their accounting reports to avoid the expense of having to revise them because of a mistake or having to defend them in costly fiduciary litigation.

Compelling and Defending Estate Accountings

Estate dispute litigators often petition the courts to compel formal accountings during their investigations of suspected wrongdoings.

If an accounting reveals unjustified expenses or missing assets or if it shows the fiduciary breached his duty of care and loyalty owed to interested parties, the courts will surcharge the fiduciary (hold him personally liable), and he must pay back all losses to the estate.

Properly performed estate accountings therefore offer fiduciaries an implied release of liability and relive them from defending their performance in expensive estate dispute litigation.

The following examples show three estate accounting performances and how individuals compel or defend them before, during or after probate:

Executor Accountings—executors prepare and present estate accounting documents during probate. Part of their accounting duties include: sending probate notices to beneficiaries and creditors; paying all estate debts and taxes; performing inventory and appraising estate property and assets; distributing remaining property to beneficiaries; and filing final estate accountings with the courts.

• Compelling Executors: Interested parties hold a statutory right to compel formal accountings if they reasonably believe an executor’s performance has wrongfully reduced their inheritance. Such actions force executors to defend their estate accountings or face court-ordered surcharges to indemnify the estate for losses sustained.

• Defending Executors: Executors are also personally liable to estates for negligent performances or for intentional wrongdoings that cause disinheritance to interested parties. To limit liability risk, executors should always hire prudent estate planning attorneys to prepare and present their formal accountings. They should likewise retain estate accounting defense lawyers to respond on their behalf when beneficiaries make groundless complaints against their conduct. Executors may use estate funds to pay for legal representation, but they must pay the estate back if they lose their defense case.

Trustee Accountings—these fiduciaries own and control the descendant’s property in trust and hold legal duties to manage trust assets carefully for beneficiaries identified in testamentary documents. Trustees therefore hold fiduciary duties to perform in the best interests of beneficiaries and to account for all business transactions executed in trust.

• Compelling Trustees: Iowa Trust Code 633A.4213 compels trustees to keep qualified beneficiaries informed about trust administration activity by presenting them with annual formal accountings. Beneficiaries therefore hold legal rights to compel accountings when trustees fail to report or when they enter fiduciary litigation to have trustees removed for wrongdoings.

• Defending Trustees: Like executors, trustees are also personally liable to the estate when they breach their fiduciary duties; however, accepted annual accountings generally release trustees from liability on actions taken during the reporting year. Estate planning attorneys often prepare formal accountings and annual release statements for fiduciaries, and trustees can deduct their legal expenses from trust accounts as well.

Power of Attorney Agent Accountings—agents holding power of attorney authority manage assets and make financial decisions for incapacitated, ill or elderly testators (principals) while they’re alive. Agents therefore are fiduciaries who owe their principal high legal duties of care and loyalty to work in their best interests.

• Compelling Agents: Interested parties may compel agents to present a formal accounting of the deceased’s estate when investigating whether power of attorney abuse took place while the principal was alive. The court may further surcharge agents if evidence shows they abused their authority and wrongfully caused harm to an interested party’s estate.

• Defending Agents: The Smith Law Firm advises agents to acquire a valid release of service from the courts immediately after their POA authority ends upon death of the principal. During probate proceedings, agents may further compel the deceased’s estate to pay an accounting attorney to secure the release. Without this document, it becomes extremely problematic and expensive for agents to perform formal accountings should an interested party compel them to do so years after the principal has died.