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Trust Law/Level VIII · Trusts of the world/8.3 Running a trust/Lesson 3

Accounts and records

What US trustees keep, how principal and income accounting works under the uniform acts, including the power to adjust and unitrust conversion, and how reports and time limits bear on records.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Build records from what already arrives: bank and broker statements, invoices and a dated note of each decision meet the UTC §810 duty without paid software. Catch: trust property must be kept separate from the trustee’s own and, where feasible, titled to the trust.
  2. Send a report that adequately discloses potential claims and states the time to sue: claims then expire after one year (UTC §1005), not five years after the trustee leaves or the trust ends. Catch: states vary; Maine’s long period is six years.
  3. Beneficiaries may waive trustee reports (Maine 18-B §813(4)), cutting annual reporting cost in small family trusts. Catch: a waiver can be withdrawn for future reports, and without reports the one-year limitation on claims never starts running.
  4. Rebalance income and remainder without court: UFIPA §203 lets a fiduciary adjust in a record, and Article 3 allows unitrust conversion after notice. Catch: either must help administer the trust impartially, and a 3 to 5 percent unitrust limit applies where needed for tax benefits.
  5. Keep tax records at least 3 years after filing, 6 years if omitted income exceeds 25% of reported gross income, and basis records until the sale year’s limitation period ends (IRS). Catch: keep trust records until the UTC §1005 limitation has also run.

MaterialsUniform Trust Code §§810, 813 and 1005 as enacted in a state, such as Maine Revised Statutes title 18-B, free on the legislature’s websiteThe Uniform Fiduciary Income and Principal Act (2018), with its prefatory note, free from the Uniform Law CommissionA sample trust accounting statement showing separate principal and income columns

Wonder

  1. What records does a trustee need to show how the trust was run?
  2. How does the distinction between principal and income affect what beneficiaries receive now versus later?
  3. How long are trust records kept after a trust ends, and why?

Explore

  1. Under Uniform Trust Code (UTC) §810, as enacted in many US states, a trustee must keep adequate records of the administration of the trust and keep trust property separate from the trustee’s own. The UTC does not list the documents required. In practice, records usually include statements and receipts for money in and out, invoices for expenses, valuations and appraisals, correspondence with beneficiaries and advisers, and notes of decisions and the reasons for them, such as discretionary distributions or investment changes. Under the Uniform Prudent Investor Act §8, prudence is judged by the facts at the time of a decision, so a record made then can show what the trustee knew. This lesson describes common practice and does not advise any trustee.
  2. Many trusts give income to one beneficiary and principal to another, for example income to a surviving spouse for life and the remainder to children. Trust accounting therefore separates principal (the capital) from income (what the capital earns). State law supplies default rules where the trust terms are silent: the Uniform Principal and Income Act (1997) was widely enacted, and some states have replaced it with its update, the Uniform Fiduciary Income and Principal Act (UFIPA, 2018). Under these acts, for example, ordinary cash dividends and interest are generally income, while proceeds from selling an asset are generally principal. Misallocating a receipt shifts value between income and remainder beneficiaries.
  3. A trust invested for total return may produce little ‘income’ even while it grows, which can be unfair to an income beneficiary; a high-yield portfolio can be unfair to the remainder beneficiaries. The 1997 Act (§104) gave trustees a power to adjust between income and principal, available where the trustee invested as a prudent investor, the terms described distributions by reference to income, and the trustee could not otherwise act impartially. UFIPA §203 retains and expands this power: unless the trust terms provide otherwise, a fiduciary may adjust, in a record and without court approval, if the fiduciary determines that adjusting will help administer the trust impartially. §203 does not create a duty to adjust or to consider adjusting.
  4. Another approach is a unitrust, in which the income beneficiary receives a set percentage of the trust’s value each year instead of its actual income. Many states added unitrust-conversion statutes alongside the 1997 Act. UFIPA Article 3 lets a trustee, without court approval, convert an income trust to a unitrust, change a unitrust, or convert back, if the trustee determines this will help administer the trust impartially and sends notice to the qualified beneficiaries and others under §304. The rate may be fixed or set by reference to market data (§306). According to the Act’s prefatory note, tax-sensitive limits, such as a unitrust rate of 3 to 5 percent, apply only to trusts that need them to qualify for tax benefits. State versions differ.
  5. UTC §813 requires a trustee to send current distributees and permissible distributees of income or principal, and other beneficiaries who ask, a report at least annually and at the termination of the trust. The report covers the trust property, liabilities, receipts and disbursements, including the source and amount of the trustee’s compensation, a list of the trust assets and, if feasible, their market values. The UTC prescribes contents rather than a form, so formats vary by state, court and trustee, and some courts require formal accountings in set formats. Beneficiaries can waive the right to reports, and the trust terms or state law may change the duty (lesson 2.2.4).
  6. No single rule sets how long trust records must be kept, but two time limits are relevant. Under UTC §1005, a beneficiary generally cannot sue for breach of trust more than one year after being sent a report that adequately disclosed a potential claim and stated the time allowed; otherwise, in the uniform text, a claim must be brought within five years after the trustee leaves office, the beneficiary’s interest ends or the trust ends, whichever comes first. States vary: Maine, for example, uses six years. For federal tax, the IRS says records must be kept as long as they may be needed for the tax law, generally at least three years after a return is filed. Records supporting reports and returns are therefore often kept until such periods have run.

Key facts

  • Uniform Trust Code §810 requires a trustee to keep adequate records of the trust’s administration and to keep trust property separate from the trustee’s own.
  • The Uniform Principal and Income Act (1997) and its update, the Uniform Fiduciary Income and Principal Act (2018), supply default rules for allocating receipts and expenses between income and principal.
  • UFIPA §203 lets a fiduciary, in a record and without court approval, adjust between income and principal if this will help administer the trust impartially.
  • UFIPA Article 3 lets a trustee convert to or from a unitrust after notice; a 3 to 5 percent rate limit applies only to trusts that need it for tax benefits.
  • Under UTC §813, a trustee reports at least annually and at termination on trust property, liabilities, receipts, disbursements and the trustee’s compensation.
  • UTC §1005 bars a claim one year after an adequately disclosing report, or otherwise five years after the trustee leaves, the interest ends or the trust ends; some states differ.

Exercise nine, six, three, one

9CollectList up to 9 records a trustee might keep, from this lesson or a sample trust account you are reading (some sources give fewer), such as a bank statement, a dividend notice, an appraisal, a letter to a beneficiary or a note of a distribution decision, and note whether each concerns income or principal.
6ClusterSort them into 6 categories: receipts, disbursements, valuations, correspondence, decision records, and reports.
3DistillReduce the 6 categories to 3 groups: records of what came in and went out, records of what the trust holds and is worth, and records of what the trustee decided and told beneficiaries.
1CrystallizeWrite 1 sentence explaining, in your own words, why separating income from principal matters when a trust has both an income beneficiary and a remainder beneficiary.

Fact check

Dates, figures and claims checked against the published sources listed below.

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