Fiduciary Accounting Essentials

A fiduciary is a person or firm acting as the financial representative of a trust, estate, conservatorship or guardianship.

Fiduciaries are obligated to handle a client’s financial matters in a prudent and ethical manner to protect the client’s assets, so a fiduciary must always act in the client’s best interests. Although the primary obligations of a fiduciary do not vary, secondary duties depend on the nature of the funds being managed.

Trust Administration

Trust Administration

When administering a trust, a fiduciary may manage funds for a minor child, a charitable endeavor or a family trust. Typically, a trust is initially funded with a lump sum. The fiduciary normally invests all or part of these funds in relatively safe endeavors. Interest earned on investments increases the amount of the trust, and any losses or fees decrease the balance. Ideally, the principal, or initial funds, will remain intact, with only the interest withdrawn.

Trust administration is a complex issue. Income from a trust may be tax-exempt or taxable. All proceeds may be paid to one individual, or multiple individuals or foundations may share in the benefits. The Internal Revenue Service has strict guidelines for reporting activities, and failure to comply could result in the revocation of favorable tax status. In addition, since trusts are organized under state law, each state has its own laws regarding reporting requirements.

Estate Administration

Estate Administration

Like trusts, estates can be complex, requiring a thorough knowledge of both federal and state laws. Depending on state laws and whether a valid will exists, estates may take months or even years to clear probate. Estate administration during the probate period includes responding to claims against the decedent’s estate, making any allowable payments to heirs and ensuring that assets, such as homes or other property, is maintained and protected.


Guardianship and Conservatorship

A child or individual who is incapable of making financial decisions may be the beneficiary of a trust, a guardianship or a conservatorship. A fiduciary may be appointed by the donor or by a judge. Guardianship and conservatorship accounting often requires periodic reports to the court, either through written statements or personal appearances. There are also various tax considerations and reports that apply.

Need for Formal Accounting

Trusts, estates, guardianships and conservatorships all require formal accounting that details all incoming and outgoing transactions to satisfy the legal reporting requirements. Beneficiaries may also be entitled to not only receive reports, but to audit the books as well. Sloppy or informal accounting can open the door to charges of mishandling or misappropriation of funds.

One critical function of a fiduciary is to maximize income for a beneficiary. With a trust, guardianship or conservatorship, this often involves investing principal wisely. Although no investment is totally without risks, a professional fiduciary knows how to minimize risks while optimizing chances for dividends or interest. They are obliged to make investment decisions that do not place the client’s funds at unnecessary risks.

Finding Accounting Help

Fiduciary accounting is not a do-it-yourself endeavor. The issues are far too complex for the average individual. Although it is possible for many people to acquire the knowledge they need to handle the fundamentals, the necessary research can require days or even weeks to perform. Furthermore, should any aspect be overlooked, the repercussions can be costly, from additional taxes to lost dividends. Even innocent mistakes can leave the administrator liable for damages or potential lawsuits.

An attorney is one option for those in need of a fiduciary. However, most attorneys are not trained in accounting, and their information may not be current. A certified public accountant knows both the legal requirements and the accounting requirements, and must constantly update their skills and remain current with all pertinent statutes. An accountancy firm is normally the best option for fiduciary accounting.

When choosing an accounting firm to act as a fiduciary, many people find that a small, local firm is preferable to a large firm or chain. Large firms may not be able to offer the personalized attention that beneficiaries need or want. Chains typically train personnel in only the basics of fiduciary accounting, and the lack of expertise can be costly to beneficiaries.

The selection of a fiduciary is of critical importance to beneficiaries or heirs. Prospective clients should ascertain the degree of experience that an accountancy has with fiduciary accounting. Clients should also inquire about potential fees; precise fee determinations may not be readily available, but the firm should at least be able to tell clients the types of services that are included in a standard fee and the services that are subject to additional charges. A little homework can pay off monetarily, but the peace of mind and reduction in stress can be just as important.

Reviewed by: Brian Winter, CPA