A fiduciary account is a well-recognized term of art and refers to the presentation of the fiduciary’s information about how he managed the affairs that were his responsibility.
The purpose of the account is to provide the parties in interest - whether they be estate or trust beneficiaries, the principal of an agent, a minor, or the court - with a statement of all receipts and disbursements of the fiduciary. In other words, what property did the fiduciary start with, what happened to it, and what is left.
The account will begin with what assets are included in the estate or trust, or are under the fiduciary’s control and management. This also includes subsequent additions to the assets controlled by the fiduciary.
The fiduciary must separate principal from income. Principal is the amount originally received plus capital gains, minus capital losses, and less any expenses or distributions chargeable to principal. Income is the interest, dividends, and other income earned by the principal. In estates and trusts, sometimes the beneficiaries of income are different from the beneficiaries of principal so it is very important to keep them separate. The Pennsylvania Uniform Principal and Income Act gives the rules for how to determine if a receipt or disbursement is allocable to principal or income.
After the listing of principal receipts, usually the next schedule shows sales or other dispositions. The fiduciary carries the assets in his account at a “book value” which is really the value the asset had when the fiduciary received it. If the asset is sold, the fiduciary shows the difference between the book value and the sales price as a gain or loss. Often the fiduciary will need help in preparing her account. Book value, or the fiduciary’s carrying value, is different from the assets cost basis for income tax purposes. Thus, the fiduciary’s gain or loss in the accounting may be different from the capital gain or loss realized for income tax purposes.
The next schedule shows any items paid out of principal including distributions and expense chargeable to principal. Logically, the next schedule is the principal balance on hand - this shows what is left. The usual format is to show both the book value or carrying value of the asset and the fair market value at the end of the accounting period. When an account covers a long period of time sometimes it is very difficult to determine the investment performance.
There are various events or transactions that don’t change the value of the assets under management but which should be shown on the accounting. Stock splits are a good example. Investments made with cash are another example.
Next are the income schedules. Income is usually grouped by type of receipts, interest, dividends, rents. Each income item is listed separately with its date of receipt. That way you can easily see if something is missing: a quarterly dividend, a monthly interest payment, a rent receipt.
Payments out of income are shown next. These are usually the ordinary operating expenses of the fiduciary along with distributions of income to beneficiaries or the principal.
Finally the account shows the balance on hand. If it is an interim accounting, that is the end. Sometimes the fiduciary shows a schedule of proposed distribution if the fiduciary services are complete.
The account is given to the parties in interest, and may be filed with the Orphan’s Court if court approval of the accounting is sought. The court’s approval of the fiduciary’s account after notice to the beneficiaries and then holding a hearing or “audit” relieves the fiduciary of most liability for his actions. If the court is not involved, often the fiduciary will ask for the beneficiary’s or agent’s consent to the accounting before releasing funds. The fiduciary will ask the beneficiary to release him or her from any liability before handing over the funds. This is usual and customary and is often less expensive and less burdensome than seeking court approval of the fiduciary’s account.
If any interested party has objections to the accounting, these objections are brought to the fiduciary’s attention. Objecting to the fiduciary’s’s account is the typical way that the fiduciary is brought to task for bad investment decisions, improper spending or distributions, and careless management. A careful review of the accounting will bring these matters to light. Providing an accounting is one of the duties of the fiduciary, and it provides the only means by which the fiduciary’s actions can be examined and it can be determined whether the appropriate standard of care has been met.