3 Key Responsibilities of a Trustee: Accounting, Taxes, and Beneficiaries

Serving as a trustee is both an honor and a serious responsibility.

Whether you’re handling a family trust or serving in a more formal fiduciary capacity, three areas can determine your success: trust accounting, taxes, and beneficiary management.

Understanding how these areas work and how they intersect can help you fulfill your fiduciary duty, maintain transparency, and prevent costly mistakes.

Trust Accounting: Not only a good practice, but a legal requirement

In California, several sections of the Probate Code define a trustee’s obligations to keep beneficiaries informed:

• Section 16060: Requires trustees to keep beneficiaries “reasonably informed” about the trust and its administration.
• Section 16062: Requires trustees to provide an accounting at least once a year, at the end of the trust, and whenever there’s a change in trustees.
• Section 16061: Gives beneficiaries the right to request information about the trust’s management at any time.

As a matter of fiduciary duty, trustees must provide a clear, accurate, and timely accounting of the trust’s financial activity.

Why Court-Ready Accounting Matters

If questions arise or disputes occur, having your accounting in a court-recognized format can make a world of difference. Courts require that formal trust accountings include:

• A statement of receipts and disbursements for both principal and income
• A statement of assets and liabilities
• Disclosure of the trustee’s compensation
• Disclosure of any agents hired and their compensation
• A statement informing beneficiaries of their right to petition the court

Maintaining your books in this format means that, if court involvement ever becomes necessary, your records are already complete and defensible. It also sends a strong message of transparency to beneficiaries, helping to prevent misunderstandings before they escalate.

At Chatterton & Associates, we prepare court-ready trust accountings from the start to help ensure our clients are prepared and protected.

Trust Taxes: Not the same as personal taxes

Many trustees are surprised to learn that trust taxes are completely separate from their personal taxes. A trust is treated as its own tax entity, and it must file its own return using IRS Form 1041.

What is the difference between personal and trust taxes?

One of the most important distinctions is how quickly trusts reach the highest tax bracket. This steep progression can create a significant tax burden if the trust retains income. However, with proper planning, trustees can often reduce taxes by distributing income to beneficiaries.

How to use distributions strategically for trust taxes

When a trust distributes income to beneficiaries, that income typically passes through and is taxed at the beneficiaries’ individual rates; this is often much lower than the trust’s rate and can help reduce the overall tax burden.

Of course, this requires careful coordination. Distributions affect not only taxes, but also cash flow, investment management, and long-term trust objectives. Working with professionals who specialize in trust-specific tax planning can help ensure that every decision aligns with the trust’s goals while minimizing unnecessary taxes.

Beneficiaries: Proactive communication is key

Even when a trust is properly managed, emotions can run high. Money, family history, and expectations can often complicate the process. One of the most effective ways to prevent conflict is through clear, proactive communication.

California law requires trustees to keep beneficiaries “reasonably informed,” but good trustees go beyond the minimum. Regular updates, timely responses to requests, and detailed accountings show beneficiaries that you’re managing the trust responsibly and transparently.

This transparency not only fulfills your fiduciary duty; it also reduces suspicion and the potential for litigation.

Tax Planning for Beneficiaries

Many trustees overlook how an inheritance changes a beneficiary’s tax situation, potentially creating surprises when filing season arrives.

When beneficiaries receive assets like brokerage accounts, IRAs, or rental properties, they also inherit the tax responsibilities that come with them.

Without proper planning, these new income streams can create confusion and higher tax liability. As a trustee, you can encourage beneficiaries to meet with a tax professional before they make major financial decisions with inherited assets. A single conversation can prevent years of tax headaches.

Managing Beneficiary Expectations

Beneficiaries often assume that a distribution equals taxable income, but that’s not always the case. Trust income and distributions don’t always align one-to-one, which can cause confusion when beneficiaries prepare their returns.

Explaining how Schedule K-1s work and reminding beneficiaries to wait for the trust’s tax return before filing their own can prevent unnecessary frustration or IRS issues.

Chatterton & Associates: Helping Trustees Uphold Fiduciary Responsibilities

Being a trustee is one of the most important fiduciary roles you can hold. The trustee’s role involves balancing legal compliance, tax strategy, and interpersonal communication, all while ensuring the trust’s goals are met.

Before your next accounting period ends, take time to review your trust’s books and filings. Are they court-ready? Are tax filings up to date? Are beneficiaries being properly informed?

If you’re unsure, we’re here to help. Schedule a review today to make sure your trust’s books and taxes are court-ready, compliant, and free of conflict.

Sincerely

The Team at Chatterton & Associates