Every Trustee and every Executor owe an absolute duty to account. And a Trust or probate accounting is a unique animal—it’s unlike any other type of accounting and not every accountant and/or CPA knows how to properly prepare one.
1. Charges and Credits: What goes in must equal what goes out.
Unlike a typical business accounting, Trusts and estates don’t have a profit and loss statement or a balance sheet. Instead, they use “Credits” and “Charges.” In the simplest of terms, they keep track of what goes in and what comes out.
For example, the Charges are the items that come into the Trust or estate (the things the fiduciary is “charged” with). They begin with the value of assets on-hand at the beginning of the accounting period. So if we were preparing a Trust accounting with a period that starts January 1, 2011, then we would need to provide a list of all the assets and their values as of that date. You then add in all the receipts that come into the Trust or estate (like income payments, dividends, any positive cash flow), and gains on sale (which only applies if any capital assets are sold).
The Credits, on the other hand, is a list of the things that go out, such as disbursements (a fancy word for bills and expenses that are paid from the Trust or estate), distributions (money paid to beneficiaries), and losses on sale of capital assets (assuming any such assets were sold). Charges end with the balance of assets on hand at the END of the accounting period.
2. The Summary Sheet.
Every accounting has a summary sheet that looks like this:
And then there are corresponding schedules where the detailed information is listed.
The trick is that the total Charges (what comes in) must be equal to the total Credits (what goes out + what’s left on hand). If they are not, then the accounting does not balance—something is missing and has to be tracked down.
3. The Power of a Calculator: It pays to add.
Whenever I sit down to analyze any Trust or probate accounting the first thing I do is grab my calculator. It is amazing how much you can learn about the sufficiency of an accounting by doing some simple arithmatic. This is true even if you prepared the accounting on your own computer. Since it is relatively easy to have an incorrect formula in a spreadsheet program (such as Excel), a simple little calculator will test the sufficiency of the numbers.
And when put to the test of my simple little calculator, many accountings tell a different tale. Take a look at this summary sheet, it appears to balance:
Yet under the calculator, the numbers don’t jive. Even though the Total Charges are the same as the Total Credits, the numbers, when added, don’t agree. There’s obviously a problem with this accounting.
Next, I turn to the actual schedules and start adding up the numbers and totals listed there. This can be a daunting task, since some of the schedules are multiple pages long. Don’t be discoraged, it pays to do your homework. Keep adding and eventually you’ll discover whether the totals are correct or not.
4. Finding the Accounting Soft Spot.
Using the incorrect summary sheet above, once you add up the numbers on each schedule you can identify where the problem lies. Once I know where the problem is, I can either fix it (if I am the one preparing the accounting) or attack it (if I am probing the accounting prepared by someone else).
What if all the numbers are correct, but I still think there’s something inaccurate going on behind the scenes? Well now I know that I have to go outside the accounting document to find it. That’s valuable information because at least I am not stuck wondering if the problem is evident from the face of the accounting. Instead, I can get started serving my subpoenas and hunting down the problem elsewhere.
Or sometimes the numbers are correct, I just think the Trustee or Executor spent too much on some expense (such as Trustee fees). That’s also valuable information because now I know that my entire case exists on the face of the accounting. The amount of fees is listed, and all I have to do is argue why they are too high.
Without zeroing in on the problem, however, I would have no idea where my point of attack (or revision) would be. So it pays to simplify the process. Do the work, and find the soft spot in almost any accounting.