Your right to view the paperwork of a living trust can vary based on whether you're the creator or the beneficiary of the trust and whether it's revocable or irrevocable. Most people involved in a trust, including the creator, trustee and beneficiaries, usually agree that regular and/or surprise audits are a good practice. Reviewing how living trusts work will help you better protect your assets or potential claims.
What Is a Living Trust?
A living trust is one that you create during your lifetime, often to protect your assets, according to the American Bar Association (ABA). These assets can include cash, investments, real property, collections, intellectual property rights, royalties and patents.
In some cases, people with living trusts name family members as beneficiaries. Many charities help people set up living trusts that name the charity as the beneficiary. Based on the terms of your trust, the trustee will use the assets in the trust for your benefit (to pay your expenses) until you pass if you become incapacitated during your lifetime.
What Is a Trustee?
A trustee is the individual or entity who manages the assets in a trust, explains the Oregon State Bar. In the case of a revocable trust, the trustee can be the person who set up the trust and who owns the assets. In the case of an irrevocable trust, the trustee is often a third-party financial professional or attorney hired by the owner of the assets that will be distributed to beneficiaries, such as children or other heirs,
What Is an Auditor?
An auditor is someone who reviews the paperwork of a trust on a regular or surprise basis to make sure the trust is being managed properly. A trust auditor should be professionally trained to do this type of work and should be an independent, third-party advocate for the creator and beneficiary or beneficiaries of the trust, according to the Office of the State Bank Commissioner of Kansas.
Revocable or Irrevocable Trust?
You should take into consideration whether the trust is revocable or irrevocable as part of your decision as to when and how to have a trustee audit performed. You can change the terms of a revocable trust, such as when assets can be disbursed. For example, a beneficiary can receive funds before the creator of the trust dies. The assets are placed in the name of the trustee or co-trustees.
With an irrevocable trust, the terms of the trust can’t be changed. The assets are held in the name of the trust, not the trustee. These are often set up because they provide greater tax benefits than a revocable trust, according to the ABA.
Select Your Auditor
Look for a trust auditor with experience in estate planning and trust administration. Make sure they know that you're looking to have a family trust audited and whether it’s revocable or irrevocable. Find out if they have experience with these types of trusts.
Get recommendations for two or more auditors, review their credentials, get references and make your selection. Meet with your auditor to discuss your goals and ask what their process will be so you can inform your trustee and introduce them.
Make sure you have all auditor fees and expenses in writing and get a signed, written contract. Have your contract reviewed by an attorney who represents you and has no relationship with your trustee or auditor.
General Guidelines for Auditing Trustees
Decide what you want to accomplish with your audit. This will help you decide whether it should be a surprise or an annual audit. Plan to obtain the following information for the prior year:
- List of assets and liabilities
- List of receipts and disbursements
- List of trustee fees and other payments
- Names, roles of and payments to any agents hired by the trustee on behalf of the trust
Notify your trustee that you've hired an auditor and that you wish to conduct an audit. Then request all the specific paperwork your auditor has requested. You'll want the most current list of assets, disbursements, earnings reports and other relevant documents.
Let your trustee know that this isn't an issue of trust (if that's the case) but just a matter of you handling your fiduciary responsibility to all trust beneficiaries and a simple check of the numbers to spot any potential errors. This can help reduce hard feelings.
Your auditor will compare all your current trust documents to documents you've previously received from the trustee. This will ensure that you've been getting accurate information from your trustee. Your auditor might also check property records to ensure that they haven't been transferred to other parties without your knowledge.
An auditor of a revocable trust will look at the trustee’s authority to make changes to the trust, review what the process must be to do this (including notifying beneficiaries) and see if any changes have been made to the terms of the trust. The terms of a revocable trust will be spelled out in the documents that created the trust, which the auditor should receive at the beginning of her contract (and before they begin work).
When auditing either a revocable or irrevocable trust, the auditor will compare all tax filings for the trust to current state and federal requirements. This means they'll have to know the tax laws pertaining to each type of trust – not only at the federal level but at the level of the state in which the trust was formed as well.
Normally, only the creator of a revocable trust (not the beneficiaries) has the right to a regular accounting of the trust. In the event that one of the parties to a revocable trust has become incapacitated or has died, the beneficiaries have different rights to the records.
Steve Milano has written more than 1,000 pieces of personal finance and frugal living articles for dozens of websites, including Motley Fool, Zacks, Bankrate, Quickbooks, SmartyCents, Knew Money, Don't Waste Your Money and Credit Card Ideas, as well as his own websites.