Mastering Fiduciary Accounting: Tips for Finance Professionals

As a fiduciary, you have an obligation to present the value of an estate when you take up your duties, the value at the end of the period, along with each and every transaction that occurred throughout the administration. All together, these schedules tell the story of how the estate/trust has been managed to relevant stakeholders, be it beneficiaries, the court, or other interested parties.

In this blog post, we’ll drill down into everything you need to know: defining fiduciary accounting, offering a step-by-step guide to managing trust assets, and looking at some of the key considerations. We’ll also explore how technology can support and streamline this vital administrative process.

What is Fiduciary Accounting?

Fiduciary accounting refers to the management of the trust’s assets and a detailed schedule of a trust’s assets is required. One schedule outlines assets on hand at the beginning of the period and provides a snapshot of the gross value of the estate at the point when the fiduciary assumes responsibility. It’s crucial to record the value of every single asset when you take over management the estate/trust, and to do so as quickly and accurately as possible.

Another schedule details assets on hand at the end of the end of the period. Depending on regulations and the terms of the trust, the fiduciary must either present this at the final account (for example at the termination of the trust), or in an annual accounting report. Either way, this schedule should show the value of every asset on hand, including the assets detailed in the beginning, and any assets acquired over the course of the accounting period.

By comparing the two schedules, beneficiaries and other stakeholders can see how the trust or estate has performed and can gain insight into how you have fulfilled your duty as a fiduciary.

Fiduciaries take different approaches to investing. For example, Fiduciary Trust Company International uses a top-down approach to select sectors and currencies through fundamental analysis and a bottom-up approach to construct portfolios of equities and fixed income securities and uses proprietary research to justify its investments.

‍Managing Fiduciary Accounting: the Step-by-Step Process

Trustees and finance professionals have a duty to manage a trust’s assets properly—accurately, transparently, and in line with legal regulations and the grantor’s wishes. Here’s a breakdown of the process:

1. Asset Inventory: First, it’s crucial to identify and record all the assets held in the trust. These could include cash held in bank accounts, as well as rental property, investment portfolios, or valuables.
2. Valuation: The assets are then valued, with these valuations updated on an ongoing basis if necessary.  For non-marketable assets, such as real estate, business interests, or collectibles, certified valuators should be called in to provide appraisals.
3. Income and Expense Tracking: A trust is not necessarily static; there might be money flowing in (for example, through property rental income, interest, or investment dividends) and out (this could be anything from accounting costs to tax payments). Everything needs to be tracked and meticulously recorded.
4. Asset Management: As well as simply tracking income and outgoings, trustees have a duty to manage the assets in the trust. This might mean selling a property, or rebalancing an investment portfolio to maximize the benefit to the beneficiaries.
5. Tax Compliance: It’s essential to collect all the relevant documents, file tax returns on time, and make sure that all taxes are paid.
6. Communication with Beneficiaries: Trustees have a duty to keep beneficiaries informed about their entitlements and distributions, and to update them on the financial health and performance of the trust.
7. Distribution: Once all debts are settled and legal paperwork has been completed, assets are distributed to the beneficiaries in line with the terms of the trust.
8. Record Keeping: Comprehensive and accurate record keeping is vital throughout the fiduciary accounting process, and can help protect the trustee in the event of a dispute.
9. Reporting: Periodic reporting might be a legal requirement, depending on the jurisdiction. Even if it’s not required by law, however, it’s still good practice to share financial reports with stakeholders on a regular basis.

Key Considerations When Managing Trust Assets

Assets on hand are central to fiduciary accounting. But whether it’s recording the inventory, determining the value of the trust’s assets, or managing these assets effectively, the process is not always straightforward. Let’s take a look at some of the key considerations surrounding assets on hand.

1. Valuation of Assets

Trusts and estates don’t just hold cash. They can include a wide variety of assets, from real estate to stocks and shares, and jewelry and other valuables. Each type of asset has to be valued accurately and managed appropriately, in its own unique way.

So, it’s important to obtain specialist appraisals if required. For example, if the trust includes both residential and commercial property, you might have to consult experts in both of these fields to properly manage the assets.

2. Understanding What to Include

When you’re presenting a schedule of assets on hand, you should only include the assets that are your responsibility as a fiduciary. For example, if you are acting as a trustee then you are only responsible for the assets held in the trust; these typically wouldn’t include assets such as joint tenancy property or annuity payments. A conservator, on the other hand, would have to include a joint tenancy account when presenting a schedule, but not a trust asset.

One common pitfall for fiduciary professionals to avoid is failing to inventorize all the assets that should be included. For example, fiduciaries often miss out everyday household items such as washing machines, computers or even furniture.

3. Carry Value vs Fair Market Value

As a fiduciary, it’s important to be aware of the difference between the fair market value of an asset and its carry value. A trust can hold many different types of asset that go up and down in value over time—stocks and shares, for example, or real estate property. As a result, the fair market value can fluctuate considerably over the period. The carry value, on the other hand, does not change. This value is determined when you take responsibility for the asset, and it stays the same throughout the account period.

Expert Strategies for Efficient Fiduciary Accounting

Effective fiduciary accounting means mastering multiple moving parts. Let’s take a look at some best practice strategies covering compliance, communication and workflow:

Compliance with applicable legal and financial regulations should be the cornerstone of any fiduciary accounting strategy. It’s paramount to keep detailed records of all transactions, disbursements, and receipts. It’s also essential to stay up to date with any changes to the law regarding trust and estates, for example through industry news and ongoing training programs.

Communication is another key pillar of effective fiduciary accounting. It’s important to be proactive about sharing information with beneficiaries throughout the process, and answer any queries promptly. Not only is this often a legal requirement, but it helps to instil confidence and reduce the risk of a dispute arising later on. It’s important to present the trust’s assets in a way that’s easy for beneficiaries to follow, for example by listing assets in the same order they appear in the inventory, or by listing holdings such as stocks and bonds in alphabetical order.

Streamlining processes and establishing the right workflow can help put these strategies into practice. For example, periodic financial reporting is integral to the trust administration process, both in terms of regulatory compliance and to keep clients, beneficiaries and other stakeholders informed about the status and performance of their assets.

Leveraging Technology for Fiduciary Accounting Excellence

Fiduciary accounting can be a complex business. In the digital era, however, technology solutions have emerged that help to streamline the process, reduce manual work, and minimize the risk of human error.

Trust administration software is designed to automate processes such as record keeping, reconciliation, and reporting, making light work of routine tasks. For example, Estateably’s solution offers estate inventory management with instant currency conversion built in and also generates customizable summary reports with one click.

Automation has a number of benefits. First, it enhances operational efficiency, freeing trustees and finance professionals from hours of manual, repetitive tasks such as inputting data or preparing regular reports. This helps to bring down labor and administration costs, and eliminates manual errors that can be costly and time-consuming to unpick.

Software also has a big role to play in reducing risk—and not just the risk of humans making mistakes. Cloud-based solutions, for example, offer strong security such as data encryption to protect sensitive financial data from unauthorized access, fraud, and cyber threats.

Moreover, the leading software solutions also feature compliance tools. These tools help ensure adherence to legal and regulatory standards by providing alerts for potential violations, flagging up looming deadlines, and offering capabilities for up-to-date tax reporting.

Finally, digital tools provide real-time access to account and market information. This enables trustees and administrators to make decisions informed by the very latest data, helping them to manage the trust’s assets in accordance with their fiduciary duty.

Conclusion

Effective fiduciary accounting is a vital element in trust and estate administration, with the difference between the two schedules providing a clear measure of your performance as a fiduciary. Through careful asset management, leveraging the latest technology, and a deep understanding of the process, trust and estate professionals can significantly improve the efficiency of their accounting while ensuring compliance and accuracy.

Estateably is building the future of trust and estate administration with an intuitive, easy-to-use platform that takes care of manual tasks and significantly streamlines the administration process. Our software includes automation tools that generate custom reports and tackle accountings with ease.

Get in touch with our team today or book a demonstration to find out how our industry-leading solution can help you power up your practice through technology.Whether you're a seasoned fiduciary professional or a newcomer to the field, mastering holdings accounting is an essential skill for ensuring efficient, transparent, and effective estate administration.

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