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May 2013
10
May 10, 2013

Court of Appeals Sends Reminder on Importance of Complete Accountings


A recent Michigan Court of Appeals ruling demonstrates why it’s important for personal representatives and trustees to prepare complete accountings. An “accounting” is a report periodically prepared by the personal representative or trustee that covers a period of time and shows the assets and money going in and coming out of the trust or estate.

Not only does a complete accounting supply beneficiaries with vital information about the progress of administration, it also can shield personal representatives and trustees from liability against claims made down the road by beneficiaries. However, only information that is reflected in the accounting protects a fiduciary from potential later claims of wrongdoing, as a recent Court of Appeals case In re Heinzerling Living Trust demonstrates.

In Heinzerling, the trustee failed to timely record a mortgage in favor of the trust, which seriously jeopardized the collateral on an unpaid promissory note. The trustee’s annual accounting, however, made no reference to the mortgage or promissory note. No objection was made to the accounting by the beneficiaries, and the accounting was approved by the court. Later, a disgruntled beneficiary filed various claims against the trustee for wrongdoing based on the issue with the mortgage.

On appeal, the issue to be decided was whether the trustee’s approved accounting, which made no reference to the mortgage or promissory note, barred the beneficiary’s claims. Ultimately, the Court of Appeals concluded that because the accounting was silent as to the mortgage or promissory note, the trustee’s actions related to the mortgage issue were not before the court when the accounting was approved, and so the trustee’s approved accounting did not prevent the disgruntled beneficiary from pursuing his claims against the trustee.

Because the trustee’s accounting was incomplete, the trustee was not shielded from liability on the mortgage issue even though his accounting was approved by the court. Had the trustee listed the mortgage value and promissory note as $0 or otherwise referenced the mortgage issue in the accounting, and the accounting was approved, the trustee would have been shielded from later claims relating to the mortgage issue.

The Heinzerling case also serves as a reminder to beneficiaries of the  importance of objecting to wrong doing by a personal representative or trustee that is reflected (or arguably reflected) in the accounting, because a failure to do so could result in the court refusing to rule on the issue at a later time. 

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