Trustees and their agents are responsible for the proper accounting of all assets and transactions within a trust account. Unlike more basic accounting, you must pay special attention to the source of all contributions and the destination of all distributions. It is also important to track the nature of the assets themselves - whether they are principal assets or income earned by the trust. Specific requirements vary from state to state and are also dependent upon the trust document, but certain basic principals apply to all records.
Obtain and account for all assets within the trust. This may require setting up trust-specific bank accounts and investment accounts, as well as transferring titles and registrations to the proper custodian. Trust assets should be kept segregated from the trustee's assets at all times.
Obtain an original value or purchase price for all assets. This is also known as the cost basis. If the trust is revocable (the granter is still alive), this is the original price on the asset. If the granter is deceased, this is the market value upon the date of his or her death.
Obtain current market values for all assets. This must be updated on a regular basis.
For statements, create a report showing the name of each asset, its original value (cost basis) and current market value. Additional information may be requested or required. Typically this includes the amount of gain or loss, estimated yield and identifying information for any publicly traded assets (such as a stock ticker or CUSIP number).
Record cash transactions in the account as they occur. Be sure to include the type of transaction and the source or destination of the cash. Record the name of any beneficiary receiving a distribution.
Record any income received from assets. Include the name of the related asset and the type of income.
Record any purchases or sales of assets and the resulting cash transactions.
Record any corporate actions related to publicly traded assets such as stock splits, stock dividends or spin-offs. You will need to adjust the cost basis and market value of the related assets for each of these actions.
For statements, create a report showing all transactions in the account for the statement period. To aid in analysis, the transactions are often grouped by type rather than chronologically.
Trustees should reconcile all assets and cash on a regular basis (at least quarterly).
Review transactions regularly to ensure there are no errors or illegal transactions.
Trustees must file IRS Form 1041 as the trust tax accounting each year. Additional tax forms for beneficiaries may also be required.
Many computer software programs that can aid in trust accounting are available. The programs take the daily accounting entries and generate a variety of reports, including some tax forms and client statements.
Trust accounting rules vary from state to state and can be quite complicated. There are considerable penalties for inaccurate reporting and illegal transactions. Consult a professional accountant or trust attorney for specific advice.