State Bar of CA Trusts and Estates Quarterly, Vol. 34, Issue 1, 2017. Article also available an online self-study test for MCLE credits @ www.calbar.org/self-study. https://cla.inreachce.com/details/information/b67b970a-8bc2-44bc-a8be-70c4150e5361
This article is a successor to “Conservatorship Accountings: How to Get Started and What to Tell Your Clients to Stay on Time!” published in the California Trusts and Estates Quarterly, Volume 22, Issue 3 (2016). This article provides an overview of often misplaced and misunderstood transactions in conservatorship accountings, including the establishment of, and changes to, market and carry values. It will also provide a review of the Inventory and Appraisal (“I&A”) and its significance to market and carry values, the various types of I&As, and the conservator’s bond. Finally, it will focus on technical preparation issues, procedures, and mandatory use requirements for the Judicial Council accounting schedule forms.
I. MARKET VALUE VERSUS CARRY VALUE
Asset values and changes to those values are important components of conservatorship administration and proper accountings. Due to fluctuations in market values, changes in carry values, and events occurring at different times, attention by the conservator and the attorney to this aspect of administration is paramount.
The market value is the value an asset would sell for on the open market on the specific date of the valuation. This value fluctuates over time with changes in the market, and therefore cannot be used to balance the accounting. The market value of assets is included in the accounting to show the actual value of assets at the beginning and end of the accounting period and is an important indication of both the performance of investments and other assets during the accounting period and of the level of financial support available for the conservatee’s care. The market value of assets at the end of the accounting period, plus annual income, is used to calculate the conservator’s bond. The market value may be used to determine the conservator’s compensation if that compensation is based on a percentage of the fair market value of assets.
The carry value is an accounting value based on the original I&A valuation and does not change except as specifically reflected in the accounting schedules. In other contexts, the term “carry value” is often used interchangeably with the term “book value.” The carry value is the value used to balance the accountings.
Care must be taken to know when, why, and how the market and carry values change, how these changes impact accounting schedules, and which of the changes trigger actions that must be timely performed by the conservator, attorney, probate referee, and/or the court.
A. Beginning Market Values and Carry Values – Identical
The assets at the beginning of the conservatorship are set forth on the I&A and are appraised using the market value as of the date of the conservator’s appointment. The property on hand at beginning schedule in the first accounting lists market values from the I&A. These values also establish the carry values. Except for cash assets, the property on hand at beginning schedule is the only time when the market and carry values will be the same.
Later-discovered assets and additional assets received are exceptions to this valuation date rule, as discussed below.
B. Market Values – First Change
The market values of most assets held in the conservatorship will change during the period of the first accounting, as shown on the property on hand at end schedule. Unless otherwise ordered by the court, the ending date of the first accounting is one year from the date of the conservator’s appointment. 1 Few assets have the same market value after a year has passed. Assets with consistent or non-changing values usually include the conservatee’s household furniture, furnishings, and clothing used on a day-to-day basis (except for collectibles or antiques). Otherwise, values of real property, securities, valuable jewelry made with precious metals, and other personal property will change.
C. Carry Values – Cash Assets
The carry value of cash assets is the actual value of the asset and will be the same as the market value of cash assets at the end of the first accounting period. The carry values are used to balance the accounting. The changes in carry value of the cash assets during the accounting period are reflected, and can be tracked through, the various accounting schedules that show the transactions that impact the cash balance (income, receipts, disbursements, and distributions).
D. Carry Values – Non-Cash Assets
In contrast, the carry values for the non-cash assets do not change as of the date of the end of the first accounting period unless there has been a change in the form of the asset that results in a change in the carry value. Additional purchases or partial sales of securities, reinvestment of dividends or capital gains, and payments on a promissory note, are examples of the types of transactions that cause a change to an asset’s carry value. These changes are tracked in the accounting on the change in form of assets schedule. That schedule itemizes each transaction resulting in a change in form of assets and shows why, when, and how the change in form of assets resulted in a change in an asset’s carry value.2 Careful tracking of the change in carry values is important because the correct adjusted carry value of the property on hand at end schedule is necessary for the accounting to balance.
Complex accountings often will include a separate change in carry value schedule to illustrate how the carry values have changed throughout the accounting period. Unless required by local rules, this change in carry value schedule is not necessary, but is an extension of the change in form of assets schedule that is required under Probate Code section 1063, subdivision (b). Including the separate change in carry value schedule makes it easier to understand why, when, and how the carry values at the end of the accounting period, which are used to balance the accounting, were established. Absent this change in carry value schedule, numerous other schedules must be evaluated to determine how the resulting carry values were established, which can often be quite difficult, especially in lengthy accountings that experience an abundance of changes to securities.
A change in carry value schedule permits reviewers to readily identify how and why carry values have changed, and to determine if the accounting is properly balancing. The itemizations shown on a change in carry value schedule can be confirmed by reviewing the other relevant schedules (receipts, gains, losses, changes in form of assets) that set forth those transactions that caused a change to any carry value. Below is an example of an item that would be included on a change in carry value schedule:
Invesco Equally Weighted S&P 500 FD CL Y (VADDX)
|1/1/2015||219.162||shares on hand||$10,268.12|
|12/14/2015||1.798||shares reinvested (lt cap gain)||$82.36|
(st cap gain)
|12/31/2015||246.175||shares on hand (new carry value)||$11,600.21|
In this example, the accounting period began on January 1, 2015 and ended on December 31, 2015. All of the relevant changes to this particular security are set forth in one place, enabling the reader to easily discern why there are 246.175 shares of this particular security on hand as of December 31, 2015, and how the new or adjusted carry value was calculated. Each transaction (purchases, dividend reinvestments) reflects the value on the date of the transaction and is added to the value established on the date the accounting began. The result is the new carry value that is used on the property on hand at end schedule. The market value for the 246.175 shares as of December 31,2015, will not be the same as the carry value. The market value as of December 31, 2015, will be obtained from the brokerage statement.
E. Market and Carry Value Schedules
Probate Code section 1062 provides that all accountings must include detailed schedules.3 Subdivision (f) of section 1062 requires a schedule that includes an itemized list of property on hand showing each item’s carry value.
Probate Code section 1063, subdivision (a) requires that all accountings include an additional schedule that shows the market values of the assets at the beginning of the accounting period and again at the end of the accounting period.
These code sections can be read to require separate carry value and market value schedules, and some accountings are prepared in that manner. However, it is common for the market and carry values for each asset to be listed on a single schedule. The author prefers to use a combined schedule for the efficiency of preparation (fewer schedules being prepared) and for the ease of review by the court and others. The combined schedule enables reviewers to see each asset at its market and carry value in one place.
Below is an example of a combined schedule showing both market and carry values:
|Description||Market Value||Carry Value|
Cash in Corestone Money Market Acct. No. xxx0594
|Securities held in Corestone Brokerage Acct. No. xxx0594:|
|219.162 shares Invesco Equally Weighted S7P 500 Fd Cl||$10,800.30||$10,268.12|
|8,787.320 shares Franklin CA Tax-Free Income Fd||$66,256.39||$63,379.23|
In this example, the schedule is a portion of the property on hand at the end of the accounting period. Accordingly, the market and carry values are different for the non-cash assets.
II. INVENTORY AND APPRAISAL – ESTABLISHMENT OF THE MARKET AND CARRY VALUES
A. Locating and Valuing the Conservatee’s Assets
The conservator’s I&A is due within ninety (90) days of appointment and includes all assets that the conservatee owns as of the date of the appointment of the conservator.4 The I&A does not include any changes in accounts or other assets after the date of appointment. The closing and opening of accounts and other changes in assets that occur following the conservator’s appointment will be included in the first accounting.
In addition, the I&A must include the conservatee’s out- of-state property on an additional attachment.5 Local rules also may require that periodic income (social security, pension, etc.) be listed on an additional attachment.6
Identification of the conservatee’s assets should not be taken lightly and the initial investigation is often intense and frustrating. It takes time to establish a meaningful list of assets and income. The conservatee’s incoming mail is one of the best sources of information about assets and debts. A thorough search of the conservatee’s residence is also essential to locate important documents, including financial statements, invoices, account statements, and other asset information.
There are database sources (some by subscription) that can be useful in locating real property holdings, including real property located out-of-state. One such resource is Data Tree by First American Title Company <http://www.DataTree.com>, an inexpensive subscription service useful for locating real property throughout the U.S. This service allows subscribers to access vesting deeds, legal descriptions, financial documents, sale transaction reports, and other information.
To determine whether any of the conservatee’s assets have escheated, visit the California State Controller’s website at <http://www.sco.ca.gov> and follow the “unclaimed property” tabs. Uncashed checks issued by third parties and other property that has not had any activity for three years will escheat. This can include dormant financial accounts, dividend checks, escrow checks, refunds, royalties, securities, etc. This website should be checked at the beginning of the conservatorship and then periodically thereafter to ensure all assets and income belonging to the conservatee have been located and collected.
The valuation date for the assets included on the initial I&A is the date of appointment of the conservator (or, if a temporary conservator was appointed previously, on the date of the appointment of the temporary conservator).7 The I&A not only provides values for assets, it also includes a detailed description of each asset, including where the asset is located, the type of asset (bank account, security, vehicle, real property, etc.), whether title is held with others, and an indication of whether an account is interest bearing.8 The initial I&A provides the market and carry values listed on the property on hand at beginning schedule for the conservator’s first accounting.
B. The Judicial Council I&A Form – In General
The Judicial Council I&A forms must be used for conservatorships. These forms consist of the two-page Inventory and Appraisal form and the Attachment page, labeled DE-160/GC-040 and DE-161/GC-041, respectively,
The first page of the I&A form (GC-040) must be completed to include:
(1) The case caption;
(2) The date of appointment (which is the same date that the assets will be valued);
(3) A description of the type of I&A that is being filed (partial, final, supplemental, corrected, reappraisal for sale, or property tax certificate);
(4) A summary section to show the totals of Attachments 1 and 2;
(5) Declarations by the conservator; and
(6) Statements pertaining to the sufficiency of the conservator’s bond.
The second page of the I&A form (GC-040) will be completed and signed by the court-appointed probate referee. The probate referee will also include the statutory commission for his or her services, and any costs, in the space provided on the form.
C. Types of Inventory and Appraisals and When They Should be Used
Described below are I&As listed on form DE-160/GC040, and when it is appropriate to use each type. The procedure for completing each type of I&A is the same: cash and cash equivalents are valued by the conservator and non-cash assets are valued by the probate referee. Once completed by both the conservator and the probate referee, the I&A is filed with the court and notice and a copy is provided to the required parties.9
Partial: This is an itemization of only a portion of the assets. A partial I&A can be used in large and/or highly- mixed- asset conservatorships, when it may be prudent to use separate, partial, inventories to assist with organizing the numerous assets. For example, I&A Partial No. 1 may list real estate holdings; I&A Partial No. 2 may list cash assets; I&A Partial No. 3 may list securities, and so forth. When there are partial inventories, they can be simultaneously filed, and together they will constitute all of the assets in the conservator ship.
A partial I&A can also be used when only a portion of the assets have been identified and it appears other assets may exist that have not yet come under the conservator’s possession and control or when the conservator does not yet have sufficient detail for an asset to be properly described and valued on an I&A. If a partial I&A has been filed and is later determined to actually include all of the assets in the conservatorship, this fact must be included in the petition for settlement of the first accounting.
Final: This is the most-often used form of I&A and includes all known assets in a single I&A.
Supplemental: This is an itemization of later-discovered assets that have not been included on any other inventories. These types of assets generally include inheritances, additional or newly located assets, or assets otherwise acquired by the conservatee from a source outside of the previously inventoried conservatorship estate. These assets are valued as of the date of discovery or the date of receipt by the conservator. This alternate valuation date should be indicated on the first page of the supplemental I&A.10 Assets that are subject to a supplemental I&A should not be confused with assets that are acquired in the investment and management of the conservatorship estate (assets that represent a change in form of assets only). Assets acquired in the investment and management of the conservatorship estate are not set forth on an I&A but, instead, are identified and tracked on the conservatorship accountings.
Corrected: Corrected I&As are used to revise assets shown on an existing partial, final, or supplemental I&A where an error in a description or value was discovered after the I&A was filed. Local Rules must be consulted to determine whether the corrected I&A must contain all assets listed in the previously filed I&A or whether the corrected I&A must list only the item requiring the correction.
Reappraisal for Sale: This form of I&A is used when real property is being sold more than one year after the original appraisal date and court confirmation of the sale is sought.11 Local Rules should also be reviewed for any additional requirements associated with the reappraisal for sale, and attention should be paid to the impact that the change in value may have on the amount of the conservator’s bond.
Property Tax Certificate: This type of I&A pertains to post-death situations and is not used in the conservatorship context.
D. Cash Assets – Attachment No. 1
Cash assets, including cash equivalents (i.e., cash on hand, certain checks, money orders, bank accounts, cash in a safe deposit box, cash in brokerage accounts, etc.) are valued by the conservator and are listed on Attachment No. 1. 12
Cash, including money market accounts, held and managed within a brokerage account are often incorrectly listed on Attachment No. 2. Most brokerage accounts hold a small amount of cash within the account and care must be taken to list such portion of cash on Attachment No. 1.
All accounts holding cash must be reconciled to the date of appointment and the amount inserted on Attachment No. 1. For transactions occurring on the date of appointment, which are usually those made by the conservatee, reconciliation should be made after those transactions have cleared. In other words, if a check or deposit is being processed by the bank on the date of appointment, the value of the account listed on Attachment No. 1 is the value after the check has been subtracted or the deposit has been added.13
E. Social Security, Pension, and Other Periodic Income
Many conservatees receive periodic income from Social Security, pension, retirement plans, or other sources. If required by local rule, the details of this income must be included, but they are listed on an additional attachment to the I&A and not on Attachment No. 1 so as not to create difficulties for accounting purposes.
The beginning assets for the first accounting are the assets listed and valued on the I&A(s). Anticipated periodic income cannot be included in the beginning assets because it has not yet been received. Instead, the conservatee’s periodic income is shown on an additional attachment only, as an example of an anticipated receipt, so that the court can determine whether or not the bond calculation is correct. The periodic income will be listed on the receipts schedule as it is received.
To report the periodic income, simply use one of the Attachment forms, indicate that it is an additional or informational attachment (and not an Attachment No. 1 or 2), and list the source and amount of the periodic income on a monthly basis. A final calculation for the total amount of all periodic income on an annual basis also can be included, which provides a reference when calculating the conservator’s bond.
F. Non-Cash Assets – Attachment No. 2
All non-cash assets (such as securities, real property, promissory notes, foreign currency, mineral/oil interests, and royalties) and tangible personal property—including vehicles, valuable household items, jewelry, antiques, and collectibles— are separately listed and itemized on Attachment No. 2. The probate referee is required to value all non-cash assets. The conservator completes only the description of the property on Attachment No. 2 and leaves the value column blank so that it can be completed by the probate referee.
G. Attachment Nos. 1 and 2 – Descriptions and Other Asset Details
There are numerous resources available to obtain the details that should be included to properly describe each asset listed on the I&A Attachments. These resources include California Conservatorship Practice (Cont. Ed. Bar 2016), The Probate Referee Guide: California Probate Referees’ Association (Rev. 04/2015) (<http:www.probatereferees.net>), and Local Rules.
Bank accounts are the most common assets in a conservatorship. The description should include the name and address of the bank, the type of account, the title (including form of ownership and others on title, such as joint tenancy, community property, etc.), the last four digits of the account number (to ensure privacy and protection, the entire bank account number should never be listed), and whether the account is interest-bearing. For example:
Item 1: Wells Fargo Bank, PO Box 1234, Portland, Oregon, checking account no. xxx7899, held in the name of the conservatee and Mary Potter as joint tenants (interest bearing); one-half of the balance: $2,150.75
Brokerage accounts are also common assets in a conservatorship. However, the account holdings are shown in a completely different manner than bank accounts (which are shown in a single sum). Each security, including stocks, bonds, and funds of all types that are managed and held in the brokerage account, must be separately listed or itemized, as follows:
Item 1:100 shares Pacific Gas & Electric common stock, CUSIP 697X2. (The value column is left blank.)
It is appropriate and helpful to provide the probate referee with additional information, such as copies of brokerage statements, other appraisals and other documentation pertaining to values, and any other asset details to assist with proper and correct valuations. If assets were sold between the appointment date and the date the I&A is prepared, the sale details should be provided.
Specialty items, such as a coin collection, jewelry (made with precious metals or stones), and firearms, are best valued by reputable appraisers who specialize in buying and selling those types of items. These include an armory for firearms, and coin and jewelry retailers.14
It is also common to find stocks held in certificate form, outside of a brokerage account or transfer agent. The
conservator should immediately take possession and proper steps for safekeeping of any original stock certificates that are located. The Attachment No. 2 description should state that the stock is held in certificate form, along with the number of shares and other details. It is recommended that all original certificates be deposited into a brokerage account. This alleviates the need to safeguard original certificates and allows for ease of management and reporting.
H. Out-of-State Assets
The California courts do not have jurisdiction over the conservatee’s assets located in other states. The conservator’s I&A must, however, list these assets on an additional attachment.15 The information regarding the out-of-state assets helps to ensure that assets belonging to the conservatee are no overlooked, provides relevant information in the event additional assets are needed for the support of the conservatee, and aids in tracking assets for proper transfer on death. The conservator will need to consider whether or not it is necessary or advisable to initiate ancillary proceedings in other states in order to gain control and management of out-of-state assets.
For the purpose of the I&A additional schedules, the values of out-of-state assets can be estimated by the conservator, or professionally valued, but they do not have to be appraised by the probate referee. Because they are not part of the conservatorship estate, out-of-state assets are not included in the overall value of the conservatorship estate or used in the calculation of the bond or any compensation. However, if the conservatee owns income-producing real property located in another state, and the income is deposited into accounts under the control of the conservator, that income is considered in the calculation of the conservator’s bond or the determination of compensation and should be included on any additional attachment to the accounting, to report the periodic income.
I. Trust Assets
Many conservatees have revocable trusts that hold some or all of their assets. Regardless of the existence of a trust, the situation or circumstances may warrant the appointment of a conservator. Appointment of a conservator of the person or estate disqualifies the conservatee from serving as trustee.16
The conservatee’s trust assets are not subject to the conservator’s control and are not inventoried in the conservatorship estate. However, to provide the court with a full picture of the conservatee’s assets, the existence of the conservatee’s trust assets may need to be included in an additional schedule, in any required general care plan submitted to the court, and in the petition for settlement of the conservator’s accountings. Often when a trust exists the assets held in the conservatorship estate are insufficient for all of the conservatee’s needs, and the trust may transfer funds to the conservatorship to bridge this gap in support.
When trust assets (usually cash) are periodically delivered to the conservator, the deposit must be shown on an additional property received schedule (and not the receipts schedule) in the accounting. Money generated by an asset held in the conservatorship (i.e., bank interest, dividends, capital gains) is shown on the receipts schedule. Cash received from an asset held outside of the conservatorship estate (such as an asset held in trust) is accounted for on the separate schedule of additional property received.
It would not be prudent to transfer title of trust assets to the conservator’s name for management because that might cause the conservatorship estate to be subject to formal probate administration on the conservatee’s death and could make an inadvertent change to the conservatee’s estate plan. Therefore, before transferring any trust assets to the conservatorship estate, including periodic transfers, a thorough analysis of conservatorship assets and trust assets should occur to ensure that the transfer will not have unintended consequences. If the conservatorship estate is worth more than $150,000 at the time of the conservatee’s death, formal probate administration may be necessary, depending upon the nature of the assets. See Probate Code section 13050 for a complete list of assets excluded from probate administration.
J. Other Assets and Descriptions
For further information on how to describe assets not addressed in this article, consult the resources set forth in paragraph G above.
III. MISUNDERSTOOD TRANSACTIONS IN THE ACCOUNTING
A. The Most Misunderstood Receipts: Sales of Assets on Hand
- Real Property Sales
- Real Property Sales
Assume a sale transaction has occurred during the accounting period. The sale of the conservatee’s home was approved by the court, and the title company wired the net proceeds to the conservatorship account. There has been a significant change in the form of assets: the conservator now has over a half million dollars in cash instead of residential real property. Does the attorney or conservator need to do anything other than collect the cash?
First, the adequacy of the conservator’s bond must be evaluated. In most instances, the bond must be increased. The value of the California real estate is generally not included in the conservator’s initial bond amount, since a conservator lacks the power to sell real property absent a specific court order expanding the conservator’s general powers. The court order confirming the sale of the real property should address the increase of the conservator’s bond.17
Next, the conservator must properly account for the sale. When the home is sold, the net sale proceeds are deposited into a conservatorship bank or investment account and are shown in the conservator’s records as a deposit. However, unlike deposits of income, which are ultimately shown as receipts on the accounting, the net sales proceeds are not a true “receipt” for accounting purposes and, thus, are not reported on the accounting’s receipts schedule. Instead, the net sale proceeds are simply a change in the form of the asset—a conversion of an existing real property asset to cash.
For the accounting to balance, the difference between the carry value of the real property and the net sales proceeds received upon the sale must be captured. This is accomplished by reporting the real property sale on either the gain or loss schedule, depending upon whether or not the gross sale proceeds exceed the carry value. If the gross sale proceeds are greater than the carry value, the gain schedule is used; if the gross sale proceeds are less than the carry value, the loss schedule is used. Additionally, each receipt or disbursement shown on the escrow closing statement must be listed in the accounting on the appropriate receipt or disbursement schedules. Receipts from sales of real property are usually limited to reimbursement for real property taxes paid. Disbursements from sales of real property are all of the costs involved in selling the property and closing the escrow, including realtor commissions, mortgage payoffs, notary fees, and recording fees.
Following the sale of the real property, the property on hand at end schedule will no longer include the real property, but the cash on hand will have increased by the amount of the net sales proceeds received. The differential between the gross sales proceeds and the carry value of the property will have been reported on either the gain or loss schedule, and the difference between the gross sales proceeds and the net sales proceeds will have been captured by the reporting of the closing statement’s receipts and disbursements on the accounting’s receipts and disbursements schedules. Thus, all parts of the real property transaction will be captured and the accounting will balance. The transaction will also appear in the change in form of assets schedule.
- Stock Sales
Similarly, when shares of stock are sold, the transaction will be listed on either the gain or the loss schedule, whichever is appropriate. The determination of whether there is a gain or a loss is made based upon the difference between the sales price and the adjusted carry value. The adjusted carry value is the carry value listed on the property on hand at beginning schedule, plus the amount of reinvested dividends or stock purchases, less the amount of any prior stock sales since the beginning of the accounting period. The change in carry value schedule is useful to track the reinvested dividend transactions, which change a stock’s carry value.
The cash received from the sale will appear in the brokerage trade confirmation or account statement as a receipt, but these funds will not be shown in the accounting on the receipts schedule. Instead, the transaction will be shown on the accounting on either the gain or loss schedule, the change in form of assets schedule and the change in carry value schedule. The property on hand at end schedule will reflect the reduction of the number of shares on hand and the increase in the cash on hand.
A. Basic Bond Calculation
The conservator’s bond requirements are set forth in Probate Code section 2320 and California Rules of Court, rule 7.207. The base figure for the of the bond consists of the total value from all I&As, plus an estimate of annual income, plus an estimate of annual public benefit payments, plus the value of the real property, less encumbrances, if the conservator has the independent power to sell. To that base figure, add 10% of the base value up to $500,000; 12% of the base value above $500,000 up to and including $1,000,000; and 2% of the base value above $1,000,000.18
The following example illustrates the calculation of the conservator’s bond under rule 7.207, California Rules of Court:
|Market Value of assets as of 7/31/16:||$1,000,000.00|
|Annual estimated receipts/income:||78,300.00|
|Annual other income (if any):||6.200.00|
|Plus 10% of first $500,000||50,000.00|
|Plus 12% of$500,000 to $1M||60,000.00|
|Plus 2% of remaining $84,500||1.690.00|
When the conservator does have the independent power to sell real property, the value of the real property is included, less encumbrances.
B. When the Bond Must Be Increased
If a transaction occurs that makes a conservator’s bond insufficient, it is not appropriate to wait until the next accounting to seek an increase in the bond. The conservator is required to apply ex parte for an order increasing the bond immediately upon the occurrence of such transaction. If the conservator does not apply to increase bond, the attorney must make the ex parte application immediately upon becoming aware of the need to increase bond.19
As mentioned above, the most common occurrence triggering the need to increase the bond is the sale of real property. If the conservator has the independent power to sell real property without court confirmation, then the bond already includes the value of the real property (less encumbrances), so that an increase may not be necessary unless the proceeds of the sale exceed the value used in calculating the bond. If court confirmation of the sale is necessary because the conservator does not have the power to sell real property, the increase in the bond should be addressed in the order confirming the sale.
Other times when the bond must be increased include when (1) new assets are discovered or received, such as the receipt of an inheritance; (2) existing assets increase in value; or (3) income rises. Additionally, the sufficiency of the bond should be addressed at the time of each accounting. The calculation illustrated in the previous example should be repeated when an asset is sold, to determine whether the existing bond is sufficient or if an increase is necessary.
C. When the Bond can be Decreased
The value of the conservator ship assets and/or income may decrease below the amount of the bond, warranting a decrease in bond. However, decreases in the bond are usually handled in a petition to approve an accounting due to the costs associated with a separate petition to reduce the bond. To determine whether a separate petition to decrease bond is appropriate, the conservator should review the cost of the existing bond premium, the likely reduction in the premium if the bond is reduced, the costs of bringing a separate petition, and the timing of the next accounting. If the reduction in the value of assets is significant and it is determined that a separate petition to reduce the bond would be cost effective, sufficient documentary proof of the reduced value subject to bond, including any receipts on distributions made, must be submitted to the court in order to obtain an order decreasing or exonerating the conservator’s bond.
Whenever an order is obtained pertaining to changes in the conservator’s bond, a file-endorsed copy must be submitted to the bond company immediately. The bond company will then provide an additional bond for increases, will revise their internal records for decreases, or exonerate the bond if the conservatorship has been terminated. Bond changes are effective on the date the court order is processed. Additional bonds must be executed by the conservator and then filed with the court.
V. JUDICIAL COUNCIL FORM SCHEDULES
The author has worked as a paralegal in support of attorneys in the probate practice area for more than 20 years and has prepared fiduciary accountings for about 15 of those years. This work has resulted in significant experience in accounting preparation, using both spreadsheet-style software programs and the Judicial Council schedule forms. This segment provides tips, based upon the author’s experience, for the technical aspects of preparing accounting schedules using Judicial Council schedule forms.
The requirement to use Judicial Council accounting forms became effective on January 1,2008. California Rules of Court, rule 7.575, sets forth the details for the required use of the Judicial Council accounting forms, including definitions of standard and simplified accountings, and when the use of Judicial Council forms is mandatory and when it is optional.20 For standard accountings, which must list receipts and disbursements in subject-matter categories, with each receipt and disbursement category subtotaled,21 the Judicial Council accounting forms (other than the summary of account) are optional. If they are not used, the same categories, information, and general layout must be used.22 The use of the Judicial Council Summary of Account (form GC-400(SUM)/GC-405(SUM)) is mandatory for all accountings.
A simplified accounting, which “lists receipts and disbursements chronologically, by receipt or payment date, without subject-matter categories,”23 may be used if the estate does not hold income-producing real property, an interest in a trade or business, or assets in excess of $500,000 exclusive of the conservatee’s residence, and if the receipts and disbursements schedules do not exceed five pages and the court has not ordered a standard accounting.24 For simplified accountings, the Judicial Council accounting schedules are mandatory.25
The Judicial Council receipt and disbursement schedules comprise numerous different schedules that serve to categorize the reported transactions. There are six separate receipts schedules and eleven separate disbursements schedules, plus one general receipt and one general disbursement schedule for use only in simplified accounts. Each of these form schedules divides the activities into categories in which the transactions are to be listed.
When preparing the Judicial Council form receipt or disbursement schedules, the number of itemized transactions that can be shown on each page is approximately 10 to 15. Additional pages for the same category must be used until all transactions in that category have been listed. Each page has a subtotal and a box next to the subtotal. The box next to the subtotal is only checked when you have reached the last page of the transactions for the category. On the last page of transactions for a category, the box is checked and the total of all pages for this category is inserted. Because there is no box or space for the subtotal of the items listed on the last page, the total of the transactions listed on the last page must be added with subtotals for all other pages in the category, so that the number listed at the bottom of the last page is the total of all pages for the category.
The same procedure is repeated for all categories until all of the transactions have been listed. Once this input has been accomplished, the preparer must be careful to calculate only the last pages of each category (the ones with the boxes checked) to arrive at the total sum for the total of all receipts or total of all disbursements. These total amounts then are inserted on the corresponding line on the Summary of Account schedule.
The transactions on each Judicial Council form schedule for a simplified accounting are listed chronologically, without respect to category. Careful input is required because if a transaction is missed, it cannot be easily inserted. There is no ability for the transactions already listed to automatically move down to allow space for an insertion. In addition, each time a missed transaction is input, the subtotals on all schedule pages and the total on the last page must be recalculated and revised.
In completing the mandatory Summary of Account schedule, the letters designated for each attachment schedule cannot be changed to accommodate additional schedules.26 This can be confusing because you cannot sequentially letter additional schedules. For example, if there is an “additional property received” schedule, it must be designated as a schedule F, G, or some later letter even though the schedule should be inserted after the property on hand at beginning schedule for review purposes. That makes the schedule line-up for the end product appear to be out of order.
The Judicial Council Summary of Account schedule includes the total of each of the applicable balancing schedules (those schedules that directly impact the balancing of the account). However, further or additional required schedules (non-balancing schedules) may be appropriate but do not appear on the Judicial Council Summary of Account schedule. Those may include schedules of liabilities, changes in form of assets, changes in carry values, assets outside of the estate, or property on hand at end of the prior account.
Preparation of conservatorship accountings is highly technical and the improper recording of any transaction on an accounting will cause it to be out of balance. This article highlights several of the most misunderstood issues in conservatorship accountings, including the difference between market and carry values of conservatorship assets, the proper completion of the Inventory and Appraisal, and the correct reporting of sales of assets on the conservatorship accounting. This guidance, when combined with the author’s tips regarding the use of Judicial Council forms, should help the preparer accurately construct the accounting in a manner that is conducive to easy review and ultimate approval by the court.
* Brothers Smith LLP, Walnut Creek, California
1 Prob. Code, section 2620, subd. (a).
2 Prob. Code, section 1063, subd. (b).
3 Prob. Code, section 1062.
4 Prob. Code, section 2610, subd. (a).
5 Prob. Code, sections 2401.1 and 1063, subd. (h).
6 See, e.g., Super. Ct., Alameda County, Local Rules, rule 7.840.
7 See note 3, ante.
8 See California Probate Referees’ Association, The Probate Referee Guide (Rev. 04/2015), <http://www.probatereferees.net/page- 1488252>.
9 Prob. Code, section 2610, subd. (a) provides that a copy of the inventory and appraisal, and a notice of how to file an objection, be mailed to the conservatee’s spouse or registered domestic partner, the conservatee’s relatives in the first degree, and, if there are no such relatives, to the next closest relative, unless the court determines that the mailing will result in harm to the conservatee.
10 Prob. Code, section 2613.
11 Prob. Code, section 10309.
12 See Prob. Code sections 8901 and 21 for a complete description of what constitutes a cash item.
13 Even if the transaction was performed by the conservator, the value for Attachment No. 1 is the value at the end of the day of the conservator’s appointment. It is rare that transactions clearing on the appointment day have been performed by the conservator, because the conservator may not have the requisite authority or documentation to perform transactions on the conservatee’s accounts until the appointment is made by the court, bond is filed, and letters of conservatorship are issued.
14 The Probate Referee Guide (see note 8, ante) instructs that if these types of assets have been professionally appraised, the probate referee be provided a copy of the appraisal. Whether or not there is an appraisal, it is helpful to have these types of items examined by a reputable dealer, so that the description will be accurate.
15 See note 5, ante.
16 Prob. Code, section 15643, subd. (e).
17 Prob. Code, section 2330.
18 Cal. Rules of Court, rule 7.205.
19 Cal. Rules of Court, rule 7.204.
20 Cal. Rules of Court, rule 7.575.
21 Cal. Rules of Court, rule 7.575, subd. (a).
22 Cal. Rules of Court, rule 7.575, subd. (e).
23 Cal. Rules of Court, rule 7.575, subd. (a).
24 Cal. Rules of Court, rule 7.575, subd. (b).
25 Cal. Rules of Court, rule 7.575, subd. (e).
26 See the note at the bottom of the Summary of Account Judicial Council form (GC-400SUM), which indicates that schedule labels cannot be relabeled or redesignated.
CIRCULAR 230 DISCLOSURE – Pursuant to rules and regulations imposed by the Internal Revenue Service, any tax advice contained in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding tax penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another person any transaction or matter addressed herein.
The summary which appears above is reprinted for information purposes only. It is not intended to be and should not be considered legal advice nor substitute for obtaining legal advice from competent, independent, legal counsel. If you would like to discuss these matters in more detail, please feel free to contact us so that we can provide the clarification and resources you need to make effective decisions.