Table of Contents
- What is Fiduciary Accounting?
- When You Might Need Fiduciary Accounting
- 5 Types of Fiduciary Accounts
- What Are the Fiduciary Account Coverage Requirements?
- What's the Difference Between a CPA and a Fiduciary?
- Frequently Asked Questions
- The Bottom Line
Key Takeaways
✔ Fiduciary accounting tracks and reports how assets are managed and distributed on behalf of others.
✔ It’s required when handling estates, trusts, or guardianships that need formal financial reporting.
✔ Types of fiduciary accounts include trusts, estates, guardianships, and custodial accounts.
✔ Coverage applies when fiduciary accounts are correctly titled, documented, and reflect true ownership by beneficiaries.
✔ A CPA provides financial expertise, while a fiduciary has a legal duty to act in another’s best interest.
Fiduciary accounting refers to the detailed financial reporting required when one person or entity manages assets on behalf of another. It ensures transparency, accountability, and compliance with legal or court standards. These reports outline how assets are collected, managed, and distributed, offering a clear record of every transaction.
Whether handled by an executor, trustee, or guardian, fiduciary accounting helps demonstrate that all actions taken are in the best interest of the beneficiaries or principals involved. It also provides a structured framework for reviewing financial activity, preventing disputes, and maintaining trust between parties.
Here are the key elements that define fiduciary accounting and when such reporting may be necessary.
What Is Fiduciary Accounting?
Fiduciary accounting is more than a spreadsheet of numbers. It’s a structured, legally required report that demonstrates how a fiduciary—someone acting on behalf of another—has managed, protected, and distributed assets. This type of accounting serves both as a record and as proof of good faith.
A Record of All Transactions
At its core, fiduciary accounting is a comprehensive record of financial activity. It tracks the valuation of assets, the collection of income, and every disbursement made from an account. This might include rental income from a property, interest earned on investments, or payments for taxes, bills, and distributions to beneficiaries.
By recording every transaction, a fiduciary creates a paper trail that shows how funds have been used and ensures nothing is hidden. A fiduciary accountant can help organize these records into clear, court-acceptable reports that demonstrate accuracy and good stewardship.
Proof of Good Faith
Fiduciary accounting also serves as evidence that the fiduciary is acting responsibly and within the scope of their duties. Every fiduciary has a fiduciary duty, which means they must act in the best interest of the person or entity they represent.
For example, a trustee managing a family trust must make sure investments, expenses, and distributions align with the trust’s terms. If questions ever arise, the fiduciary accounting stands as proof that all actions were made in good faith and according to legal and ethical standards.
A Clear Financial Overview
One of the most valuable aspects of fiduciary accounting is the clarity it provides. A well-prepared accounting shows the financial health of the account, listing all assets, liabilities, income, and expenses for a specific period. This gives beneficiaries confidence that the assets are being handled properly and that nothing is being misused.
A professional accounting firm that handles estate or trust work can help present this information in a standardized, court-ready format, which is often required in probate or guardianship proceedings.
Accountability and Transparency
Transparency is at the heart of fiduciary accounting. These reports show that assets are being managed fairly and in accordance with the law. They can be reviewed by beneficiaries, attorneys, and even taxing authorities to verify that everything is in order.
For many fiduciaries, hiring an experienced fiduciary accountant helps maintain that accountability and reduces the risk of disputes or misunderstandings.
When You Might Need Fiduciary Accounting
Fiduciary accounting is required in many legal and financial situations. Whenever someone manages money or property for another person, the law often requires an official record of how that money is handled.
Managing a Trust or Estate
When a person dies and leaves behind a trust or estate, the trustee or executor must manage those assets and eventually distribute them to the beneficiaries. Courts and beneficiaries usually require a formal accounting before final distributions are made.
This type of accounting shows what income the estate earned, what expenses were paid, and what remains to be distributed. A fiduciary accountant ensures that the report meets state and court standards and accurately reflects all transactions.
Settling an Estate
Before an estate can be closed, the executor must confirm that all debts, taxes, and expenses have been paid. The fiduciary accounting provides this confirmation. It shows each payment, every deposit, and the final balance.
This document gives beneficiaries peace of mind and satisfies the court that the executor has fulfilled their obligations. Working with a qualified accounting firm helps executors navigate this process correctly and efficiently.
Acting as a Conservator or Guardian
When someone is appointed by a court to manage the finances of a minor or an incapacitated adult, fiduciary accounting is mandatory. The conservator or guardian must submit regular reports showing how funds were used to benefit the person under their care.
In these situations, fiduciary accountants play a critical role. They help conservators maintain accurate records, prepare reports, and ensure compliance with court orders.
Serving as a VA Fiduciary
The Department of Veterans Affairs (VA) appoints fiduciaries to manage benefits for veterans who are unable to do so themselves. These fiduciaries must submit periodic accountings that show every expense, deposit, and purchase made for the veteran’s benefit.
Proper recordkeeping is crucial to remain in good standing with the VA. A knowledgeable accounting firm can help VA fiduciaries stay organized and compliant with reporting requirements.
5 Types of Fiduciary Accounts
There are several types of fiduciary accounts [1], each created when one person manages assets for another. A fiduciary accountant or accounting firm can help set them up and maintain compliance.
1. UTMA and UGMA Accounts
These accounts let adults transfer assets to minors without creating a trust. The custodian manages the funds until the child reaches legal age and must act in the child’s best interest. Many custodians use fiduciary accountants to help with tracking and reporting.
2. Accounts with a Power of Attorney
A fiduciary account with a power of attorney allows an agent to manage someone else’s finances. The agent must keep funds separate and maintain clear records. An accounting firm can help ensure proper documentation and compliance.
3. Decedent Estate Accounts
Executors open estate accounts to manage a deceased person’s assets, pay debts, and distribute remaining funds. This common type of fiduciary account often requires reports prepared by fiduciary accountants for the court and beneficiaries.
4. Real Estate and Escrow Accounts
Escrow accounts hold funds during real estate or legal transactions until all terms are met. A fiduciary accountant ensures deposits and withdrawals are tracked accurately for transparency.
5. Brokered Deposit Accounts
These accounts spread client funds across multiple banks to increase insurance coverage or diversify deposits. An accounting firm helps monitor balances and ensure compliance with regulations.
What Are the Fiduciary Account Coverage Requirements?
When a fiduciary holds deposits on behalf of others, those funds may qualify for pass-through insurance coverage—meaning the deposits are insured as if owned directly by the underlying principals—only if certain conditions are met.
To ensure this protection applies, the following criteria must be satisfied [1]:
1. True Ownership by the Principal
The funds must genuinely belong to the principal (the actual owner), not the fiduciary, custodian, or third party managing the account. To verify ownership, regulatory bodies such as the FDIC may review:
✔ The written agreement between the account holder (fiduciary or custodian) and the principal.
✔ Applicable provisions of state law governing the account’s ownership and control.
2. Proper Account Designation
The financial institution’s records must clearly show that the account is held in a fiduciary or representative capacity. Examples include designations such as:
✔ “ABC Company, Custodian”
✔ “ABC FBO (For the Benefit Of) Jane Doe”
✔ “Jane Doe UTMA John Smith, Jr.”
3. Detailed Recordkeeping of Beneficial Interests
The institution’s, fiduciary’s, or related third party’s records must accurately identify each principal (beneficial owner) and specify their respective ownership share in the total deposit.
These requirements ensure clarity of ownership, accurate insurance coverage, and regulatory compliance under federal deposit insurance rules.
What’s the Difference Between a CPA and a Fiduciary?
Although Certified Public Accountants (CPAs) and fiduciaries both play important roles in managing and protecting financial assets, their responsibilities, legal duties, and professional focus are distinct. Understanding these differences helps individuals and families choose the right kind of professional support for their financial needs.
Certified Public Accountant (CPA)
A CPA [2] is a licensed accounting professional who provides a wide range of financial and advisory services while adhering to established professional and ethical standards. CPAs help both individuals and organizations make sound financial decisions through detailed analysis, compliance work, and strategic planning.
Common CPA services include:
- Tax preparation and planning: Ensuring compliance with federal and state tax laws and helping clients minimize tax liability.
- Estate and trust accounting: Managing financial reporting and distribution for estates and trusts.
- Assurance and audit services: Providing independent reviews or audits of financial statements for accuracy and transparency.
- Financial and business consulting: Offering advice on budgeting, forecasting, and growth strategies.
- Forensic accounting: Investigating potential financial irregularities, fraud, or legal disputes.
Fiduciary
A fiduciary [3] is someone legally responsible for managing another person’s money or property in that person’s best interest. Fiduciaries can serve under various legal or formal designations, such as
Once appointed, a fiduciary must follow the terms of the governing document—such as a trust agreement or power of attorney—and is held to the highest standard of loyalty and care.
Core fiduciary duties include:
- Acting solely in the beneficiary’s best interest. Every decision must prioritize the needs and welfare of the person or entity represented.
- Managing assets prudently. This may include paying bills, managing investments, collecting income, or maintaining insurance coverage.
- Maintaining clear separation of assets. A fiduciary must never mix personal funds with those they manage on behalf of others.
- Keeping detailed records. Complete, transparent documentation of transactions is essential to demonstrate accountability and compliance.
Frequently Asked Questions
How often should fiduciary accountings be completed?
The timing depends on what the court, trust, or estate documents require. Many fiduciaries provide reports once a year, while others do so at the end of their service.
Can fiduciary accounting be done using regular accounting software?
Some general software may work for tracking transactions, but fiduciary accounting often needs more detailed reporting formats. A fiduciary accountant can handle the specific reporting requirements.
What happens if a fiduciary doesn’t provide an accounting?
If an accounting is not provided, beneficiaries or courts can demand one. In some cases, the fiduciary may face penalties or removal from their position.
Do all fiduciaries need professional help with accounting?
Not always, but most benefit from hiring a fiduciary accountant or accounting firm. Professionals help ensure the reports are complete, accurate, and accepted by the court if needed.
Is fiduciary accounting required for small estates?
It depends on the state laws and court rules. Even small estates may require an accounting if there are multiple beneficiaries or disputes.
The Bottom Line
Fiduciary accounting ensures transparency and accountability when managing assets for others. Proper reporting helps protect both fiduciaries and beneficiaries.
Saranac Advisors offers guidance on trust and estate accounting, helping clients stay organized and compliant.
Schedule a consultation to learn more about your fiduciary accounting options!
REFERENCES:
- FDIC: Federal Deposit Insurance Corporation. FIDUCIARY ACCOUNTS (12 C.F.R § 330.5; 12 C.F.R. § 330.7). n.d.
- University of the State of New York - New York State Education Department. Certified Public Accountant. N.d.
- Consumer Financial Protection Bureau (CFPB). What is a fiduciary?. Last Reviewed: June, 27, 2023
Disclaimer: The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. Some of this material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named representative, broker-dealer, state - or SEC - registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.