This article was co-written with Mary Jane Barrett, Esq., also of that firm, and Honorable Calvin S. Drayer, Jr., a Judge of the Orphans' Court Division, Court of Common Pleas of Montgomery County, PA. These co-authors are members of the Pennsylvania Supreme Court's Orphans' Court Procedural Rules Committee; and Mary Jane serves as its Chair. Eugene H. Gillin serves as an ad hoc Committee Member, who guided the accounting format changes through the Committee and the Supreme Court approval process.
That Committee had drafted, proposed for public comment, further revised, & then finally recommended to the Pennsylvania Supreme Court, a set of "Model Fiduciary Account" forms that were adopted by Order of that Court, and that now are mandatory for use in accounts submitted by fiduciaries in Pennsylvania for court audit and confirmation.
For background & relevant links about the Model Account Forms, see prior PA EE&F Law Blog postings:
- "Clarifications on PA's New Accounting Formats", (04/06/07);
- "Comparison of PA's Old & New Accounting Formats" (04/03/07);
- "PA's New Orphans' Ct Accounting Forms" (04/02/07); &
- "PA SC OC Rls Cte Proposes Revised Model Fiduciary Accounts" (11/03/06).
What You Should Know"
with Mary Jane Barrett & Hon. Calvin S. Drayer, Jr.
New Account Forms
On March 29, 2007, the Pennsylvania Supreme Court issued an Order amending Pa. O.C. Rule 6.1 and approved Revised Model Forms of Account for an Estate and Trust and a new Model Account for a Charitable Remainder Unitrust. The Model Accounts and the previously approved “Uniform Fiduciary Accounting Principles” appear in the Appendix to the Orphans’ Court Rules. The Rule change and Model Accounts became effective on April 30, 2007.
The Model Accounts Project complements the statewide fill-in forms adopted by the Court last fall. Fiduciary lawyers using model forms and filing accounts that conform to the samples no longer need to be concerned about maintaining an array of forms for use in particular counties. Practitioners and judges in small counties that may not have offered pre-printed forms or lacked local Orphans’ Court rules now benefit from materials that reflect the collaborative effort of experienced Orphans’ Court lawyers and judges across the state.
In luncheon remarks to the Supreme Court Orphans’ Court Procedural Rules Committee at its February 2005 meeting, Chief Justice Ralph J. Cappy charged the Committee with the task of conforming Orphans’ Court forms and practice to a statewide benchmark. Work to accomplish that objective commenced immediately and issuance of the Order approving the revised and new forms of Model Account effectively fulfills the Court’s directive.
The Model Accounts previously incorporated in Rule 6.1 were originally adopted in 1974 to provide a uniform form of account for Pennsylvania as “county practice” was then the order of the day with certain counties requiring formats that differentiated between real estate and other assets. The former Model Executor’s Account and Model Trustee’s Account previously approved under Pa. O.C. Rule 6.1(g) were modified to correct mathematical and formatting errors and reflect other changes unique to practice in Pennsylvania, while remaining consistent with the model accounts recommended for use by the Committee on National Fiduciary Standards.
The Fiduciary Accounting Standards Report has been moved to the Orphans’ Court Rules Appendix but remains the seminal document defining the purposes of fiduciary accounting. The Model Charitable Remainder Unitrust Account is new and incorporates additional schedules that permit the Orphans’ Court and the parties to whom the unitrust account is furnished to verify that unitrust payments, which are based upon the annual value of the trust principal, have been accurately computed and distributed.
Revised Rule 6.1 mandates uniform accounting methods consistent with “best practices” by requiring that accounts be prepared in conformity with the published models, except upon special order of Court. The former rule, which permitted local courts to accept alternate accounting forms, was inconsistent with the Supreme Court’s objective to standardize practice throughout the commonwealth.
Rule 6.1 enumerates the separate schedules that may be required in the course of preparing an account as “receipts, gains or losses on sales or other dispositions, disbursements, distributions, investments made and changes in holdings, and other schedules as appropriate.” Distributions had previously not appeared in the litany of enumerated schedules. The revised rule also requires that “principal and income shall be accounted for separately within the account.” Thus, assets held in a dividend reinvestment plan will require that income investments and changes in holdings be tracked separately from assets held in the principal portion of an account.
Details of Changes
The cover page of all models removed references to Social Security or Tax Identification Numbers in light of privacy concerns and the pervasiveness of identity theft. The models include forwarded subtotals and the heading of each page within the account repeats the name of the involved schedule to make it easier for interested parties to understand the information presented. While no page number appears on the cover page, it is always intended as Page 1 and the pages that follow are numbered sequentially. As certain counties have fee schedules that include per-page charges, this method insures accuracy in the page count.
The summary and index page removed the “gross estate” calculation included in earlier drafts as the methodology of determining this amount remains dependent on county practice and the related fee schedule of such county.
The schedule of Gains or Losses on Sales or Other Dispositions in the Model Trust Account illustrates the sale of a residence and reflects the gross sale proceeds (and was intended to be so labeled, but that glitch can be remedied when the models are tweaked again in 25 years) and the expenses of sale are enumerated in the principal disbursements section of the account.
The preferred method of handling a so-called closing charge (unpaid fiduciary compensation, counsel fee or costs) is illustrated in the Disbursements of Principal schedule of the Model Trust Account. The counsel fee omits a marginal date and is identified as an expense “to be paid.” By handling the expense in this fashion, interested parties are informed that the fee has not yet been paid but the principal balance of the account is reduced to reflect the unpaid disbursement thereby insuring that beneficiaries understand that the balance anticipates sums to be paid.
The schedule of Changes in Holdings includes a refinement that came to be known to members of the Supreme Court Rules O.C. Rules Committee as the "Drayer Rule".
Judge Drayer remarked that he found the Changes in Holdings schedule a useful tool to track an investment within an account. For this reason, an entry will be required within this schedule for every asset received either as a receipt, subsequent receipt or investment, unless, at the end of the accounting interval,
- the same asset remains in the balance with no other intervening activity (split, spinoff, etc.);
- the asset was sold in a single transaction and therefore is no longer in the balance;
- an asset was purchased in a single investment transaction and remains in the balance; or
- an investment was purchased in a single transaction and sold in a single transaction and therefore is no longer in the balance.
The previous Model Accounts did not include a signature line for the fiduciary to sign the account at the end as is now required by Rule 6.1(b)(4). The Verification Page replaces the notarial acknowledgment that appeared in the earlier models.
The prior Model Executor’s Account included Proposed Distribution schedules. A determination to eliminate these schedules was made as, in many cases, marketable securities are a component of the balance for distribution. Any “current” value included in a matter filed with the court would necessarily be stale by the time a Decree of Distribution or Adjudication was issued by the auditing judge.
Thus, the fiduciary should ordinarily request the court to direct the filing of a Schedule of Distribution after approval of the account. The use of a Proposed Distribution schedule might still be appropriate in matters settled informally as the time lag would not be a factor. Most commercial software includes this feature but its use must be considered in context.
The Model Charitable Remainder Unitrust was added to the array of models and includes those additional schedules necessary to make an account of this type susceptible to review by interested parties without reference to extraneous information. The account follows the schedule pattern of the estate and trust models with additional information schedules added to show the composition of the trust portfolio at the beginning of each tax year along with the corresponding unitrust payout calculations. The intention was to illustrate a “plain vanilla” ‘69 Act Unitrust.
Accounts for other split-interest vehicles could be prepared along similar lines depending upon the distribution requirements of the instrument or applicable law. The three-year smoothing rule comes to mind as a common requirement.
In short, what’s new is simply the refinement of the accounting format familiar to fiduciary lawyers and their para-professionals.
Pennsylvania remains in the forefront of this process as the next iteration of the treatise by Professors Robert Whitman and David M. English on Fiduciary Accounting (last published by ALI-ABA in 2002) is expected to include the Model Charitable Remainder Unitrust and the Model Estate and Trusts Accounts just approved by the Pennsylvania Supreme Court but edited to eliminate entries specific to Pennsylvania practice for a text distributed nationally.