Often estate planners, and their family members serving as trustees with them in family trusts, hold the view that the preparation of financial statements by their accountants is sufficient to demonstrate their compliance as trustees.
Little do they know that financial statements are not even a requirement in terms of the Trust Property Control Act (the Act) and certainly do not, on their own, serve as evidence that the trusts are compliant. What is required is that trustees collectively, actively manage the trust and document decisions for each transaction.
It is imperative that all decisions made by trustees are recorded in minutes of meetings or resolutions taken – each important transaction should be supported by a duly authorised resolution of the board of trustees. This is critical to actively demonstrate the management of the trust with the necessary audit trail when substantiating actions taken by the trustees.
Regardless whether financial statements are prepared, a lack of these required documents would give the South African Revenue Service (Sars) or creditors (including a soon-to-be-ex spouse) grounds to prove an alter ego (an extension of oneself) trust, which results in the complete disregard of the trust, with the associated negative consequences.
Often financial statements are first prepared and then the accountant/service provider prepares resolutions to support the financial statements.
Do not ratify transactions at the end of the year and assume that you will be able to explain to Sars and creditors that you have actively been managing the trust. You may be caught off guard by Sars and creditors, which may result in you being required to paying additional taxes, and you may even lose the trust assets to creditors, or you may be held personally liable for your actions, or a lack thereof.
It is also not a requirement in terms of the Act that a trust’s financial statements are audited. It is however important to note that the Master of the High Court (the Master) has a statutory right (in terms of Section 16 of the Act) and the beneficiaries have a common law right to request the appointment of an auditor for the trust. Instead of seeking reliance on audited financial statements, the onus is rather on the trustees to clearly identify and record trust property in terms of Section 11 (Registration and identification of trust property) of the Act.
In terms of this section trustees are required to clearly indicate the trust property held by them in their capacities as trustees in the bookkeeping records. Registered trust property should be clearly indicated as such. Any account or investment at any financial institution should be identifiable as a trust account or investment.
Often trust financial statements do not provide the level of information as required of trustees.
A modern interpretation of this section of the Act requires an asset register to be maintained by the trustees that clearly describe the assets, including their purchase dates, values and locations. This will prevent exposing the trust assets to risk in the event of a trustee being sequestrated or liquidated. Although Section 12 (Separate position of trust property) of the Act provides a statutory safeguard by stipulating that trust property will not form part of the personal estate of a trustee (except in so far as the trustee, as a trust beneficiary, is entitled to trust property), it will only be effective if the requirements of Section 11 are met, by clearly identifying and recording trust property.
The onus is also on the trustees and to deliver to the Master any trust documents and records when requested to do so to the satisfaction of the Master (in terms of Section 16 of the Act). In terms of Section 17 (Custody of documents) of the Act trustees should keep any document that serves as proof of any investment, safe custody, control, administration, alienation or distribution of trust property for five years after the termination of the trust.
In the Doyle v Board of Executors case of 1999 it was held that beneficiaries are entitled to information concerning the management and administration of trust assets. The Court held that trustees have a duty to provide full trust administration reports and accounting records, supported by vouchers, dating back to the time a discretionary trust had been established, to trust beneficiaries, and even to contingent beneficiaries born later. This case confirmed that financial statements are not enough – trustees need to demonstrate, by providing documentary evidence, that they are actively managing and administering the trust’s assets.
In summary, when accepting an appointment as a trustee, a person assumes the responsibility of ensuring the proper management and administration of trust assets on behalf of the beneficiaries. This requires compliance with all legal and statutory requirements discussed above and not only financial statements prepared by an accountant. Should a trustee neglect his/her duties, he/she may be personally held liable.
Phia van der Spuy is a registered Fiduciary Practitioner of South Africa®, a Master Tax Practitioner (SA)™, a Trust and Estate Practitioner (TEP) and the founder of Trusteeze®, a professional trust practitioner.