Often there is a misconception that financial statements confirm the compliance of a trust.
Most of the times the accountant only provides accounting and taxation services to trusts, but does not provide compliance and administration services.
There is a material difference between trust administration and accounting for trusts.
Although financial information is required to report to trust stakeholders and submit tax returns, a trust that lacks administration and compliance is exposed to risk of attack.
SARS and any personal creditors, including a soon-to-be-ex-spouse, can rely on a combination of factors (lack of resolutions, minutes, or a bank account) to request that a court declares the trust the ‘alter ego’ (an extension of oneself) of the founder or controlling trustee, resulting in the disregard of the trust to penetrate the trust.
This ‘cost’ may be significantly higher than the effort or the cost required to properly administer a trust in terms of our law.
It is important to demonstrate that a trust is managed as a separate entity to the founder, the trustees and its beneficiaries and that trust assets are held and dealt with separately from anyone else.
Financial statements are often prepared before the accountant or 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.
What happens if a trustee resigns or passes away during the year before all the resolutions were signed (ratified) by all trustees?
You may be caught off guard by SARS, which may result in additional taxes being paid.
You may even lose the trust assets to creditors or be held personally liable for your actions or lack thereof.
Below is a self-assessment for the trustees to consider the risks, other than the lack of accounting and taxation for a trust, which may impact the trust.
If you have answered “No” to one or more of the below questions or statements, you will need the services of a professional trust service provider (who utilises proper systems) to assist you in getting the trust compliant to protect it against attack.
Does the trust exist and is the trust deed current?
1. Was the trust registered after 2016? If registered before 2016, was it ever amended to make provision for legislative changes?
2. Does the trust deed contain a “severability clause” severing any possible illegal provisions in the trust deed?
3. No circumstances have changed that warrant an amendment of the beneficiary definition or an amendment of the trust deed.
4. There is no testamentary reservation in the trust deed.
5. The founder (or trustee) does not have any reserved rights in the trust deed that may indicate control of the trust or a lack of intention to create a trust.
Is the trust compliant?
1. Does the trust have a bank account, and if so, are all trust related payments made from this bank account and not from the credit card or bank account of the estate planner/trustee? Was the initial donation (if an amount in cash) in terms of the trust deed paid into the trust bank account by the founder?
2. Is the trust registered for Income Tax and are all relevant tax returns submitted to SARS?
3. Does the trust deed require trustees to meet (sometimes at least once a year) and do the trustees have written signed minutes of these meetings as proof?
4. Do the trustees have signed resolutions by all trustees for every transaction in the trust?
5. Does the trust have an asset register as required in terms of the Trust Property Control Act?
SARS has a renewed focus on trusts. On 28 September 2022 they issued a media release (SARS sharpens its focus on Trusts). SARS has conducted a detailed current state analysis of tax compliance by trusts and their beneficiaries to determine whether all trusts and their beneficiaries are registered with SARS for tax purposes and whether all trusts and their beneficiaries have filed their annual income tax returns, and if so, whether such returns fully and accurately reflect their actual tax status and their payment obligations have been fully met.
SARS is working hard to increase and expand the use of data. So it has become important for all roe players in a trust to have a proper (digital) system in place to demonstrate compliance.
Estate planners have run out of time to get away with sloppy (or the lack of) trust administration.
Phia van der Spuy is a Chartered Accountant with a Masters degree in tax and a registered Fiduciary Practitioner of South Africa®, a Chartered Tax Adviser, a Trust and Estate Practitioner (TEP) and the founder of Trusteeze®, the provider of a digital trust solution.