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13 months ago

Blue Chip Issue 82

  • Text
  • Financial
  • Advisors
  • Investments
  • Equity
  • Wealth
  • Offshore
  • Asset
  • Portfolio
  • Investing
  • Global
  • Momentum
Welcome to our Investing Offshore Special Edition of Blue Chip. a quarterly journal for the financial planning industry and the official publication of the Financial Planning Institute of Southern Africa NPC (FPI). Blue Chip publishes contributions from FPI and other leading industry figures, covering all aspects of the financial planning industry.

FPI When it comes to

FPI When it comes to trust administration, SARS is your friend No, we’re not talking about the South African Revenue Service. For the purposes of this article, SARS refers to BDO’s foolproof four-step trust administration process. Read on to find out if your family trust passes the test. In the most recent episode of BDO’s Talking Trusts webinar series, I caught up with Phia van der Spuy of Trusteeze to unpack a topic which is pertinent to many South Africans, namely why trust accounting is not trust administration. Van der Spuy and I sought to debunk the widespread myth that administering a trust is all about maintaining accurate accounting records. Annual financial statements are great accounting reports that show the financial position and results of a trust. But they do not meet the benchmark or regulatory requirement for trust administration. In fact, financial statements are not even a requirement in terms of the Trust Property Control Act (TPCA) and certainly do not, on their own, serve as evidence that a trust has complied with the requirements of the Act. This article will cover some of the key themes of our discussion, but if you want to really get to grips with the finer details I’d highly recommend watching the whole episode on YouTube. A trust is not a company Before we go any further, it is vital to understand that a trust is completely different to a company. This is the first mistake many people make when administering a trust, so perhaps we should look at some of the key differences: • A company is a legal entity defined by the Companies Act and regulated by the Companies and Intellectual Commission (CIPC). All companies must submit detailed financial statements, among many other requirements. A company is owned by its shareholders, but it stands independent of them and can be sued in its own right. A company applies clearly defined levels of authority in decision-making. Decisions are typically made by majority vote. • A trust only comes into existence through its trust deed, a contractual arrangement giving instructions to trustees. Every trust is different. The high-level requirements and fiduciary obligations of trustees are defined in the TPCA but all decisions and actions taken by the trustees must be made with reference to the trust deed and not the Act. A trust is not a legal entity in its own right, but rather an accumulation of assets that is jointly owned by the trustees (which can be individuals or legal entities). A trust cannot sue or be sued. There are no delegated levels of authority in trusts, 74 www.bluechipdigital.co.za

so there can be no “main trustee”. All decisions must be made jointly by all trustees and trusts are said to be “run by resolution”. Administering a trust is, therefore, not in any way like operating a company. Trustees have a fiduciary responsibility under the TPCA to administer the trust for the benefit of the identifiable beneficiaries. Now it’s time to reveal how we use “SARS” as our blueprint for trust administration. S is for set up Effective trust administration starts with understanding the trust deed. Each trust is unique, so you need to set up your administration in accordance with the trust deed. This will cover what trustees can, can’t and must do; how often meetings must be held; and who the beneficiaries are. A trust must have a bank account and the founding donation stipulated in the trust deed (even if it is R100) must be deposited into this bank account. It is imperative to have a Letter of Authority issued by the Master of the High Court which confirms the trustees. You also need to make sure you keep an asset register that clearly identifies all trust assets and how they were acquired by the trust. A is for act Trustees need to act. Once you have established the administrative basis for the trust, you need to make sure that you follow the instructions set out in the trust deed. Right at the top of this list is ensuring that all trustees collectively and actively manage the trust assets in the best interests of beneficiaries. It is especially important to avoid having “puppet” or “dominant” trustees. Each trustee needs to be actively involved in managing the trust assets for the benefit of the beneficiaries. This means meeting as often as the trust deed stipulates (annual meetings are a minimum requirement) and making sure that decisions are made according to the Joint Action Rule. Internally, trustees can debate and disagree over decisions, but to the world-at-large your resolutions represent the trustees’ single view and decision. And remember, only individuals listed in the Letter of Authority lodged with the Master have authority to act on behalf of the trust. A change of trustees is only effective once registered with the Master. R is for record Document, document and document all your actions as trustees. You need to have a paper trail that provides documentary evidence of the actions, decisions and transactions made by the trustees. The following documents need be kept for at least five years after the trust has been deregistered: • Resolutions • Minutes • Asset register • Summary of transacting entities • Disclosure of connected persons Trusts are run by resolution which must be signed by all trustees and cannot be backdated. All this record-keeping is demanding, but technology has made it much easier. At BDO, we have adopted a trust portal for document storage. This cloud-based platform gives all trustees a single view of the trust file from anywhere in the world. Having a single view of the trust records is an imperative building block for effective administration. S is for statements Reporting and preparing statements ends the cycle of administration. Trustees are accountable to each other, the Master of the High Court, the beneficiaries of the trust and the taxman. Unlike in a company, a trust’s annual financial statements should separate each trust asset into its own silo with its own schedule of income and expenditure. Not all traditional accounting packages have this capability, and this is an area that often trips up trustees. Annual financial statements reflect the actions taken by trustees in relation to the trust assets. Be careful not to fall into the trap of reverse engineering resolutions to support the financial position of a trust. Trust administration starts with resolutions and ends with statements. The bottom line Trusts do not administer themselves, and the best way of ensuring that you do not have any hassles with the taxman, the soon-to-be-ex-spouse or the law is to make SARS (Set up, Act, Record, Statements) your friend. Used wisely, trusts can be an extremely effective way of managing wealth. But a neglected trust – or a trust that is hijacked by one trustee – can be a recipe for disaster. For an idea of what can go wrong, I urge you to watch the webinar as Van der Spuy details several different court cases. There is a case of a brother unknowingly signing surety on his brother’s business and another one where a husband tries to cut his soon-tobe-ex-wife out of a trust. If you are struggling with any aspect of trust administration or if you still rely on accountants to be your administrators, it is best to get a professional trust administrator so that the trust remains valid and is not attacked as your alter ego. By Ricardo Teixeira, CFP®, COO Wealth Advisers and Leader: Non-Executive Director Hub, BDO South Africa www.bluechipdigital.co.za 75

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