Do trustees receive the service they require? - 31 January 2024

2023 has been a roller-coaster year with a tremendous amount of changes introduced; also changes in legislation affecting boards of trustees – often lay-person trustees. We should all take a deep breath, take stock of what we have, and (in the beginning of the year) proactively plan for the year ahead. Boards of trustees require 4 types of services. The first is statutory services to trusts, such as trust registrations, trust deed amendments, trustee changes, and the like. Secondly, trustees, often being laypersons, require hand-holding in the active administration of trusts. Thirdly, trustees may now require the services of an independent trustee. Fourthly, trustees require financial information and someone who can assist them with tax returns and other South African Revenue Service (SARS) submissions. Trustees should ask themselves which of these services their current service providers provide, and obtain the required services their current service providers fall short in. The required services are briefly explained below.

Statutory services

Historically, this has been perceived as a stand-alone service, which did not concern many others. Given the recent changes to trust legislation, it has become critical that the date of effective changes to trust information is managed and tracked (and communicated timeously to other trust role players), as it may have an impact on requirements such as the reporting of ‘beneficial ownership’, where non-compliance of trustees may be punished. Gone are the days when someone agrees to act as a trustee, and the very next day they start signing trust resolutions, attending meetings, etc. Similarly, the day you hand in your resignation as trustee of a trust, you are not yet off the hook. There are more steps required. All these changes impact when your details should (or should no longer) appear on various documents, such as ‘beneficial ownership’ reporting to the Master (on a real-time basis) and to SARS (as at the end of the trust tax year), trust resolutions and minutes of meetings (which are now all to be provided to SARS with the trust’s annual tax return), and financial statements.

Day-to-day trust administration

Few people understand the concept of active trust administration. A comment from SARS in an open forum that they will, for example, be able to establish the date a trust resolution was prepared (to determine whether it meets the requirements of our tax laws), should be sufficient warning that trustees should (start) treating a trust as a separate entity which requires more active management than any other entity – that is because the courts held that a trust is run by resolution. The trustees also have to observe the trust deed (the constitutive charter of the trust). After the introduction of the Financial Action Task Force (FATF) measures, trustees need to be assisted to meet their new obligations, such as keeping information of all ‘beneficial owners’ and ‘ultimate beneficial owners’. The Regulations require trustees to keep 14 items on each ‘beneficial owner’ of the trust. The current offering of many so-called service providers to submit a once-off beneficial ownership report to the Master (to make a quick buck) falls short, for the following reasons – the beneficial ownership report that needs to be submitted to the Master of the High Court only contains 10 of the 14 required information fields per beneficial owner; therefore the trustees should keep a real-time record of all 14 items and the exercise is not a once-off one – different to companies, trustees should update their records with real-time information and immediately report any change to the Master, especially the 10 fields that need to be reported on the ‘beneficial ownership’ register to the Master. Few people speak (or know about) the requirement for trustees to maintain information on their interactions with “accountable institutions”. The new (punitive) measures require trustees to become ‘FIC experts’, as they need to know the elaborate list of new “accountable institutions” in terms of Schedule 1 of the Financial Intelligence Centre Act. They need to inform an “accountable institution” they deal with that they are acting in their capacities as trustees (therefore paperwork is required to prove that). The trustees are also required to maintain a register of “accountable institutions” they deal with. The Regulations also require trustees to understand and record details of “accountable institutions” such as whether the trustees are using the “accountable institution” as an agent, and whether their relationship can be classified as a “single transaction” or a “business relationship”. Clearly, layperson trustees do not have the required knowledge and require the help of a professional who can assist them. Ultimately the board of trustees remains liable for non-compliance so they must obtain proper professional assistance to meet these new requirements. Traditionally, even though it was the perception that the trust accountant ‘has everything under control’, most trusts were non-compliant, as typically the accountant did not provide active trust administration as part of their service offering to their clients. It is therefore important for trustees to check with their accountants (and other service providers) whether they do (or can) provide the service and get that in writing in an engagement letter.

Independent trusteeship

Since March 2017 the Master requires the appointment of independent trustees for new “family business trusts”. The role can no longer be one of ‘tick the box’ and ‘do nothing thereafter’. Huge reliance is placed by lay-person trustees on the independent trustee, especially relating to the new punitive measures introduced for trusts. ‘So-called’ independent trustees have to urgently evaluate their positions and rather resign if they do not possess the required skills and experience (and appetite) to guide the lay-person trustees.

Accounting/tax

Whereas financial statements were historically (falsely) relied upon as evidence of trust compliance, it is now clear that they (in effect) are a result of ongoing administration and compliance. The tax practitioner will now have difficulty submitting trust tax returns, as they are (for example) required to submit documents such as trust resolutions, minutes, and the latest trust deed with the trust tax return. They will therefore become the final verifiers and controllers of trusts’ compliance. As an example, the tax practitioner should be skilled enough in trusts to know that they would need to check the terms of the trust deed relating to the number of required meetings to be held by the trustees, and if for example, the trust deed stipulates that trustees should meet once a quarter, that 4 sets of minutes are to be uploaded with the trust tax return. Gone are the days when trust financials consisted of 1 page of journal entries with resolutions created as an after-fact.

Conclusion

Many traditional trust service providers are resigning from their roles in trusts due to the additional risks encountered by them after the legislation changes. Trustees, however, require these services. As long as trustees and service providers are clear about the trust services provided, it may provide additional income streams to service providers, who traditionally provided some of these services for free, which can no longer be justified, given the risk and the costs of compliance.