DOES MY FAMILY TRUST REALLY NEED FINANCIAL STATEMENTS?

Jun 29, 2015

It’s a question we get asked from time to time: “My family trust only owns the house, nothing else. I’ve never had financial statements done for it; is it really necessary?”

Well, your lawyer may tell you no, we but our view is “Yes! Absolutely!”  To explain why, please see this excerpt from from Family Trusts 101 by Janet Xuccoa, Chartered Accountant, GRA:

*** start of excerpt ***

Pg 117

FINANCIAL STATEMENTS

It never fails to amaze me the number of Trustees that don’t have annual financial statements prepared for the Trust they are administering.

How can a Trustee meet one of their fundamental duties of accounting to a Beneficiary if they do not possess up to date financial knowledge of the Trust’s affairs?  Furthermore, a Trustee has a duty to meet the tax obligations of the Trust and these obligations can’t possibly be identified and satisfied if a Trustee doesn’t know the financial position of the Trust. So in my view, the rule is financial statements should be prepared for Trusts.

Sometimes a Trustee will ask me if the above rule applies to a Trust which does not receive or earn income. I think it does.

If a Trust is a recipient of income then financial statements and tax returns must by law be prepared and lodged with Inland Revenue. If a Trust does not however earn or receive any income, then I still believe financial statements should be prepared because by doing so three things are established

First, the loans owed back to the Settlor/s (if any) can be identified and a correction (if needed) can then be made. Furthermore, a decision with respect to gifting can be formed.

Secondly, the assets and liabilities of the Trust will be noted in the financial Statements which helps Trustees conduct an Annual Financial Statement Review and an Annual Trustee Meeting.  If you read ahead you will understand why this Review and Meeting are important and the role the financial statements play.

Lastly, by completing financial statements Trustees are put in a position of being able to meet the duties they owe to the Beneficiaries.  In other words, the Trustees are able to account to the Beneficiaries and will be able to identify and satisfy the Trust’s tax obligations.

Pg 118

FINANCIAL STATEMENT REVIEW

I think a great aid in avoiding a successful sham Trust allegation is the performing of a Financial Statement Review. This Review should be conducted annually, once the financial statements for the Trust are to hand. 

I recommend the Professional Trustee conduct the review.  Once performed, the Professional Trustee should report back to their co-Trustees on the matters that need attention.

In particular, the financial statement review should cover:

  • The checking of the transactions and balances noted in the financial statements against the records held for the Trust
  • A decision with respect to Gifting
  • The establishment of loan balances and the checking of all Deeds of Acknowledgement of Debt, Variable Interest Loan Agreements and other loan contracts; and
  • The noting of any Beneficiary distributions made and the confirmation that appropriate and timely Resolutions have been passed by the Trustees.

Lastly, I expect a Professional Trustee’s review to determine what documentation, if any, is required to bring the administration of the Trust up to date.  This could include the preparation of Resolutions, Deeds of Acknowledgement of Debt and Variable Interest Loan Agreements to name but a few documents.

*** end of excerpt ***

BUY THE BOOK!

We thoroughly recommend purchasing Janet’s excellent and easy to read book on Family Trusts.  Click here to purchase. Thanks to Janet for permission to publish this information here.

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