focus and pressure on trustees from regulatory bodies and stakeholders
(beneficiaries, settlors, protectors and other interested parties) has never
been greater. Legal, commercial, financial and professional risks to trustees
who are responsible for complex portfolios of businesses continue to increase.
More sophisticated beneficiaries and settlors are demanding a higher degree of
transparency from trustees into the financial affairs of the trust. Often it is
the lack of transparency into the financial affairs of the trust that is core
to any dispute amongst stakeholders, resulting in the trustee’s actions being
placed under an even higher degree of scrutiny.
this article we examine a number of challenges we have seen trustees face to
maintain accurate and meaningful financial records and highlight selected best
practices for trustees to consider, which can mitigate the risk of trust
accounts becoming the subject of a future dispute.
Change in circumstance
Throughout the life
of a trust fundamental changes often occur, some planned and others unexpected.
The injection of new funds, sale of assets, restructuring, divorce, addition or
removal of beneficiaries and death of settlor are all examples of instances
which can lead to dispute amongst different stakeholders in the trust. These
disputes are generally between family members, as beneficiaries of the trust,
and a polarisation of interest quickly occurs when one group may have had, or
perceived to have had, more transparency into the operation of the trust.
Because emotional attachment trumps a commercial mindset to resolve the matter
quickly, the trustee is caught in the middle and has to deal with immediate and
burdensome requests for up to date financial information in order to close the
the trustee has maintained accurate records during the life of the trust and
has fulfilled the financial reporting requirements as mandated by the trust
deed, there is lower risk that the trustee will not be able to meet these
information requests on a timely basis and therefore it is less likely that the
trustee will find itself in a contentious situation. If the trust accounts have
not been maintained on an accurate, consistent and current basis, then the
trustee opens itself up to potential backlash from the trust’s stakeholders, or
worse, a breach of trust claim for failing to maintain accurate records.
example of a case, in which the authors were involved, concerned a dispute
between beneficiaries, which had arisen in the wake of a significant change of
circumstance in the trust. Assistance was provided to the trustee and their
legal team by recreating several years of financial reports for the trust,
which were required due to inadequate record keeping and
financial reporting over the life of the trust. While the dispute may still
have arisen had reliable, timely and accurate financial reports been available,
the dispute would have been based solely on principle rather than concern over
lack of information, accountability and transparency.
The lack of reliable
financial information and transparency only serves to intensify any dispute
amongst the trust’s stakeholders, meaning increased frustration for all parties
and potentially significant legal costs. If a trustee finds itself in this situation,
immediate steps should be taken to assess risk exposure and then to correct or
prepare proper accounts. This will result in unforeseen costs to the trustee or
the trust, which is likely to be insignificant in comparison to costs
associated with a prolonged legal dispute.
a significant change in circumstance involving the trust has occurred, a
proactive approach by the trustee to ensure transparency into the trust is a
key consideration. If for example a family patriarch has passed on as in the scenario
described above, the trustee will likely be required to report to new parties
who may not be intimately familiar with the trust structure and its assets.
Trust beneficiaries will likely have questions regarding the trust’s financial
affairs and may be predisposed to thinking that the trustee is purposely
failing to disclose complete information or is otherwise disadvantaging them in
some way. For example, upon seeing a trust’s balance sheet for the first time,
a beneficiary may have an inherent bias in thinking that the asset values are
understated, without any reasoning other than believing that they must somehow
be entitled to more wealth than actually exists. Similarly, beneficiaries may
be surprised and angered when realising for the first time that other
beneficiaries may be entitled to a greater portion of the family’s wealth.
Limiting the possibility of dispute – selected best
the following section we examine measures which trustees can take to limit the
possibility of a dispute from occurring in the first place or at least be
prepared to handle a potential dispute. These measures include ensuring that
appropriate financial reporting language is included in the trust deed and
having systems and resources in place to ensure accurate and timely financial
trust deed is the starting point for determining the format and frequency of
the trust accounts and other financial reporting measures. For the purposes of
drafting financial reporting language in the trust deed, it is important to
understand who the primary users of the trust accounts and other financial
reports will be and what use they have for the accounts and reports. In some
cases the financial reporting will be for information purposes only, to support
tax filings in single or multiple jurisdictions, or perhaps the impact of
financial results on distribution entitlements to beneficiaries.
on structure, the trust deed should include language robust enough to deal with
the reporting on a potentially diverse and complex portfolio of assets, which
may include real estate, private equity investments, publicly traded
securities, art and other collectibles, yachts or aircraft.
Other points which
should be considered when drafting financial reporting language in the trust
If the trust accounts are subject to audit or
review by an independent party, an increased administrative burden should be
considered by the trustee. This should also include an assessment of the
necessary records to be retained and the duration to keep such records.
Depending on the domicile of the trust or
underlying trust assets, knowledge of statutory reporting requirements and
information to be retained by the trustee should be considered.
There are several choices when it comes to
determining the accounting principles to be used for preparation of trust
accounts such as International Financial Reporting Standards or country
specific generally accepted accounting principles. While this may be partially
dictated by the statutory requirements, it is important that trustees are aware
of differences in accounting principles when it comes to reviewing the
financial reports of underlying trust investments.
Many trust structures contain investments in
complex assets which are inherently difficult to value including derivative
financial instruments, real estate, or common or preference shares in
underlying holding or operating companies. Consideration should be given as to
the basis on which the assets will be valued (acquisition cost or fair market
value for example) and reported in the trust accounts. Depending on the nature
of the asset, the trust deed may call for the trustee to obtain assistance in
the form of an independent valuation specialist to perform a valuation of the
language in the trust deed should adequately address the financial reporting
needs of the users of the trust accounts as well as any statutory reporting
requirements. Accordingly we recommended that the trustee with assistance from their
accountants, are engaged in the process of drafting the financial reporting
language in the trust deed.
Other considerations and their impact on financial
the scope and complexity of financial reporting issues a trustee is faced with will
ultimately depend on the particular nature of the trust structure and its
assets, trustees should also consider:
The level of visibility, if any, the trustee has in relation to the
operation and financial reporting of private businesses that the trust may have
invested in. Trustees should seek to gain an understanding of business
operations as well as the key members of management. Trustees may experience
difficulty in extracting meaningful information out of company management, if
for example the operations are located in a jurisdiction where statutory
reporting requirements are less stringent or which is unaccustomed to the
concept of transparency and full disclosure. In this case, the trustee may
consider visiting the company’s headquarters or primary place of business as
often the most efficient method of understanding a business is to be “on the
ground” and observing its operations first hand.
Recent regulatory changes have been adopted which
may also impact reporting and record keeping measures on the business.
Assessment of exposure to requirements under the new Foreign Account Tax
Compliance Act, increased enforcement of the Foreign Corrupt Practices Act in
the United States and the introduction of the United Kingdom Bribery Act may
give rise to actual and contingent liabilities within a trust which may also
need to be disclosed for financial reporting purposes, particularly where the
trust or any entities held within the structure are connected with US or UK
persons as defined by the relevant legislation.
the pressures from regulatory bodies and stakeholders in trust activities has
never been greater, we have shown above that the trustee can take proactive
measures to limit or mitigate legal, commercial, financial and professional risks.
By adhering to clearly defined financial reporting policies and addressing
accounting issues within the trust deed itself, transparent, accurate and
timely financial information can alleviate the possibility of the trust
accounts becoming the subject of future dispute, saving the trustee and
stakeholders valuable time and limited resources.