Held to account - keeping trust accounts when there are underlying companies

Saturday, 01 March 2014
John Harper looks at some of the issues relating to keeping trust accounts when there are underlying companies.

In the world of trustees and corporate services, there was a time when I probably thought that I had seen it all. I subsequently learned that this blissful state of enlightenment was but a mirage.

We had just taken over as trustees of a rather complicated trust. I knew that there were a number of fixed-interest beneficiaries (and not all with equal interests either). Furthermore, the income to which these individuals, the children of a long-since-deceased Danish multi-millionaire, were entitled arose as a result of dividends paid by both trading and investment activities in a number of underlying companies incorporated in various jurisdictions around the world. Once that generation had died out, their children (then about a dozen, as I recall) were the remaindermen, again receiving capital in differing proportions. As someone who came to this industry from the accountancy stable, the prospects of administering this were positively mouth-watering. It would not take long, however, for me to realise that all was not well – that, in fact, to misquote Shakespeare, ‘something was rotten in the state of Denmark’.

The previous trustees had, for many years, attempted to carry out their duties to the beneficiaries in what I can only describe as an illogical, disorganised and unacceptable fashion. Upon enquiry, I surmised, reading between the lines, that the first of their mission statements must have been that they did not ‘do’ accounts. The second would have been along the lines of ‘keep the beneficiaries in the dark and save ourselves a whole lot of hassle’.

From time to time, they would write to the administrators and/or directors of the underlying companies and request that several payments, of what appeared to be purely arbitrary amounts in total, should be made from each respective company direct to the beneficiaries. At least they did adhere to the correct percentages when it came to ‘who got what’. Apparently, the beneficiaries accepted these payments gratefully and everyone seemed happy.

The previous trustees had, for many years, attempted to carry out their duties to the beneficiaries in an illogical, disorganised and unacceptable fashion

But to what extent had the trustees paid all available income to the life tenants, as they should have done? How did they know the profits of each company (they rarely called for financial statements) and, even if they did, were the amounts paid as dividends suitable, taking all things into consideration? As trustees, they had clearly not read about the case of Bartlett v Barclays Bank. Even if they were not on the board of each company, they should have insisted on attending AGMs, as 100 per cent owners, or at least been privy and party to such decisions as shareholders are entitled to be.

That is not to say that all of the after-tax profits of each company should have been paid out as a dividend to the trust. To distribute all of the profits may have had a detrimental effect on the finances and future growth of the underlying companies. That in turn may have prejudiced the value that the remaindermen would one day inherit. The trustees should have discussed dividends with the respective boards before they were paid and ensured that a suitable balance was struck.

This then brings me to the next bee I have in my bonnet about such matters: companies do not pay distributions to beneficiaries of trusts. Such payments are not proper corporate expenses. Companies pay dividends to shareholders, who, if they happen to be trustees, can then use some or even all of the money to pay distributions to beneficiaries. To engineer shortcuts, as happened in this case and still happens all too often, is not only incorrect from an accounting viewpoint but also begs the question as to whether the trustees actually understand the true nature of the trust/company structure and the correct obligations imposed upon all parties.

All too often, the trustees have said in their defence: ‘We have made the necessary adjustments through the loan account.’ Such a reply does not warrant any bonus points (even if they did also ensure that the trust and the company held the necessary meetings or produced the appropriate resolutions). Nothing can replace the good old-fashioned transfer of the dividends up to the trust’s bank account and then the payment of the distributions out of it. 

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John Harper

John Harper TEP is a part-time lecturer, delivering face-to-face courses for the STEP international diploma examinations all around the world.

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