Trusts represent income or assets which have been set aside for a particular purpose or for the benefit of particular persons or entities, known as the beneficiaries. The trustee has legal ownership of the assets but manages those assets for the beneficiaries, who have beneficial ownership. The trustee’s role can be given to an individual, group or entity (such as a company). It may or may not be possible to change the nominated trustee, depending on terms of the trust deed.
A trust may be established by a person, by a will, by a court order or by operation of the law. In the case of churches, it is common for a trust to be created through a major legacy or bequest as specified through a deceased estate. It is important to determine first whether the bequest is merely a gift to the church which can be used by the church as it sees fit. Even where the will specifies that the bequest must be used for a specific purpose, it may still not qualify as a trust. Often legal advice will need to be sought to determine the exact nature of the bequest and what conditions the church must meet to comply with the will.
The trustees of the trust are obligated to deal with the trust according to the express or implied terms of the trust, as specified in the trust deed or will.
If your church has dealings with trusts, there are a number of issues that should be considered by those charged with governance:
- The trust deed or will;
- Control of the trust;
- Entitlement to income or capital; and
- Governance issues.
What is a trust deed?
A trust deed is a legal document which is created at the inception of the trust and is effectively the governing document. If a trust is created via a will, the will itself will be the relevant legal document.
The deed specifies a number of key conditions which can include:
- The parties to the trust, including the trustee beneficiaries;
- Acceptable purposes for the use of trust funds;
- Conditions surrounding beneficiaries and entitlement issues; and
- The duration of the trust’s existence.
It is vitally important that a copy of the trust deed is available for review by the trustees. Trust deeds can be complex and often require professional legal interpretation in order to correctly carry out the trust purposes.
Who is entitled to income or capital?
The trust deed will specify when and how the income and assets of the trust are to be allocated among beneficiaries. Some beneficiaries may be entitled to some or all of the income or capital or a combination of the two. It is very important that the trustees understand who the beneficiaries are and what entitlements the trust deed provides. In the case of will trusts, the trustees must know what are acceptable purposes for use of the funds.
Trustees have ongoing obligations to ensure the trust is managed effectively. Their roles may include the following:
- Hold assets of the trust for the beneficiaries of the trust;
- Manage the assets for the beneficiaries;
- Obtain a tax file number for the trust if required;
- Obtain endorsement as a charitable fund if applicable;
- Open and manage all bank accounts;
- Ensure the assets of the trust are protected (for example, insurance is acquired);
- Distribute income and/or assets to the beneficiaries;
- Keep the book of accounts;
- Prepare an annual profit and loss statement and balance sheet;
- Lodge income tax returns if applicable; and
- Make general day-to-day decisions regarding the trust.
Trustees should hold regular meetings in order to make governance decisions and monitor performance of trust assets. All decisions relating to the trust should be recorded in minutes of meetings of trustees.
It is important that there is adequate reporting of the financial position and financial transactions of the trust on a timely basis to the members of the church. There should also be transparency in relation to who the trustees are and the process of their appointment. Financial reporting should include a summary of the purposes of the trust and any restrictions imposed on the transactions of the trust by way of the trust deed.
It is vitally important that assumptions are not made in relation to the operation of a trust. If issues arise relating to formation of the trust, correct interpretation of bequest conditions, allocation of income or capital, potential beneficiaries and changes to the trust deed, it may be necessary to seek advice from an independent legal advisor. Non-compliance with a trust deed can have significant ramifications.