The Inland Revenue Department places a duty on Trustees to prepare financial statements and file tax returns if the Family Trust or other Trust earns income. Trustees may also have to prepare and file GST returns.
Trustees need to remember that they are personally liable for the affairs of the Trust and this includes paying any taxes that are due to the Inland Revenue Department.
Good record keeping, including having bank statements evidencing transactions the Trust has engaged in, is crucial to preparing accurate financial statements from which the Trust's tax returns can be compiled and the Trustees can be made aware of their taxation responsibilities.
Even if a Trust does not produce any income and simply holds passive assets such as a family home, it is still recommended that financial statements be prepared for the Trust. The financial statement will note advances made by the Settlors to the Trust, loans the Trust may have made to other entities, the gifting position, the assets the Trust holds and the liabilities the Trust has incurred. Again, such financial statements help the Trustees satisfy their duty when accounting to the Beneficiaries of the Trust. Reduced accounting fees will apply for the preparation of these types of financial statements.
Properly prepared financial statements are a great tool that Professional Trustees use to ensure the Trust is being administered correctly and that all Trust documentation is up to date and in place. Without financial statements, this task is severely hampered. Correspondingly, poorly prepared financial statements will be a hindrance to Trustees and in some situations can be very dangerous. A claim from beneficiaries could occur many years in the future. Copies of financial statements record past events, and is an important part of ensuring the Trust is separate and not an alter ego of the settlors, which means the Trust could be ignored and the assets treated as still owned by the settlers. Defeating the reason the Trust was set up in the first place. A little expense now to avoid a potentially costly mistake later.