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Trust Accounts

Trust Accounting Definition

· A system of keeping records by:

(i) A Trustee

· A trustee is a person compelled in equity to do certain things on behalf of a beneficiary. A trustee could also be an executor created by will to administer the estate of a deceased in accordance with the will.

· A trust is a relationship which arises whenever a person called a trustee is compelled in equity to hold property for the benefit of a person or for some object permitted by the law in such a way that the real benefit accrues not but to the beneficiaries or other object of the trust.

· Usually appointed under a Trust Deed.

· Trustee stands in a fiduciary relationship with the beneficiary and therefore the obligations imposed by equity in such relationships also apply to trust accounts.

· If the trustee cannot himself keep the accounts, he must either employ or avail somebody who will keep the accounts. However, the trustee remains personally liable for the accounts.

· S 24 of the Trustee Act empowers a Trustee to engage an agent to transact any business or do any act required in administering the trust. The section provides indemnity to the Trustee for reasonable expenses incurred towards employing the agent to achieve the purposes of the trust.

(ii) An Executor

Usually appointed by will.

(iii) An Administrator

Where a person dies intestate there will be an administrator. Intestacy provisions of the Law of Succession Act apply.

Primary Objectives Of Trust Accounting

· To ensure that a detailed record of the affairs of the trust is maintained.

· To give information to the beneficiaries of a trust.

Requirements Of A Trust Accounts System

ü Must contain a list of all the assets and liabilities at the inception of the trust.

ü Must give a complete history of all subsequent transactions of both capital and income.

ü Must be able to provide a ready means of ascertaining the position of the trust at any point in time.

ü It will show how the trust funds have been distributed.

ü It must be as simple as possible.

ü Must show particulars of all receipts and payments and all money received by the trustee must be receipted and all payments supported by vouchers and invoices.

ü Must be up to date at all times since the beneficiary is in law entitled to require account of the trust at any time.

Rights Of A Beneficiary

· To inspect the accounts, vouchers, receipts, title deeds or any other documents pertaining to the trust. The inspection may be done the beneficiary personally or through his agent.

· The beneficiary has a right to take copies of all records of documents relating to the accounts but must make the necessary payment.

· The beneficiary has a right to investigate the accounts, make any inquiries thereon and ask any question regarding the account. See Re: Fish (1893) 2 CH 413.

· The beneficiary is entitled to full, accurate and regular information with regard to the operations of the accounts. If any investments have been made, the beneficiary has a right to know the nature of such investments and the returns thereon.

· The beneficiary is entitled to seek the opinion of a 3^rd party e.g. an advocate regarding the operations of the trust. Where part of the trust funds are invested in shares of a company, then the beneficiary is entitled to such information as a shareholder would be entitles to in company law subject to the company’s Articles of Association.

· The beneficiary is entitled to examine any 3^rd party basis of the trustee’s administration of the trust, e.g. legal opinions, advise of shareholders or investment brokers, valuers etc.

· Where a trustee retires or otherwise ceases to be a trustee, he must hand over all books and accounts to his successor and the beneficiary has a right to expect such a handover, see Tiger v Barclays Bank Ltd (1952) 1 All ER 85.

· The beneficiary has a right to receive accounts prepared in good faith which are complete and reflect the trustee’s obligations vis á vis the trust.

The Form of the Trust Account

Once a trustee accepts his appointment his first obligation is to gather information as to the state of the trust or estate as at the date of commencement of his duty. Thereafter, the trustee must administer the trust or estate in accordance with the law and subsequently distribute the trust or estate funds in accordance with the law.

All accounts prepared by the trustee are contained in the Estate Book. This book contains all the information relating to the trust from inception to distribution. The contents of the estate book are intended to inform the beneficiaries and the trustee himself about the position of the trust at any given time.

The Estate Book

Will contain the following items:

(a) Documents;

(b) Memorandum;

(d) Schedule of liabilities;

(e) Cash accounts;

(f) Income accounts;

(g) Special income accounts;

(h) Investments accounts;

(i) Apportionment accounts; and

(j) Distribution accounts

Documents

All documents relating to the trust must be properly kept and available to the beneficiaries and any other interested party. The documents will be the basis of any action taken by the trustee and enable him to fulfill the mandate and obligations imposed upon him by the law. Examples are:

· The will;

· Any codicil;

· Grant of probate or letter of administration;

· Expert opinions;

· Gazette notices; and

· Court orders or proceedings or any relevant certificates of death etc.

The aim of keeping documents is that the information contained in the documents section of the estate book must be complete and accurate.

Memorandum

Is a record or narrative of all material transactions on activities relating to administration of a trust or the estate. For example:

· Details of the deceased;

· Date and place of death; and

· Details of the beneficiaries and how they are related to the deceased

Estate of X deceased

Memorandum

No.	Date	Particulars	Reference
1.	1.1.2006	On 30^th Nov 2005, Mr X died in Nairobi domiciled in Kenya leaving a will dated, 1.1.2005.	Page 1 Documents Certificate of Death Page 2 Documents Will
2.	1.1.2006	Deceased left the following surviving him: (a) Mrs X widow (b) Son A (c) Son B (d) Daughter C (e) Daughter D	Birth Certificates p 3 Docs p4 docs p5 docs p6 docs
3.	1.1.2006	On 20^th December 2005, grant of probate, High Court Nairobi in succession cause number 2000 of 2005.	Grant of Probate Page 7 docs

Objectives are to achieve completeness and accuracy.

Schedule of Assets

Records:

(a) all assets belonging to the deceased or settler i.e. land , chattels, cash etc; and

(b) all assets that come into the trust in the course of management or administration of the trust.

The aim is to ensure that all assets are recorded and their true or realistic value given.

Schedule of Assets

No.	Date	Particulars	Cash Account	Reference
1.	1.1.2006	Freehold parcel of land- LR No. X KJD 10 Acres	-	Memorandum – item no. 5 Documents – item no. 5 title deed
2.	1.1.2006	Motor Vehicle - Toyota	-	Memorandum- item no.10.
3.	1.1.2006	1000 shares Barclays Bank – Nominal value of shares.		Memorandum – Share certificate Documents 10
4.	1.1.2006	Cash in Bank – KCB A/c no. 123. Moi Avenue Branch	Opening Balance	Memorandum Bank Book
5.	1.1.2006	Cash in hand	xxx	Memorandum

Schedule of Liabilities

Upon commencement of the trustee’s duties he must prepare a schedule or list of liabilities owed by the deceased at the time of death. During administration of the trust, new liabilities may arise and the old ones settled. These changes must be recorded in the schedule of liabilities. At the end of each year, a schedule of assets and liabilities must be brought up to date by taking into account any movements that have occurred and balances carried forward into the next year.

The list of assets and liabilities do not per se indicate that the trustee has either acquired possession of the assets or has accepted validity of the list of liabilities. The lists are merely a recognition of the existence of assets or liabilities and the legal responsibility will accrue to the trustee upon the happening of a specific event to be recorded in the memorandum.

Number	Date	Particulars	Amount	Cash Account	Other Reference
1.	1.1.2006	Loan from HFCK over LR no. xx/xx Nairobi dated 1^st June 2005 at an interest of 15% per annum.	500,000	xxx	Documents Memorandum
2.	1.1.2006	Loan from KCB secured by chattel mortgage on motor vehicle registration no. KAV 001 interest rate 10% p.a.	100,000	xxx	Xxx
3.	1.1.2006	Medical expenses
4.	1.1.2006	Money borrowed from KCB to pay for medical expenses.
5.	1.1.2006	Paid off entire medical expenses.

At the end, the balance of liabilities should be nil.

Cash Accounts

Is a very crucial part of the estate book kept by the trustee. It records all cash accounts relating to the trust/estate. All receipts must be debited and all payments credited to the cash account.

Unlike a schedule of assets/liabilities, the cash account automatically gives rise to legal rights and liabilities for the trustee in the sense that a debit entry in the cash account is an acknowledgement by the trustee that he has received and is liable for the cash so received as recorded.

Conversely, any credit entry is an acknowledgement that the trustee has applied trust funds in accordance with his legal obligations. The trust account also operates as a trust account as distinguished from the income account. It must indicate the nature of the transactions taking place.

N	Date	Particulars of receipts	Amount	Ref.	N	Date	Particulars of receipts	Amount		Ref.
1.	1.1.06	Opening balance	1,000,000	Sch. of assets	1.	5.5.06	Paid medical bill to x hospital.	300,000	Memo Sc. Assets
2.	1.3.06	Proceeds from life insurance policy.	500,000	Memo Sch. Assets	2.	6.5.06	Land rates/rent	xx	xx
3.	1.4.06	Quarterly rent from house no. on LR xx/xx	100,000	Memo Sch. Assets	3.	8.5.06	House repairs	xx	xx
4.	1.5.06	Borrowing from X bank to pay medical bills	300,000	Memo Sch. Liabils.	4.	1.6.06	Payment to tenant for life.	xx	xx
					5.	2.6.06	Advancement to remainderman or beneficiary	xx	xx

Example for the exam

Using the correct form, show the entries to be made in the memorandum, schedule of assets and cash accounts in respect of a lawful payment of Kshs 200,000 made by the trustee to Mr Hassan, one of the Remaindermen in order for Mr Hassan to set up a legal firm in Mombasa.

Income Account

In relation to matters of an estate, the tenant for life is entitled to income whereas the remainderman is entitled to the capital of the estate. The income account will record payments made to the tenant for life, the residue in the cash account is distributed to the remainderman and the tenant for life is not entitled to the distribution of that capital residue in the cash account.

In preparing the income account it will be necessary for the trustee to record the entries in the apportionment account. All receipts of an income nature are an entitlement of the tenant for life whereas the receipts of a capital nature are deemed to the remainderman e.g. rental income of an account from a house part of an estate is due to the tenant for life but proceeds from the sale of the house are of a capital nature and are therefore the entitlement of the remainderman.

Income accounts are only necessary if you have a beneficiary of more than one type.

No.	D.	Parts.	A	Ref	No.	D.	Parts.	A	Ref
1.	1.4.06	Quarterly rental income from house no. x on LR xxx	100,000	Mem. Sch. Assets Cash A/c	1.	1.2.06	Repairs to house.	xxx	xxx
2.	1.5.06	Dividends on equity shares in XYZ ltd.	50,000	Mem. Sch. Assets Cash A/c	2.	1.3.06	Payment to tenant for life.	xxx	xxx
3.	1.6.06	Coffee dues form ABC Coffee Co.	30,000	Mem. Sch. Assets Cash A/c	3.	xxx	Farm inputs Farm labour	xxx	xxx
4.	1.7.06	Payments from KCC.		Mem. Sch. Assets Cash A/c

An entry into the income account serves a dual purpose for the trustee:

(a) it is an admission by the trustee that he recognizes his liability to the tenant for life; and

(b) it is a record of payment made to the tenant for life and is therefore evidence of the discharge of the trustee’s liability to the tenant for life.

Special Income Accounts

Besides the income account there might be need for the trustee to maintain a special income account or accounts. This account records income which is the specific entitlement of a particular beneficiary as may have been stipulated by the deceased. A testator may make a specific provision for income to be paid to someone in addition to the tenant for life and therefore all payment made to such other person will be recorded in a special income account.

The same form applies as for income accounts. There should be as many special income accounts as there are payees.

AFRICA LAW CENTRE

NOTES ON TRUST ACCOUNTS-PART 1