[Question] SPECIAL TRUSTS

[Angelee]

Heeelpp!!!

I have been approached by a client with a special trust for the first time which is verrrry behind - no records since inception 2009.

The beneficiary is her son. He had an accident, was paid out by the RAF. The money was invested so that income can be distributed to him.

Mom is the donor - donation amount in trust deed is R100.

Beneficiary lives off way more than what the interest can provide as he suffered brain injuries and cannot be gainfully employed and so Mom puts lots of personal money into trust for him - which I am recording as a loan to the trust and not donations as Mom needs it paid back eventually.

The initial payouts from the RAF will be debited to the investment accounts it was deposited into...but what do I credit??? I cannot credit an income statement account such as "compensation from RAF?" as it was not compensation paid to the Trust - it was compensation for the injured party, who now happens to be a beneficiary of a trust into which the funds have been transferred. But he is a beneficiary and not a donor...I am going round and round with this question.

Also, it appears that only from March 2012, compensation payments were non-taxable? Thus I assume the injured party has to declare that payment as a lump sum payout for that year?

No wonder the other accountants did not do anything...they too may have been confused??

I would appreciate your assistance

[sterne.law@gmail.com]

Not sure if this helps, but for clarity.
If son is brain damaged, who represented him? Someone would have been appointed curator in order to stand in for him and to litigate as his representative.

[Angelee]

The trust does have trustees - who are family members.

[Dave A]

By my understanding, there's nothing ordinarily preventing a beneficiary from making a donation (or donations) to the trust they're a listed beneficiary of.

[Justloadit]

I use 'The Best Trust Company' in Randburg, Johannesburg,to handle all my Trust affairs.
You may need to find someone who only deals in trust issues, who will be conversant on all the issues that you have raised.
One of the first problems I can see, is that there is no independent trustee, which already creates a bit of a problem.

[CLIVE-TRIANGLE]

The initial payouts from the RAF will be debited to the investment accounts it was deposited into...but what do I credit??? I cannot credit an income statement account such as "compensation from RAF?"

It's a loan from the beneficiary.

Also, it appears that only from March 2012, compensation payments were non-taxable? Thus I assume the injured party has to declare that payment as a lump sum payout for that year?

This relates to pre-2012 claims:

The compensation received from the Road Accident Fund does not qualify for an exemption from normal income tax in terms of section 10.

The compensation may be excluded from gross income as it will normally be capital in nature. It would be capital in nature if the originating cause of the payment is to compensate the recipient of the compensation for personal injury or loss of capacity or ability to continue to function as before the accident. Compensation for personal injury may lead to capital gain, but such a capital gain must be disregarded by a natural person or a special trust – therefore it will not have any tax consequences.

If the receipt, however, is to compensate the recipient for a loss of income, the receipt will be gross income. The compensation may also be made to reimburse the recipient for expenses suffered as a result of the incident. To the extent that these expenses were deducted for purposes of calculating a normal income tax liability, the compensation will be gross income (as a recoupment).

So far we have assumed that the compensation was by means of a lump sum payment. It must be remembered that where the compensation in question is received by way of an annuity, it is part of gross income whether or not it is of a capital nature – refer to KBI en 'n Ander v Hogan, 55 SATC 329 1993 (4) SA 150 (A).

[Angelee]

Thank you to all the responses....but do I go with Clive-Triangle's loan from beneficiary or Dave-A's donation....Implications are very different....balance sheet vs income statement....donations tax....

[Dave A]

I think the main key in resolving the accounting "dilemma" posed in your o.p. is never lose sight that you are dealing with three different persons, two natural and one juristic. They are transacting with each other. All that has to be decided is the nature of the transfer of funds between them.

[CLIVE-TRIANGLE]

Thank you to all the responses....but do I go with Clive-Triangle's loan from beneficiary or Dave-A's donation....Implications are very different....balance sheet vs income statement....donations tax....

You should not attempt to shape a transaction to suit the outcome of a tax position. Those monies are a compensation award made to the young man and are in the trust's bank account due to convenience, rather than a decision made by him to make a donation to the trust. The whole purpose for the existence of the trust stems from the belief that he is not able to manage his affairs properly, and to propose that he is able to resolve to make a donation is somewhat contradictory. I also am sure that it complicates the position of all concerned, which is unnecessary.

The issue of "loan" is merely accounting terminology; the trust received money that does not belong to it, and is holding it in trust for the beneficiary.