Source: Suleiman Yahaya and Samira Lawal at Andersen Tax LP
Private trusts are widely adopted as efficient means of wealth succession. It entails a fiduciary relationship, whereby a person termed the “trust creator” or “settlor”, entrusts another person termed the “trustee”, with property (which may be tangible or intangible) to be managed for the benefit of select persons termed “beneficiaries”, in accordance with certain terms stated in a trust deed. In other words, in a private trust, a tripartite relationship exists between the trust creator, the trustee and the beneficiaries.
It is common to have a protector as a party in private trust structures. A protector is a person that monitors the activities of the trustee in the interest of the beneficiaries. The obligation and duties of the protector are usually defined in the trust deed. To ensure that the goals of a trust arrangement are achieved, it is vital that the key players are aware of their respective obligations and how they should jointly and individually work towards the success of the arrangement in line with the settlor’s goals and aspirations.
Overview of the Responsibilities of Parties in a Private Trust Arrangement
It is important to note that while there is no specific regulation or Act on the administration of private trusts in Nigeria, the laws that govern trusts in Nigeria essentially comprises English Trustees Act of 1893, Trustee Investment Act 1957, the English common law, rules/ case laws relating to trusts. That being said, the parties in a trust arrangement have distinct obligations that are stated in the trust deed and binding on the respective parties. Thus, the provisions of the trust deed can be upheld in any court of law where matters arise over the trust arrangement. Some common responsibilities of the parties in a trust arrangement are highlighted below:
Trust Creator – Some of the responsibilities of the trust creator/settlor includes setting up of the trust, transfer of asset to the trust, selection of reputable trustee(s), determining the manner of distribution of trust assets/ income to beneficiary, provision of guidelines and regulations as pertains to the trust arrangement which is to be documented in the trust deed etc.
Trustee – The trustee is responsible for the management of the trust assets, implementation of the terms contained in the trust deed, distribution of the trust assets in line with the provisions of the trust deed, determining the manner of distribution of trust asset/ income to beneficiaries, compliance with tax obligations as pertains to the trust income etc.
Beneficiary – To adhere to the instructions laid down in the trust deed with respect to their conduct whether in relation to education, health etc.
Key Notes for Parties in a Trust Arrangement
A. Trust Creator
- Seek professional advice before setting up a private trust
It is important to seek for professional advice from reputable legal and tax practitioners before setting up a trust. This will enable the trust creator to understand the trust structure, ascertain the type of trust (i.e. discretionary, non-discretionary, revocable, irrevocable etc.) to be established based on the objectives of the trust creator, legal and financial implications of the arrangement etc. These counsels are helpful as it empowers the trust creator with knowledge of how to go about guarding their interests in the trust. - Ensure that the trust deed is unambiguous and well detailed
A private trust can either be living or testamentary. A living trust is usually governed by a trust deed, while a testamentary trust is governed by the Will of the testator. In any case, what is important is that the manifestation of the intention of the settlor regarding the trust arrangement. Hence, it is important that the trust instrument is as detailed and as unambiguous as possible. This is vital so as to ensure that the intent, aim and purpose for setting up the trust are not misinterpreted or misunderstood by the parties involved. The trust deed or Will should explicitly state the nature and objective of the trust; the beneficiaries; details of the trust properties; the duties of each party to the trust; powers of the trust creator, the trustees and the beneficiaries; remuneration of the trustees, the grounds for the termination of trusteeship, and winding up of the trust amongst others. - Selecting the trustees
Regardless of the character of the trustee i.e. institutional or non-institutional, it is important to consider reputation, experience and prestige, in the selection of a trustee. This can be determined via a detailed research on the choice of trustee, review of their clientele base, processes and procedures, professional identity, ethics and history. Institutional trustees are widely preferred for their stability and the perception that they have well developed processes and procedures, and may not want to be involved in unethical activities due to fear of litigation and reputational damage. - Using protectors
Assigning protectors to a trust provide additional comfort to the trust creator, that his wishes as documented in the trust deed will be effected. Trust protectors acts separate from the trustee. Their main task is to ensure that the interest of the beneficiaries is protected through the life of the trust. The role of a trust protector is usually embedded in the trust deed or agreement. The deed will state their powers, duties and responsibilities. These may include reviewing investment management decisions of the trustee and its accounting, reviewing decisions in relation to trust income distribution to the beneficiaries, and serving as a conduit between the trust creator, trustees and beneficiaries in areas of disagreement.
B. Trustees
- Fulfilling fiduciary responsibilities and obligations
Fiduciary responsibility entails the legal obligation of a person or an entity to act in the best interest of its client. A trustee must hold true to its fiduciary obligations which is to ensure that they act in an honest and reasonable way, and do not use their position as trustee to benefit themselves. They are legally and ethically bound to fulfilling these obligations. Such fiduciary obligations include a duty to prudently invest the assets of trust, duty to distribute the trust property (based on the provisions of the trust deed) and maintain equality between the beneficiaries, and duty to render account and provide information on the trust property as may be required by the beneficiaries. Hence, depending on the legal provisions of the trust jurisdiction, trustees may be charged to court and prosecuted where they are in breach of their responsibility, leading to huge fines, penalties and liabilities. - Inclusion of protection clauses for fiduciary liability in the trust deed
Since the trust deed or instrument is the most impactful tool in a trusteeship agreement, it is important that the trustee utilizes such mechanism for protecting themselves from unnecessary liability through the insertion of relevant protection clauses in the trust agreement. If a trustee abides by its duties, and operates strictly within the scope of the powers and limitation of the powers binding upon them, they should not be held liable for any loss that does not flow from their actions or inactions. - Using trust advisors
A trust advisor provides direction and guidance to the trustee in the execution of the latter’s duties. Trust advisers are charged with the responsibility of providing guidance to the trustees on issues that may directly or indirectly have impact the trust. Thus, it is quite beneficial for trustees to appoint advisors to enable them succeed in the performance of their duties and obligations.
C. Beneficiaries
- Trustee-Beneficiary meetings should be held often
Meetings should be scheduled between the trustee and the beneficiary as often as necessary. Such meetings may range from serious business meetings with the agenda pre-agreed ahead of time, to casual discussions over lunch. It is pertinent that such meetings are held as often as necessary in order to serve as a relationship building tool between the trustee and the beneficiary, to pass across information, to clarify grey areas and issues of concern. Given the dynamics of society, such meetings could be held virtually where the parties are unable to have a physical meeting. This enables the beneficiary to understand the role or other requirements that may be expected of them in relation to the trust arrangement. - Understand your role as a beneficiary
The beneficiaries must understand their roles in a trust arrangement. For instance, they must be conversant with all the responsibilities of the trustee, modern portfolio theory and process of asset allocation, attend family business meetings, gain a clear comprehension of each trust in which the beneficiary has an interest etc. This will enable the beneficiary to reap the full benefits in a trust arrangement.
Conclusion
Trust arrangements have numerous advantages, some of which have been discussed in this article. In setting up a trust, it is therefore important for parties to consider the important points, some of which have been discussed in this article. Trust creators should seek the advice of professionals who will guide them through the process and ensure the realization of their wishes and aspirations during and after their lifetime.
