We continue our series on “Generational Wealth Planning”. In this edition, we will be looking at “Operational Insights in Utilising a Trust”.
Trusts- Asset Protection
It is natural for an individual, particularly one who has worked hard all his life in order to accumulate real wealth, to seek some form of insurance against the vicissitudes of life.
Asset protection, in its widest sense, is the process of structuring a client’s financial affairs to safeguard his assets against certain risks. A trust is typically used to safeguard assets, protect them from expropriation and help reduce or manage risk. When its main objective is to protect assets, it is often referred to as an ‘asset protection trust’. Trusts are typically used for asset protection purposes.
In Nigeria, Trust assets held by a corporate entity are protected assets. In the event the corporate entity is insolvent or wound up, such assets do not form assets belonging to the insolvent or winding up entity (see Companies and Allied Matters Act 2020 Section 693.
Effecting Flexibility in Administration and Execution of a Trust
Reserved Powers and Letters of Wishes
Theoretically, it is noted that as soon as the trust has been created and constituted, the role of the Settlor disappears. This is because he no longer has any ownership of or rights over the trust property. He has transferred legal ownership of the trust property to the trustees and surrendered dominion and control over such property. The settior may very well have established a catalogue of terms that bind the trustees and govern how they are to hold, manage and dispose of the trust assets, but, the settlor typically no longer has a say in the management and disposition of those assets.
However, in practice, a settlor is naturally most reluctant simply to transfer assets into trust during his lifetime and then completely fall out of the picture. He may, therefore, for instance, appoint himself as a beneficiary, or make express provision in the trust instrument to reserve for himself certain administrative and/or dispositive powers so that he may influence the trustees in the manner in which they administer the trust and make distributions.
If the powers reserved by the settlor are significant, however, there is an increased risk that the trust may be set aside as a sham in so far as it lacks the irreducible core of obligations owed by the trustees to the beneficiaries and enforceable by them which is fundamental to the concept of a trust.
An alternative method of allowing the settior to have some influence over the management and disposition of trust property is achieved by a Letter of Wishes (that serve as advisory to the Trustees and are not binding) or by the appointment of a Protector.
Appointment of a Protector
A protector is usually an individual (or sometimes a corporate nominee), appointed by the settior in the trust instrument, to ensure compliance with the settlor’s wishes and purposes expressed therein; to assist the trustee in managing the trust assets and administering the trust; to oversee the actions of the trustee; and thus, to protect the trust and its assets. The essential role of a protector is to ensure that both the letter and the spirit of the trust are complied with.
Protectors may be:
- professional persons, such as attorneys, or tax or other advisers or professional trust protectors, or
laypersons, usually a beneficiary or a committee of beneficiaries
- The settlor will usually employ the former if he requires the protector to be pro-active. The settlor will appoint from the latter category if the anticipated role is more passive.
Under most Trust structures, a Successor Trustee can be appointed under the Trust Deed. The Successor Trustee is a Trustee who takes over the activities under a Trust in the event that the original Trustee is incapable of continuing his duties either by termination or insolvency.
Enforcement of Trusts Against 3rd Parties
In a Private Trust, the Beneficiaries can enforce the terms of the Trust against the Trustees and parties that are non-beneficiaries (“excluded persons”).
The Beneficiaries of a Trust are owed duties of competence, good faith, provision of timeous accounts on the administration of the Trust, protection of their interests against third parties, prompt distribution of their inheritance or benefits, amongst others, and the Trustees have a duty to execute their duties and obligations, as set out in the Trust Deed, and as prescribed by law.
Beneficiaries have a right to file a petition in a court of law seeking an enforcement of the performance of the terms of the Trust against any excluded person. Beneficiaries have in- personam (personal) equitable rights to compel the trustee to comply with the trust. In addition, the beneficiaries also have in-rem (property) equitable rights to trace and recover property transferred in breach of trust.
The remedies available to an aggrieved Beneficiary in the event of a breach of trust by a Trustee or an enforcement against excluded persons include claims for damages, injunction to restrain a breach, tracing and/or recovery of the Trust property, criminal prosecution, amongst others. This right is subject to extant Nigerian statutes of limitation statutes. Section 32 (1) of the Limitations Law, Laws of Lagos State 2015, Cap L84, for instance, provides that any action by a Beneficiary to recover money or other property, or in respect of any breach of trust, must be commenced within six (6) years from the date on which the Beneficiary’s right of action arose.
Our series on Generational Wealth Planning – continues in subsequent editions of this Newsletter.
As part of our Private Client services, we have experienced Trust and Estate Planning Advisors ready to assist you in developing an estate plan that can protect you and your family’s wealth for generations.
Contact us at firstname.lastname@example.org for more inquiries.
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