A Feast of Trusts

When visiting a new city, partaking of local delicacy is at the heart of savouring the experience. Kilishi in Kano, Dodo Ikire in Ibadan, Nkwobi in Nnewi. Abundant choices, extraordinary variety.

Imagine the disastrous results if someone with a delicate stomach were to try extra-spicy Suya after hot beans. As any true Nigerian would know, the best way to avoid such an unfortunate occurrence would be to ask advice from a trusted local (expert), after communicating one’s limitations. A Trust would require similar measures.

There are several types of Trusts, each tailored to an individual purpose. Anyone who aims to avoid unnecessary professional fees and financial waste must consult a professional Trustee before settling on a suitable type of Trust.

In this article, we will explore the most common types:

1. Revocable TrustThis is a Trust that can be changed or cancelled at any time by the Settlor (Creator). The assets in the Trust are still owned by the Settlor and therefore are still subject to his/her direct control. A revocable trust, however, becomes irrevocable if the Settlor passes on.
2. Irrevocable TrustThis type of Trust cannot be modified or revoked by the Settlor without the permission of the beneficiaries in the Trust. Once an irrevocable trust is established, the Settlor relinquishes sole control of the assets listed in the Trust.Circumstances under which a Trust might be irrevocable include where the asset in the Trust is jointly owned by the Settlor and a Beneficiary of the Trust.
3. Qualified Terminable Interest Property Trust (QTIP)This type of Trust, also known as Life Trust, divides a Settlor’s assets among two classes of beneficiaries at different times. This Trust is usually used by a Settlor who does not want to deprive a particular beneficiary of a particular asset but also does not want that beneficiary to deprive another beneficiary of that same asset.A common example is for a Settlor to allocate an asset or income (such as rent or dividend) from the Trust to a spouse for that spouse’s lifetime and upon his/her death, wish that the same asset or income be allocated to the Settlor’s children.

   In such a situation, the first beneficiary only retains use and enjoyment of the asset or income during his/her lifetime but cannot dispose or otherwise prejudice the asset in such a way as to affect or disturb the reversionary right of the other beneficiaries under the Trust.

4. Spendthrift TrustA spendthrift Trust is useful if a Settlor believes that his/her heirs will squander their inheritance.In such circumstances, the Settlor may specify when and how the beneficiaries may access the assets designated for them. This pre-condition imposed by the Settlor may be direct (such as an age requirement, a marriage requirement or an educational accomplishment), or periodic (such as a directive that until the effluxion of a predetermined time, the beneficiaries may only receive income earned by the assets rather than the full principal).

   This Trust also protects the trust assets from the beneficiary’s creditors and prevents the beneficiary from pledging the trust assets to satisfy his/her debts.

5. Asset Protection TrustThis type of Trust is typically used to protect assets from creditor attacks. The Trust allows the Trustee to hold your assets and separate them from your person so that the assets are protected against taxation, divorce, bankruptcy proceedings, judgment debts, and litigation.This Trust is usually structured to be irrevocable for a specified term, during which the Settlor is not made a beneficiary. It is also structured in such a manner that undistributed assets of the Trust are eventually returned to the Settlor upon termination of the Trust, provided that there is no risk to the assets as at the time the Settlor is to regain complete control of the protected assets.
6. Special Needs TrustParents of a physically challenged child can establish a special needs trust as part of their general estate plan, thereby removing any worry that upon their demise, the child will be prevented from receiving benefits.Special needs include medical care and expenses, equipment, education, treatment, rehabilitation, and insurance. It may also include dietary needs, physiotherapy, vacations, or other items that enhance self-esteem.

   The list is quite extensive and covers all requisites for maintaining the comfort and happiness of a physically challenged person.

7. Discretionary TrustThis is a Trust under which the trustee is given the discretion to pay or apply the income or capital of a Trust Asset, or both, for the benefit of all or one of the beneficiaries. The beneficiary is given no right to administer any part of the trust asset and has no way of knowing whether any discretion will be exercised in his/her favour.A discretionary Trust can be either exhaustive or non-exhaustive. Where it is exhaustive, the trustee is under a duty to distribute the whole of the income but has discretion as to whom will receive it. Where the discretionary Trust is non-exhaustive, the trustee is given the discretion to determine not only to whom the income should be distributed, but also whether and to what extent it should be distributed, if at all.

   The trustee must exercise the discretion as and when necessary, but failure to do so does not relinquish the discretion.

8. Blind TrustA blind Trust is a trust agreement where neither the Settlor nor the beneficiaries have any control or influence over the assets in the trust. Once assets are transferred to a blind Trust, the trustee can freely buy and sell assets according to the mandates of the trust agreement. The Settlor and beneficiaries cannot know what assets are being held, what is bought or sold, what the annual returns are, among others. They cannot contact the trustee for updates on holdings, principal, or returns, and they cannot give the trustee any input or directions regarding management of the assets.Blind Trusts are usually set up to avoid potential conflicts. Where a perceived or real conflict of interest could arise if a person by the nature of their office or position may be involved or may obtain knowledge that affects his/her investments, placing those assets in a blind Trust, especially an irrevocable one, is intended to allow the official act impartially.

   Blind Trusts are useful particularly to political office holders, corporate executives and board members who want to avoid insider trading. The beneficiary is effectively “blind” to dealings in the Trust, hence its name.

   Blind Trusts are beneficial to people who require objectivity in their business or political roles and for people who require high levels of privacy regarding their assets.

9. Charitable TrustCharitable Trusts are created for a designated class of persons in society.A Charitable Trust is typically a result of the philanthropic, moral or religious imperative of a Settlor. However, it may also be a financial planning tool, providing the Settlor with valuable lifetime benefits since charitable donations are tax-deductible under Section 25 of the Companies Income Tax Act.

   In addition to financial benefits, a charitable Trust also has the intangible benefit of rewarding the Settlor’s altruism since recipients of charities usually honour donors with awards, monuments, statues or even landmark buildings.

 

With such an abundant variety of Trust types, a person intending to set up a Trust must first consult a seasoned Trust expert to provide a combination that is tailored to address specific needs in a hassle-free manner.

Time to fill your plate, relax and enjoy the benefit of foresight!

NB: For expert advice on the type of Trust suitable for you, click here… Trust Administration