The Basics: What is a Trust?

If you have given some thought to how you want to manage your estate and transfer your property to the next generation, you have probably heard about a trust. What is a trust? A trust is a legal instrument that can do many things. It can be used to provide for you and your family, allow easy access to your property should you fall ill or die, or give to a cause that you are passionate about. Trusts are also used to avoid probate and save taxes in the transfer of a deceased’s property. There are different ways that people choose to provide for their families in the event that something happens, or give back to society, and a trust is one of those ways. 

There are different types of trusts to serve different purposes. There are public trusts, private trusts, revocable trusts, and irrevocable trusts. Which trust you choose will depend on your objectives. Public trusts, also known as charitable trusts, are created to serve a charitable purpose. Private trusts are created for the benefit of a few people such as the members of a family.

What is a Trust and How Does it Work?

A trust is an arrangement where an individual (the settlor who owns the property) sets aside some assets under a trust deed that specifies the purpose for which the assets are to be utilized and the beneficiaries of the asset. The assets are legally transferred to a trust company or individual (the trustee who receives legal control of the settlor’s property) who holds and manages the assets on trust for the beneficiaries. For example, if you wish to make provisions for the future education and welfare of your children, you may decide to put a lump sum in trust that will ensure that whoever you appoint as a trustee applies the funds to your children’s education and welfare no matter what happens to you. Trusts can be set up for a wide range of purposes including children’s education, retirement benefits, property management, and private charity.    

Aside from appointing someone to physically take custody of your minor beneficiary, you can appoint a property guardian or set up a trust for your minor children. In such instances, the appointed trustee holds the beneficiary’s property on trust for them until they attain majority or any age specified in the trust. 

A trust can be created by a will or during the lifetime of an individual. A trust created during the lifetime of an individual is known as a living trust. A living trust is designed to avoid probate/estate taxes in the transfer of property to your beneficiaries. With living trusts, your property is transferred to a trust during your lifetime. This way, your beneficiaries avoid the time and cost of the probate process required to transfer ownership of your property upon your death. When property is transferred by a will, it is subject to an inheritance tax based on its value.  

The formalities for setting up a trust can be very complex. It is advisable to consult an estate planning professional to help you properly create a trust whose purpose is not defeated by incompetence. 

Basics of a Competent Trust

A trust must be able to achieve what it is set up to achieve otherwise it is an incompetent trust. A competent trust is devoid of uncertainties. A professional proficient in creating trusts will help you avoid setting up a trust that is bound to fail because of uncertainties. The language of a trust must be certain so that the trustees (or the courts where the trustees fail) can administer the trust in the manner intended by the settlor of the trust. There is a ‘hallowed’ or ‘cardinal’ principle that a trust must be defined with sufficient certainty to enable the trustees (or the court) to execute the trust according to the settlor’s (your) intention.

The issue of certainty has four prongs: conceptual certainty, evidential certainty, ascertainability, and administrative workability.

Conceptual Certainty 

When the beneficiaries of your trust are named individuals, e.g., my son Alex, my first grandchild, etc., there will usually be no problem with conceptual certainty and therefore no arguments arise. However, if you want to give a gift to a class of beneficiaries such as your ‘friends’ or ‘relatives’, or ‘all good citizens’ of Lagos State, there must be sufficient context, otherwise it may be difficult for the trustee (especially if you are no longer around) to know with certainty how the categories ‘friends’ or ‘relatives’ or ‘all good citizens’ are to be defined. 

Evidential Certainty 

This is the extent to which the evidence available enables the trustee to identify a person as being a member of the class of beneficiaries. For instance, if the beneficiaries were to be ‘relatives’ and it was agreed that the relatives were those persons descended from a common ancestor, there would be no question about the concept of ‘relatives’. The question now would be whether there was any difficulty in establishing whether certain individuals are ‘relatives’ or not, as defined. If they are some long, lost cousins, do they have birth certificates (or DNA test results) that evidence the fact that they are descendants of the common ancestor?

Ascertainability

This is simply the extent to which the whereabouts or continued existence of identified or potential beneficiaries can be ascertained. Depending on how the trust is set up, would we be looking for all ‘relatives’? And if we found 50 qualifying relatives, could we say with certainty that this was all and go ahead to distribute the trust?  What about the relative who we know existed at some point, but, because he left Lagos by ship to Liverpool 65 years ago, no one knows whether he is still alive or if he had any children?

Administrative Workability  

This is the extent to which it is practicable for trustees to discharge their duties towards the beneficiaries. Suppose we agree that “all good citizens” of Lagos State referred to all residents of Lagos State who had paid their taxes every year for five years. It would be possible to identify all such persons, but the question would be whether the settlor has set up a mission impossible for the trustees because the trust is administratively unworkable.

If your trust is not properly set up, leaving uncertainties, then it will fail and the trust will be avoided. To make sure that does not happen and that your intended beneficiaries receive your gift to them, your trust must be set up with these four prongs of certainty in mind.

Whether you plan to set up a private or charitable trust, your estate planning professional will be able to guide you based on your desired objectives for the trust.