LAW AND WEALTH MANAGEMENT With Olubukola Seun-Oguntuga

Passing it on? Who do you trust?

Victor is a wealthy businessman with shares in a number of private and public companies. In the last few years, he has received substantial dividends on his shares and has had to pay tax on these income. Victor is now being taxed at a high rate and wonders if his tax liability can be reduced if he moves some of his shares to members of his family.

Olufemi is 16 years old and is doing very well in his studies. He intends to become a lawyer and work in his father’s law firm. Interestingly, his father would like to give him some money for his education but he is concerned that if Olufemi has access to the money now, he may just spend it without using it for his studies. One solution might be for someone to hold the money for Olufemi and disburse it only for his education. But who?

Now, can these intentions be actualized? Absolutely! If you trust me. Trusting me or anyone else to achieve any of the foregoing objectives can be better appreciated going back in history, quite a bit.

In the old Roman Empire, when Roman soldiers were deployed outside of Rome, they would usually transfer their assets to someone reliable to make sure that their families were adequately catered for during their absence. It was expected that this “someone” who could be a friend or relative would expend these assets for the maintenance and up-keep of the Roman soldier’s family during this period.

Also, in medieval England, landowners granted their land to 3rd parties for the use and benefit of another party for a limited time.  This practice continued until 1553, when the “Statute of Uses” ended the practice of creating uses in real property and ultimately became the catalyst for the development of a body of laws which allow one person to hold full title to a property for the benefit of another person. With this development, a wealth management mechanism was created, called trust.

In its simplest form, a trust is a situation whereby property is held by one party for the benefit of another. The person who creates the trust is called a grantor or settlor, and the person who holds the property is a trustee, while the person who enjoys the trust property is the beneficiary. Finally, the terms upon which the trust is created are set out in a trust agreement or deed.

To be effective and enforceable as a trust, property must be transferred from one person to another; who will hold it for yet another. This transfer will necessarily create a separation between the legal ownership and control of the property on the one hand, and its equitable ownership and benefits on the other. This is because, when a trust is created, there is a fragmentation of the incidents of ownership of the property. Ordinarily, the standard incidents of ownership of a property consists of benefits and burdens; rights and duties. These rights typically include the right to possession, the right to manage the property; the right to capital and the right to income. When a trust is created however, the incidents of ownership are split between two parties; the trustee and beneficiary such that the trustee holds the management functions and the beneficiary holds the “enjoyment” functions. Consequently, any income generated from the trust property will belong to the beneficiary (less the trustee’s fee) and any profit made from the trust property will also accrue for the advantage of the beneficiary.

So, instead of retaining the benefits of the shares, Victor can transfer them to a “trusted” person to be held on trust for members of his family, who may only be required to pay tax at a lower rate. Similarly, to pass on the money to Olufemi without necessarily “passing it on”, his father simply needs to trust someone. Trusting this person, who can be a friend, relative or corporate organisation, would however require Olufemi’s father to transfer the money to him/her/it to hold as trustee, for his son’s education until he qualifies as a lawyer. This way, he makes the trustee legal owner of the money, with a contingent interest in the money for Olufemi’s education.

For the most part, trusts are used like Wills, with the primary purpose being to distribute assets to the beneficiaries in the absence of the creator of the trust. However, unlike a Will, trust allows the owner of the property to transfer it to the preferred beneficiary without the need for grant of probate. Indeed, without the usual reluctance that would attend discussions about the transmission of assets to the next generation, you would readily discuss a trust. One can in fact wager that almost everyone has at some point or the other created a trust, or currently operates one without necessarily tagging it so. This is because every time someone is acting or acts on one’s behalf for the benefit of another, we have a trust situation. Where there is some deliberateness about the state of affairs, especially as regards transfer of assets from one person to the next for the benefit of another, then the law simply requires the existence of certain elements for the transfer to become enforceable as a trust.

Essentially, every trust must have four elements. First, the trust maker. This is the person who makes the trust and who is typically called the “Grantor” or “Settlor.” Second, is the person who manages the trust assets and performs the functions of the trust. This person is called the “Trustee” and can sometimes be the same person as the trust maker or can be a professional or institutional trustee. Third, must be a person or class of persons who will benefit from the existence and operation of the trust. This person is called a “Beneficiary”. Last, we must have the assets that constitute the trust, otherwise called the trust property or assets. These elements are completely independent of each other and no trust could be said to exist if even one of these elements did not exist. For clarity, let us attempt to identify these elements from Olufemi’s circumstances. The trust maker would be Olufemi’s father, his trusted friend or relative would be the trustee, Olufemi would be the beneficiary and the sum of money his father intends to set aside for his education would be the trust asset or property.

Normally, where a trust is created during one’s lifetime, nothing really changes. One can still retain control of the assets, file the same tax returns, maintain the same tax identification number and would not be required to change the name on their cheque books. Indeed, during one’s lifetime, all of the assets in the trust may be used to support one’s preferred lifestyle. Then, when the creator of the trust is no longer available to enjoy the benefits of the property, the property would be distributed to the preferred beneficiaries. In other words, whilst the maker is alive, the trust is typically still amendable and revocable. In some instances though, depending on the terms of the trust, the trust can become irrevocable upon the death of the maker.

With relatively few legal niceties, a trust remains one of the most accessible tools for wealth management and transfer. As it is apparently inevitable that someday, one will no longer be around to enjoy the assets toiled for during one’s lifetime, I suppose the simple question remains – who do you trust?