Trusts

A trust is one of the cleverest inventions of English law. It lets one person own property in his own name while another person gets the benefit of it. A father can hold property for his minor child, a church can hold land for its members. A bank can hold investments for a family, without the property ever belonging to the people who hold it.

Trusts are common in estates, in charities, in investment funds and in family arrangements, and accountants are often asked to act as trustees or to advise them. In the exam the topic produces definitions, lists (the three certainties, duties of trustees, rights of beneficiaries, ways of ending a trust) and a few short problems.

This topic covers the meaning and uses of a trust, its classification (express, implied and constructive; private and public), the three certainties, charitable trusts, the formalities for creation (the Statute of Frauds), the duties and powers of trustees including the Trustee Investments Act, the rights of beneficiaries, the appointment of trustees and the ways a trust ends.

Meaning and uses of a trust

The trust comes from the effort to avoid the hardships of the common law, especially the evasion of feudal incidents of land ownership. It is part of the English doctrine of equity, which has come to permeate ideas of justice everywhere, including Nigeria.

Definition

The accepted definition is Professor Keeton’s: a trust is the relationship which arises wherever a person called the trustee is compelled in equity to hold property, whether real or personal, for the benefit of some persons (of whom he may be one) or for some object permitted by law, in such a way that the real benefit of the property accrues, not to the trustee, but to the beneficiaries or other object of the trust.

May 2016 asked the examiners to explain the term (3 marks), November 2020 asked for it again, and November 2023 asked about a trust created by Umoru.

The persons in a trust

In November 2020 the examiners applied this to Ade, who asked Segun to keep his Toyota car for the use of Tunde while Ade was away on a scholarship: Ade is the settlor (the owner who creates the trust), Segun is the trustee, the Toyota is the trust property, and Tunde is the beneficiary, the equitable owner.

Uses of a trust

May 2016 asked for three uses (3 marks). A trust is useful to:

1. enable more than one person to own land;
2. facilitate charitable purposes;
3. enable property to be held for persons who cannot hold legal title themselves, such as minors;
4. enable property to be used for the benefit of persons in succession; and
5. help avoid or minimise tax.

Classification of trusts

There are two main types: those created expressly (express trusts) and those that come into being by operation of law (implied trusts). They may also be classed as private trusts and public (charitable) trusts.

Private trusts

A private trust is created by an individual either inter vivos (to take effect in his lifetime) or by will (to take effect after his death). May 2017 asked for two ways of creating a private trust (4 marks). Private trusts are of three kinds:

Public (charitable) trusts

A public trust is mainly charitable: created to benefit the public generally, or a significant part of it. It is in some ways the opposite of a private trust. The three essentials are:

1. Public benefit. The main intention must be to benefit the generality or a significant section of the public. A trust for the descendants of three named families is not charitable (Re Compton). A trust for the relief of poverty is exempt from the requirement, even if limited to the donor’s relatives.
2. Wholly and exclusively charitable. A trust partly for charity and partly for non-charitable purposes fails as a charity.
3. Charitable in law. There is no statutory definition. But the courts hold it must be for (Pemsel): (i) the relief of poverty; (ii) the advancement of education; (iii) the advancement of religion; or (iv) other purposes beneficial to the community, such as animal welfare, museums and efficiency of the police. Trusts for political purposes, to change government policies or the law, are not charitable.

Private and public trusts compared

November 2014 asked for four differences (8 marks). The examiners gave:

The three certainties

An express private trust has three essentials, called the three certainties (Knight v Knight, Lord Langdale). November 2020, May 2019 (3 marks), May 2021 (3 marks) and others asked for them.

1. Certainty of intention. By the words he uses, the settlor must show a clear intention to create a trust: a positive and unambiguous command that something specific shall be done. He must not equivocate, and the words must not be merely precatory (a wish or hope). This applies only to express trusts, and if it is missing the grantee takes the property absolutely.
2. Certainty of subject matter. The specific property in the trust, and the interest each beneficiary is to take, must be certain. A settlor who gives “some” of his houses to some persons and “the rest” to others creates no trust, because the subject matter is uncertain. The trustees then hold on a resulting trust.
3. Certainty of objects. The beneficiaries must be ascertainable or capable of being ascertained from the settlor’s words. If the objects fail, the trust fails and the trustees hold on a resulting trust for the settlor.

Creation of a trust

Equity looks to substance, not form. Except where a statute says otherwise, a trust needs no particular form. It is validly created once the three certainties are present.

The Statute of Frauds

Section 7 of the Statute of Frauds 1677 (a statute of general application, in force except in the states of the old Western Region, where Section 78 of the Property and Conveyancing Law 1958 applies) provides that all declarations or creations of trusts or confidences of any land shall be manifested and proved by some writing signed by the person who is legally able to declare the trust, or by his will in writing, or they are void.

• Every express trust of land or an interest in land must therefore be proved in writing, signed by the maker, by a document made in his lifetime or by his will.
• The rule does not apply to other property such as shares and stocks, so a trust of those may be created orally.
• It does not affect resulting or constructive trusts, even of land.
• The writing need not take any particular form. A signed document that effectively declares the trust is enough, but it must show that there is a trust and what the trust is (Smith v Matthews).

In May 2021 Esero planned to create a trust over his housing estate to finance the education of his children. The examiners advised that he must create it in writing, because the subject matter is land. He must also have the three certainties.

Duties of trustees

The office imposes legal duties. The first is to ensure that the trust instrument and his appointment are valid, since a defect may affect his power to act.

1. Investment. A trustee must invest trust funds to enhance their value, or at least to prevent them falling, within the trust instrument and statute. The main statute is the Trustee Investments Act, Cap T22. Under section 2, he may invest only in:
   • securities of the Federal Government;
   • securities of a State government that the President has declared by notice in the Gazette to be authorised;
   • securities of companies or corporations listed in the Schedule, namely the Nigerian Coal Corporation, the Nigerian Ports Authority and the Nigerian Railway Corporation, as notified by the President (who may add to the list); and
   • debentures and fully paid-up shares of a public company registered under Companies and Allied Matters Act (CAMA), quoted on the Nigerian Exchange Group (NGX) or a similar exchange. The shares must have a nominal value of not less than ₦1 million. The company must have paid dividends for each of the three preceding years of not less than 5% of the nominal value a year.
   A trustee may not invest more than one-third of the trust fund in shares and debentures, and the part invested in a single company may not exceed one-tenth of the fund (and in its shares one-twentieth) (section 2(3)(c)).
2. Non-delegation. He must act personally, because the settlor chose him for personal confidence or skill. If he employs an agent, he remains responsible (Turner v Turner). He may appoint agents out of necessity or by general usage, but must choose and supervise personally.
3. Impartiality. He must be impartial between beneficiaries and be seen to be.
4. No deviation from the terms. He must follow the trust strictly. The court will not itself alter a trust because the change seems to benefit an infant beneficiary (Chapman v Chapman).
5. Loyalty. He must avoid any personal interest that conflicts with his duty. He may not buy trust property from himself or his co-trustees, and any beneficiary may have the sale set aside however fair it was (Okesuji v Lawal).
6. Account and information. He must keep clean and accurate accounts and make them available to beneficiaries.
7. Act gratuitously. He is not paid, unless the trust instrument authorises it, the court orders it, or he is a public trustee or judicial trustee. He is entitled to be reimbursed for expenses reasonably incurred, which is a first charge on the trust fund, with a lien, ranking even ahead of the beneficiaries.
8. Distribution. He must distribute to the proper beneficiaries as directed. If in doubt about who they are, he may pay the fund and title documents into court.

Powers of trustees

A power is a discretion, whereas a duty is an imperative. A trustee has no duty to insure trust property unless the instrument says so. But he has an implied power to insure if he thinks it profitable, and may pay the premium from the fund or its income.

The Trustees Laws of the states of the old Western Region allow insurance against fire up to the full value, and give powers to compound liabilities, give receipts for trust money, and sell trust property by auction.

Rights of beneficiaries

The basic right of a beneficiary is to have the trust duly administered in accordance with its terms and the law (Target Holdings v Redferns). March/July 2020 asked for three, and the examiners gave five:

1. to have the trust property duly administered according to the terms of the trust;
2. to ensure that trustees do not dissipate or waste trust funds or commit fraud, by legal process, including an action for accounts;
3. to an injunction to restrain trustees from endangering the trust, for example where the trustee is about to be declared bankrupt or is incapacitated;
4. to take legal action against the trustee for recovery where trust property has been fraudulently transferred, by tracing the property into the hands of whoever has it; and
5. to trace against a third party who takes the property with a defective title, unless he is a purchaser in good faith for value without notice.

The right to trace is available against a trustee who has converted trust property to his own use, or mixed it with his own funds to acquire assets for himself.

Appointment of trustees

• Any person of full capacity may be a trustee, including corporations and aliens. An infant may not. If an infant is named, the court may appoint another person of full age to act while he is a minor.
• A trust corporation must have, as one of its objects, the power to be appointed trustee.
• A public trustee may be appointed, and the court may appoint trustees: a trustee appointed by the court is a judicial trustee.
• Original trustees are appointed at the beginning of the trust. New or additional trustees may be appointed later, for example where an original trustee has died, has been abroad for an uninterrupted 12 months, has retired, refuses to act or wants to be discharged. November 2022 asked for original trustee (5 marks) and unit trust (5 marks): a unit trust is an investment managed by an appointed manager, who makes arrangements for the public to take part as beneficiaries of the trust investment.

Termination of the trusteeship

May 2022 asked for four ways (8 marks). The syllabus gives four ways in which a trust, in the sense of a trustee’s office, can be brought to an end:

1. Disclaimer. No one can be compelled to be a trustee. A person appointed may decline the office by a deed or other writing, or orally, or by conduct, simply by refusing to act.
2. Removal. A trustee may be removed if he refuses to act, is unfit to act, is incapable of acting, or has been outside Nigeria for an unbroken 12 months.
3. Retirement. A trustee who has accepted may retire under the retirement provisions of the trust instrument or under statute, by application to the court for an order retiring him, or with the beneficiaries’ consent.
4. Death. The death of a trustee naturally ends his office.

Working through the rules

Is there a valid express trust?

Is it a charity?

Investment limits in figures

A trust fund is ₦120,000,000. The trustee may put no more than one-third in shares and debentures: ₦40,000,000. In any one company, the investment may not exceed one-tenth of the fund (₦12,000,000), and the part in its shares not more than one-twentieth (₦6,000,000).

Worked problems

Problem 1: Ade, Segun, Tunde and the Toyota

1. Participants. Ade is the settlor and legal owner who creates the trust. Segun is the trustee. The Toyota is the trust property. Tunde is the beneficiary, the equitable owner.
2. Definition. A trust is the relationship that arises where a trustee is compelled in equity to hold property for the benefit of others, so that the real benefit accrues to the beneficiaries.

Problem 2: Esero’s school trust

1. The mode. The subject matter is land, so the trust must be manifested and proved by writing signed by Esero (Statute of Frauds, section 7), or by his will in writing. Otherwise it is void.
2. The essentials. The three certainties: his clear intention to create a trust, the specific estate and the interests of the children, and the objects, his three named children.

Problem 3: Umoru, Godwin, Tohib and Murphy

1. Godwin. No one can be compelled to be a trustee. He may disclaim in writing, orally, or by conduct, by refusing to act.
2. Tohib. A trustee must carry out his duties personally, because the settlor reposed confidence in him. He cannot delegate to Murphy, however conscientious.
3. Advice. Godwin’s disclaimer is valid, and new trustees may be appointed. Tohib must act himself or retire.

Problem 4: the trustee who bought the house

1. The rule. A trustee for sale may not purchase the trust property from himself, because it conflicts with the duty of loyalty. However fair the sale, any beneficiary has an absolute right to have the conveyance set aside (Okesuji v Lawal).
2. Advice. The beneficiaries may have the sale set aside.

Questions that have been asked on this topic, and how to answer them

Common mistakes in the exam

• Saying the trustee is the owner for all purposes. He holds legal title only.
• Giving two certainties instead of three.
• Saying every trust must be in writing. Only a trust of land must be.
• Confusing a trust fund with the trustee’s own property.
• Saying a trustee may delegate freely. He may not, except out of necessity or usage.
• Saying a trustee is entitled to payment. He acts gratuitously, unless authorised, but is entitled to reimbursement.
• Saying a political trust is charitable. It is not.
• Forgetting that a charity may last forever and cannot fail for uncertainty of objects.
• Naming only three ways when asked for four ways of ending the trusteeship.

Quick revision

• Trust: trustee holds legal title for beneficiaries who hold equitable title. Types: express, implied (resulting), constructive; private and public.
• Three certainties: intention, subject matter, objects. Land: written and signed (s.7 Statute of Frauds). Shares: oral allowed.
• Charity: public benefit, wholly and exclusively charitable, charitable in law (poverty, education, religion, community). Cy-près, tax-exempt, may last forever.
• Trustee duties: invest (Trustee Investments Act), no delegation, impartiality, follow the terms, loyalty, account, gratuitous, distribute.
• Beneficiary: administration, accounts, injunction, tracing. Trusteeship ends: disclaimer, removal, retirement, death.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Section A style: multiple choice

Section B style: written questions

Model answers

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