PROTECTIVE TRUSTS
CONTENTS
1.0 Introduction
2.0 Objectives
- Main Content
- Meaning and Features of Protective Trusts
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment (TMA)
7.0 References/Further Readings
INTRODUCTION
Protective trusts are essential in estate planning, providing benefits of people, especially family members and for a variety of other purposes. In commonwealth jurisdictions and the United States of America, the use of this type of trust is common place, although the nomenclature in other places may differ. The use of protective trusts is not common in Nigeria as in England or other jurisdictions. The extended family systems in Nigeria coupled with cultural and social difference in the lives of the people are major factors militating against the use of protective trusts in Nigeria. As it is with charitable trusts, the economic situation in Nigeria has to some extent affected the use of protective trusts in Nigeria, because the majority of the people are poor. A consideration of thus type of trusts is necessary to familiarize you with it and its workings.
OBJECTIVES
In this Unit, you will be taken through the features of what may be regarded protective trusts, and the objectives of the type of trusts. You learn about the distinctive feature that distinguished protective trusts from discretionary trusts and the advantages of this class of trusts over discretionary trusts. You will also be familiarized with the usual clauses in protective trusts, which are meant to keep the benefit out of danger and from accruing to the beneficiary when the provisions of the clause are breached. At the end of this Unit, you should be able to:
- Know the essential features of a protective trust
- Explain the rights of beneficiaries under a protective trust
- Understand situations when beneficiary can be deprived of income under the trust.
- Understand practical uses of protective trust
- Explain the advantages of protective trusts over discretionary trust
MAIN CONTENT
Meaning and Features of Protective Trusts
Protective trusts as the name imply is trust created for purpose of protecting certain beneficiaries under which the trustees are charged with the payment of an income or other income to be paid periodically throughout the life of that person or for a period lesser than that. First if may be to the benefit of A, and thereafter to the benefit of A’s children and at a particular age, A will now take the benefit of the entire fund.
A protective trust may be set up in a series such that the benefit accrues progressively, at first the trust may be structured first, till the beneficiary attains the age of twenty first, second from twenty first to thirty-six, third, from thirty-six to forty-six and fourth for the life of the beneficiary. In some cases, the progressive accrual of the income may be tied to a period of time, after the maturity of the first trust, say ten years in the first instance and thereafter for another term of fifteen years, etc.
The advantage of a protective trust is that youthful vulnerability will not result in a beneficiary filter away all the trust property since it will accrue periodically and not at once. Unlike discretionary trust, the beneficiary is also assured or a steady income and not left to the mercy of trustees. See Re Richardson’ W.T. [1928] Ch. 504.
Forfeiture clause in usually inserted in protective trusts which indicates that on the occurrence of a certain event, the interest of the principal beneficiaries will determine in the case of a series of beneficiaries, such that others can take benefit too from the trust. See Re Sartoris’s Estate [1892] 1 Ch. 11. In some other cases, the forfeiture clause may indicate the occurrence of certain events upon which the principal beneficiary will be deprived of income or some part of it.
In some other cases, protective trusts may be structured in order to prevent the trust fund/property or some part of if from being available to creditors should the beneficiary go bankrupt, or upon attempted alienation, or from being charged or that it will become vested in some other persons, etc. and on the occurrence of such events forfeiture of the beneficiary’s interest will take place. See Re Hall [1944] Ch. 46 and Re Longman [1955] 1 W.L.R. 197.
However, some common grounds for forfeiture of the beneficiary’s interest are as follows:
- In the event of the beneficiary committing a breach of the trust terms
The bankruptcy of the beneficiary, so as to prevent the income of the principal beneficiary from being available to the trustee in bankruptcy. See Re Walker [1939] Ch.
- When an order of sequestration of the beneficiary’s income for contempt of court. See Re Barring’s Settlement Trusts [1940] Ch. 737
- When the principal beneficiary executed a deed of variation which gives up his right to part of his income in certain situations
You have to note that merely inserting a provision which will result in the forfeiture of the beneficiary’s interest on grounds of bankruptcy or attempted alienation will be void; but it is valid to make the limitation of the beneficiary’s interest to be determinable until the beneficiary goes bankruptcy or when he attempts to alienate his interest. See Brandom v. Robinson [1811] 18 Ves. 429.
Although a settlor may create a protective trust for his own benefit, forfeiture clause or determining event will however on ground of public policy be void against his trustee in bankruptcy, as this will prevent his creditors from having access to his interest in the trust property. See Re Burroghs-Fowler [1916] 2 Ch. 251.
In a protective trust, the trustees may be given the discretion to apply a certain part of the trust fund for someone’s benefit; such a person only entitled to part of the fund and as a result cannot request that the whole fund be handed over to him. See Re Smith, Public Trustee v. Aspinall [1928] Ch. 915. Where the trustees have no discretion in the application of the fund, the particular beneficiary can come to demand for the fund to be given to him. See Green v. Spicer (1830) 1 Russ & My 395.
Protective trusts can be used for various purposes such as education of family members, to provide for a person during his life time, etc. as it is with discretionary trusts.
SELF ASSESSMENT EXERCISE (SAE) 1
Discuss the rights of the beneficiaries to the trust property under a protective trust and under what circumstances can the beneficiaries put an end to the trust.
CONCLUSION
Protective trust has been a very useful instrument in the hand of settlor for providing benefits for one or a series of beneficiaries in the same trust. It also has the unique advantage of being used to provide for a principal beneficiary first after which his interest may determine and thereafter for other beneficiaries and also for other for life. It is better than discretionary trust in the sense that the beneficiary’s interest is certain but discretionary trust is flexible. You should be able to employ protective trust in practical situations for the benefit of your clients after becoming professionally qualified.
SUMMARY
In this Unit, you have learnt that about protective trusts, its features, uses and advantage over discretionary trusts. You have learnt that the importance of protective trusts is the protection of youthful vulnerability and for providing for a life tenant, and at the same time, the beneficiaries are not left to the mercy of the trustees. You are further familiarized with the fact that forfeiture clause are usually inserted in protective trusts which indicates the occurrence of events upon which the interest of the beneficiaries will be forfeited, and a brief instances when this can happen. In the next Unit, you will learn about trusts in favour of creditors.
TUTOR-MARKED ASSIGNMENT (TMA)
- Discuss the importance of inserting a forfeiture clause in protective trust instruments and state the likely events when forfeiture of the beneficiary’s interest will take place
- What is a protective trust? Discuss the rights of trustees under a protective trust
REFERENCES/FURTHER READINGS
Caverly, N.B. and Simon, J.S. Estate Planning with Protective Trusts to Cover Your Assets, Retrieved September 26, 2010 from http://www.dummies.com/how-to/content/estate-planning-with-protective-trusts- to-cover-yo.html
Hayton, D.J. (2001). Hayton & Marshall Commentary and Cases on The Law of Trusts and Equitable Remedies. London: Sweet & Maxwell.