Planning and Development of a Trust for First Nations

Planning and Development of a Trust

© Deloitte LLP and affiliated entities.

INDEX

• What is a Trust/Trustee• Trust Planning Cycle• Trust Structures

– Corporate Trust Model– Community Trust Model

• Trust Best Practices• Trust Development Considerations

2 Planning and Development of a Trust

© Deloitte & Touche LLP and affiliated entities.

Trusts – In General



What is a Trust?

The concept of a Trust has been in existence for centuries.• The original concept comes from the Middle Ages.• A lord would leave his property and servants with a Trusted person (Trustee) while away hunting or at

war.• This Trustee would have full control of the lord’s assets until he returned.

Trusts are used in situations today where there is a need or a desire to:• Separate and preserve assets, for a person or group of people, over a specified period of time.

Trusts are established through the creation of a Trust Agreement which outlines:• A specific intention or reason to create a Trust;• The property or money to be held in Trust;• The person or group who will benefit from the Trust (the Beneficiary); and• Instructions for how the property or money may support the Trust’s beneficiaries.



Why Use a Trust?

It is a preferred vehicle for Aboriginal Settlements.• Trusts, when properly structured and operated, have proven to be very successful for

many Aboriginal Communities.

It is often a requirement of the Settlement Agreement.• Governments/businesses that settle claims often require some or all of the settlement

assets to be paid into a Trust.

The property or money held in Trust is protected.• Trust funds can only be used in accordance with the Trust Agreement.• It can be set up in a way so that there is accountability and transparency for how the Trust

funds are used.• Trustees have a legal fiduciary duty to ensure the Trust terms are carried as written.

The Trust can be used as a strategic financial vehicle.• Trust funds can be invested to earn additional money for the Beneficiaries.• Trusts can be structured in a way to avoid paying tax on trust income.



How a Trust Works

A Trust is an agreement between an owner of a property or asset (Settlor) and person or entity (Trustee) designated to manage the property or asset for the benefit of a third party (Beneficiary).

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Settlor

• Receives a Settlement of property or money

• Creates the Trust• Places the Settlement

into Trust• Transfers legal

ownership of the Trust assets to a Trustee

Trustee

• Gets appointed by the Settlor or the Beneficiary

• Takes legal ownership of the Trust property

• Agrees to protect and manage the Trust in accordance with the terms and conditions of the Trust Agreement

Beneficiary

• Has a right to benefit from the Trust

• Has a right to receive regular reports and a full accounting of the state of the Trust

• Has a right to be informed on Trust related activities

• Holds the Trustee accountable for the proper management of the Trust



Trustees: Duties

Responsible for complying the Trust Agreement. To do this, the Trustee must:• Become familiar with Trust Agreement and its terms.• Carry out the various duties assigned to the Trustee in the Trust Agreement.• Stay informed on all Trust business and Trust activities.• Participate in key Trust related decisions.

Act selflessly and independently. A Trustee:• Has a legal obligation to act in the interests of the Beneficiary (ies) .• Cannot personally benefit from her/his role as a Trustee.• Avoids conflicts of interest between the Trustee’s duty to the Beneficiary and his/her own interests.• Avoids conflicts of interest between the Trustee’s duty and his/her own duty to other people or

organizations.

Be ultimately accountable for Trust operations.• Understand that a Trustee role is a very important position.• A Trustee cannot delegate duties to a third party without retaining legal responsibility.• If a Trustee breaches his/her duties and responsibilities, he/she could be personally accountable or

liable.• A Trustee’s personal assets could be at risk if he/she is found liable.



Trust Planning Cycle



Aboriginal Trust Start-Up

Action commenced

Understand and preserve electronic evidence

Transactional data analytics Design alternate compensation schemes

• Interviews • Identification of data sources • Preservation of identified sources

• Data mining and data profiling • Trend, pattern, and anomaly analysis

Develop voluntary compensation plans Address multi- jurisdictional classes Reduce litigation risk by establishing a

Distribute notice and claim form Design administration processes

and trust account management

• Determine class and subgroup characteristics

Trust Settlement Pending (up to 1 year)

Trust Planning•Determine Trust type•Determine Trust purposes•Determine Trust structure (i.e. Nation Trustees or Admin Trustee only)

Trust Preparation•Begin preliminary drafting •Structure for tax efficiency •Determine Trustee qualifications•Determine how Trustees will be selected

•Complete Trust draft

Trust Ratification•Educate community on Trust•Ratify Trust agreement•Select Trustees

Commence Trust•Settle Trust•Transfer funds to Administrative Trustee

Begin Trust Operations•Determine Trust operational plan, policies and procedures etc.

•Clarify how Trustees will work with Chief & Council, if applicable

•Select Trust legal counsel•Select Trust auditor•Select investment consultant if desired to assist in selecting the investment manager

Investment Management•Hire Investment Manager(s)•Transfer funds to Investment Manager(s)

Prepare Trustees•Trustee training (on roles, responsibilities, and specifics of trust and investments), if applicable

Trus

t Im

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enta

tion

Trust Preparation


© Deloitte LLP and affiliated entities.10

Trust Structures



Trust Structuring Models

• For all trusts, a trust agreement is required to:– Provide guidance for how the trust is to be operated– Outline the purposes of the trust– Specify how settlement funds can be used and how they are disbursed– Guide how trust decisions are made and by whom

• The two trust administration models most often used for Aboriginal trusts are as follows:– Corporate Trust– Community Trust



Traditional First Nation trustOttawa trust funds First Nation Community Trust

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Balancing community decision making/capacity building with protection of trust assets

Community decision making/capacity building spectrum

Administrative Trustee Model


Corporate Trustee Model

Trust Manager or Independent Model


Corporate Trust



Traditional (Financial) Trust“Corporate Trustee” Model

Trust Capital

Corporate Trustee

First Nation

Held and invested by

Disbursed to

Programs, projects, services

etc…

Determine how fundsflow and to whom

Light Blue

Grey

= person/entity with the most power

= other consultants likely required

Planning and Development of a Trust14


“Financial Trust” Model – Pros & Cons

Pros• Minimal meetings required so potentially less administrative

cost to operate• Could be appropriate for a trust of <$10 million• Fewer consultants required

Cons• Nation Trustees are either non-existent or have very limited

power• The community often has little input into trust activities• Decisions are being made by either the Corporate Trustee

or Chief & Council. Chief & Council may be criticized by members on how trust funds are spent

• Limited opportunity for capacity building within the community

• The beneficiaries (i.e. community members) often do not feel well-informed on trust activities.

• There may be a conflict of interest in cases where the Corporate Trustee is also the Investment Manager.

• This type of trust would always be required to be consolidated into Nation’s financial statements

In this Model, typically Nation Trustees, if any, have minimal decision-making powers and responsibilities as to how trust funds are used. Upon either a resolution from Chief & Council requesting trust funds or a requirement in the trust agreement to annually payout all income to the Nation, the Corporate Trustee flows funds to the First Nation to determine how funds are spent. Often the Corporate Trustee is also the investment manager and is responsible for all investment decisions.



Community Trust Model



“Administrative Trustee” Model

Trust Capital

In consultation withNation Trustees

First NationProjects Programs

Flow of funds

Chief and Council

Funds held by

Community

Funds invested with Administrative Trustee

Determine how funds flow and to whom

In consultation with

Investment Manager

Light Blue Grey = person/entity with the most power = other consultants likely required

Community Trust


Per capital distributions (if allowed)


Community Trust – Pros & ConsBest Practices• Nation or community trustees are selected/elected• Trustees consult with Chief & Council and the community to obtain input before decisions are made• Chief & Council are not Trustees but are encouraged to attend trust meetings• Administrative Trustee does not have a vote but must be present for quorum• Administrative Trustee writes the cheques so can effectively veto a decision (if not compliant with Trust Agreement)• The Administrative Trustee is not the investment manager as the Trustees undergo an independent process• Administrative Trustee is responsible to ensure compliance with the Trust Agreement (protects the Trustees) and to

ensure the Trustees receive appropriate training before making decisions

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Pros• Community Trustees are empowered with decision-making authority• Decisions are not made “outside the community” by a Corporate

Trustee• Significant opportunity for capacity building for Nation Trustees• Alleviates decision-making burden from Chief & Council and

potential for political conflict• Greater community consultation and involvement• Trust operations and spending are more transparent to the

community

Cons• More trust meetings are required under this model and there are

more Trustees so this type of trust can cost more to operate• May not be appropriate for a trust not expected to be $10 mil or

above.



Trust Best Practices



Creating a Trust – Best Practices


• Start trust development early – as early as one year prior to conclusion of the settlement– Customizing to ensure Trust Agreement fits the community takes time

• Consider the appropriate trust model given the specific circumstances/needs of the First Nation

• For a Community trust, determine the extent of power/protection needed outside of Nation Trustee powers (i.e. Protection without paternalism)

• Start with the trust framework – not the trust agreement• Use a lawyer to draft the trust agreement who is experienced with Trust Law and trusts• Ensure there are proper trust amendment clauses• Ensure trust agreement is very clear from an operations standpoint to avoid

confusion/conflict later on• Remember to allow enough flexibility in the Trust Agreement to accommodate evolution of

First Nation governance over time • Utilize a Comprehensive Plan which is a term defined within the Trust but is modified

outside of the Trust Agreement for all Trust policies and procedures that you expect will change over time. It can be updated every 5 years and approved by the Trustees, Chief & Council, membership or any combination depending on which process works best for your circumstances.


Making a Community Trust Work• Have Nation or Community Trustees who represent community members/beneficiaries

– General election– By family groupings or clans– By geography– Other

• Involve Chief & Council at trust meetings, but not as Trustees• Trustees develop clear code of conduct and conflict of interest guidelines• Specific economic development and investment decisions are not made by Trustees• Have an investment consultant facilitate a competitive process for selection of investment managers,

including annual monitoring• Ensure processes in place to consult and report to membership• Ensure ongoing Trustee training as required• Hold regular (in person) meetings (more maybe needed in start up years)• Have an Administrative Trustee who must be present for quorum to ensure Trust Agreement is

followed – Protects Nation Trustees and beneficiaries

• Bring in traditional forms of Governance of the Nation where possible• Consider how to measure results of trust spending over time



Trust Development Considerations



Elements to Consider in a Trust

Sources of Trust Funds• Is a trust required by the payor?• Will there be more than one source of funds coming into trust, now or in the future?

Trust Purposes• What will the trust funds be used for?

• Funding for programs and services to members for education, health care, social programs, housing, culture and language etc.

• Distributions to members – allowed?• Economic Development• Land purchases• Are there any prohibitions on trust fund uses?• Note: For some of these items, the trust agreement would need to contemplate:

• How funds will be calculated for that purpose – set amount or a percentage of income?• How to determine what programs and services will be funded – community consultation?• How to set community priorities – development of a Comprehensive Plan?




Trustee(s)• Would the trust have a Corporate Trustee or Community Trustees?• How many Community Trustees, excluding the Corporate or Administrative Trustee, would

serve on the trust?• What is the term of the Community Trustees?• How will Trustees be selected? (Appointment by Chief & Council, elected by membership,

selected by family grouping; etc.)?• Are there specific qualifications required of Community Trustees? (Business background,

education level)• Who is eligible to be a Trustee? (Non-members? Chief & Council?)• Should the trust contemplate having an Elder and Youth representative to sit on the trust

to represent the interests of these groups and/or for training or liaison purposes?• Should the trust contemplate having Trustee Alternates to train and build-up the capacity

of members, and have more members involved on the trust?• What is a reasonable honorarium for the Trustees – who will determine this amount?• How involved will Chief & Council be in the decisions of the Trust, or should the Trustees

have decision-making authority?




Distributions• If distributions to members are a consideration, then the trust agreement would need to

contemplate:• How frequent will be the distributions be made – one lump sum, periodically, annually?• How will the distributions be determined – set amount, based on an income formula?• How will the minor’s balances be managed?• Will minors receive their entire balance at the age of majority, or will there be a maximum annual

payment set? • Will the minor’s balances earn interest?




Economic Development• If economic development is considered a purpose of the trust, then the trust agreement

would need to contemplate:• How much will be available for economic development or how will the amount be calculated?• Will the funds be advanced in the form of a grant or loans to be repaid, or a combination of both?• Will this economic development fund be replenished if all funds are utilized?• If an economic development board is created, what is the timing or criteria to transfer funds to the

board?• How will economic development projects be approved?• Will there be criteria or guidelines set for the projects? If so, who will develop these criteria?• Who can access the funds – the band only or individual members?




Other• Should there be a consideration to maintain the purchasing power of the trust (i.e. reinvest a portion of

the realized income each year to keep up with inflation?)• How long will the trust last – a set time frame, in perpetuity?• If it is a set time frame, what will happen to the funds after that period of time?• Will funds be flowing to the Nation each year? If so:

• How will the amount be determined – set amount, percentage of income?• Will a BCR be required to request the funds or will the funds flow automatically?• Will there be restrictions on how the funds will be used – general purposes, specific purposes?• Will the band be required to report back to the Trust or community to account for how the funds are spent?

• Should the trust funds be used to provide guarantees or loans? If so, what kinds of restrictions or guidelines should there be – who can access the funds, limits, purposes etc…

• What are the eligible investments for the Trust – in accordance with the Prudent Investor Rules and Trustee Act, or should there be other investment considerations included in the investment policy?

• What is the process to vary the trust and who has authority to vary the trust – Trustees only for minor/clerical changes, referendum for major changes?

• How important is it that the trust assets be government controlled and therefore not included in the Nation’s Consolidated Financial Statements?




Consultation with Membership• If members are unable to attend the community meetings in person (i.e. off-reserve members), what

other means of consultation are there?• Is there sufficient time to mail out materials to off-reserve members in order to get meaningful

feedback?• Where do most off-reserve members reside? Would it be practical to hold consultation meetings in a

central location that is convenient for the off-reserve members to travel to?• Should the internet be utilized to get information out and to receive feedback from members? If so,

who can develop this process? Is there sufficient time to do this?• Do members have access to the internet? If so, is there sufficient number of members who do access

the band’s website to review any information that may be posted?• Are most members proficient in English or will translation of materials into the traditional language be

required?



Questions?

Lisa [email protected]

Vickie [email protected]

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mailto:[email protected]

mailto:[email protected]