Indigenous economic growth: Good trusts, bad trusts, no trusts

For many Indigenous Nations across Canada, establishing trusts can be a pivotal step toward advancing economic independence and building a legacy of self-sufficiency for future generations.

Billions of dollars from government settlements and other revenues flow into these funds, and when properly structured, trusts can be transformative tools with the potential to support sustainable development, foster growth, and empower Nations.

If misused, misconstructed, or misunderstood, they can become barriers to the very progress they were meant to enable. In the worst cases, they end up imposing ironclad restrictions on how Nations can use their wealth effectively.

The core problem is that many of these trust agreements are drafted by lawyers unfamiliar with the unique requirements and complexities of Indigenous trust law. Often, these structures are set up by litigation experts who negotiated the settlements themselves but lack the specialized skills required to structure funds in a way that works in the Nations’ best interests. Because of this lack of expertise, many are created under a one-size-fits-all approach that fails to engage beneficiaries.

And while the federal government has relaxed mandates requiring settlement funds to be placed in trust, faced with a lack of alternatives, many Nations still adopt these structures.

An all-too-common scenario

Recently, I met with the chief of a First Nation who was grappling with a problematic clause in their trust agreement. The clause purported to allow the trust to issue mortgages to members of the community.

Mortgages are much needed on-reserve, this is undisputable. And while the idea seemed positive and straightforward, the provision overlooked significant legal and practical complexities. First, issuing mortgages is a regulated activity under the Bank Act. Second, under the Trustees Act, mortgages would be classified as investments, subject to the “prudent investor” rule, which requires a high standard of financial responsibility. Private mortgages to individuals rarely meet this standard.

The most unsettling issue? Debt enforcement. If a member defaulted on their mortgage, the trust would be legally obligated to do everything in its power to recover the debt – potentially suing one of its own members, and a beneficiary of the trust none-the-less. The chief, astonished by this reality, admitted no one had explained these pitfalls when the clause was included.

Unfortunately, this isn’t an isolated case. Nations often find themselves in similar binds, stuck with trust structures that don’t align with their needs or expectations. It’s easy to see how these situations arise – someone throws out an idea in a meeting, and it gets written into a trust document without a fulsome understanding of the limits of trust law and other legal and regulatory requirements.

Now, imagine the frustration of a First Nation placing $300 million into a trust, believing it will fund very specific projects for members and the community at large. Only after the funds are locked in do they discover that many intended uses are restricted or outright prohibited.

Couple these limitations with the fact that many trusts are expressly stated to be irrevocable and subject to stringent, often unattainable, rules of amendment. Unlike commercial contracts, trust agreements cannot be amended simply by agreement of the signatories. Instead, complex rules for amending certain aspects of the trust (such as its uses) often expressly require approval by vote of the beneficiaries. And sometimes, the threshold for approval requires agreement from a majority of the Nation’s members; that is, not a majority of those who cast a ballot but a majority of the eligible voting members, a double majority if you will. Aside from the impractical reality of ensuring the necessary voter turnout, these referendums are time consuming, expensive and the outcome, all but unachievable. In the end, the community is stuck with the trust as written, holding hundreds of millions of dollars of the Nation’s assets, but unable to support the purposes for which it was intended.

Had some of these First Nations been fully informed, they might never have placed their money into a trust in the first place. Then again, not choosing a trust at all brings a host of other challenges and risks.

No trusts

The alternative to trusts often means the Nation would hold the assets directly, without the protections of a strong legal structure around it – no corporation, no limited partnership, just direct ownership of an investment portfolio.

On the surface, that might seem manageable. You could set it up in a simpler structure or hire top-tier investment managers to grow the portfolio, easily achieving the same returns as in a trust.

But here’s the catch: without a trust, you can lose a critical oversight safeguard.

The strength of a trust lies in its ability to act as a safe harbour for long-term growth and prosperity. Without it, settlement funds—which are often one-time disbursements – can be subject to the shifting preferences of different leadership groups, potentially leading to challenges in maintaining their intended purpose.

There’s also the risk of liability. If the Nation holds these assets directly, and someone sues the community, there is no protection of those assets from being used to satisfy a judgement. With a trust, you have a layer of protection and governance that shields the funds from both internal and external risks. So, while having no trust might seem simpler on paper, in practice, it often leaves the community’s assets exposed to a range of risks that a well-structured trust could help prevent.

Without a trust, there is also no protection from the distribution of those assets for any purpose decided by leadership, including on a per capita basis. And the experience with such distributions so far has not been good.

For one, they represent a lost opportunity to establish a reserve of wealth that can sustain a Nation for generations to come, producing annual revenue to fund programs and services in perpetuity. These distributions also disentitle future members of the community from sharing in the benefit of the settlement funds while also extinguishing their legal rights for compensation in the future. At an individual level, these funds are often quickly exhausted on unproductive uses and in some cases, result in tragic outcomes for the most vulnerable community members.

Good trusts

Can these problems with trusts be overcome? Definitely.

One promising solution is the creation of Indigenous sovereign wealth funds – financial structures specifically designed for Indigenous Nations, with flexibility and community control built in from the start. This is something I will talk about in a future article.

As it stands, the legal framework for something like that doesn’t currently exist. And fundamentally, a lot of these problems can be addressed simply by implementing best practices and ensuring Nations are empowered to make informed decisions. Here are three best practices worth highlighting.

First, the foundation of a good trust starts with an informed client – one who fully understands the parameters of trust law, the implications of the trust agreement they are establishing, and the future limitations of managing their assets through a trust structure. When clients have this clarity, they’re less likely to experience frustration when encountering disappointing surprises down the line. Misunderstanding leads to mistrust and limits a community’s ability to use its resources effectively. So, starting from a place of full understanding is key.

Second, a common pitfall is over-restricting trusts out of fear of misuse by future councils with shorter-term priorities. While this fear is understandable, overly rigid structures can become unworkable over time. Trusts need built-in flexibility to adapt to shifting community needs.

Consider that some trusts can last for a century – or even in perpetuity. No one today can predict what a community’s economic, social, or cultural needs will be 50 or 100 years from now. Flexibility is essential to ensure the trust remains relevant and accessible.

Flexibility means, in part, that trusts include reasonable thresholds for amendments. Requiring a double majority – participation from a majority of eligible members and a majority voting “yes” – is often unattainable. Instead, thresholds should reflect practical realities, allowing necessary changes without creating deadlock.

Third, and most importantly, is a call to the legal profession to both properly inform clients about what they’re committing to when establishing a trust and to ensure that they have the necessary expertise to draft it. Where a lawyer does not possess that expertise, the rules of professional conduct mandate that the client be referred elsewhere.

Perhaps there’s scope to embed this understanding early in legal education. Given the newfound importance of these tools in advancing Indigenous economic reconciliation, legal educators must ensure that young lawyers are being educated about the unique legal and cultural dimensions of Indigenous trusts.

We must recognize that the unprecedented transfer of wealth to Indigenous Nations is creating a powerful seed for economic reconciliation right now. And we must get it right. There are important roles for government, legal and financial professionals to play in ensuring that Indigenous Nations have access to the tools needed to capitalize on this opportunity to create sovereign and sustainable wealth for generations to come.