Nigeria: Wealth Succession Planning: Private Trusts Or Wills

The need to have an efficient wealth succession plan cannot be overstressed. The lack of it may lead to an erosion of the entire wealth that has been built over the years. In study conducted on wealthy Nigerian families, it was observed that only one family has been able to transfer wealth to the third generation. Most of the wealth that was accumulated by the first generation ended with either the first or second generation. This could be attributed to many factors such as absence of any deliberate plan that will ensure succession, customary beliefs, procrastination, the belief that wealth will transfer to the next generation seamlessly etc.

Recent events such as the Covid-19 pandemic (which has led to sudden deaths) has now heightened the need for individuals to urgently begin to consider options for transferring their wealth to the next generation in a sustainable manner. It should be noted that there are various options that can be used to achieve this. However, this article aims to review Trust and Wills as wealth succession tools.

What is wealth succession planning

Wealth succession planning involves the formulation of a strategy to ensure that your assets go to the right people at the right time. A proper wealth succession plan will address issues such as correct identification of the assets to be transferred or distributed, when the wealth is to be distributed and for what purpose, who should be involved in decision making, the beneficiaries and any exclusions etc.

Options for Wealth Succession

There is no single approach to wealth transfer exercise. The process of selecting a wealth transfer method is unique to every family, as such must be customized to complement each family's needs and objectives. There are widely recognized methods but we will focus on Will s and Trusts.

Wills

A Will is a legally binding document, created by or on behalf of a person (testator), which clearly states the way and manner such testator's assets (liquid/illiquid) and other belongings should be distributed after his life time. This is the most popular means of facilitating transfer of wealth. However, it is not uncommon to see that many people still pass on without a Will. In this instance, the person would be deemed to have died intestate. When this happens, his Estate will be administered by the State.

A person who has a Will before death will be regarded to have died testate. A well drafted Will should detail amongst other things, the assets of the testator, their location, their value, the names of the recipients/ transferees of the assets and the Executor who will be responsible for handling the final affairs. After the lifetime of the testator, the Will is subjected to the probate process. The framework for this process is as determined by the Probate Registry of the deceased's State of residence and is quite similar across the various states in Nigeria. It is however time consuming and laden with several with bureaucracy.

Benefits of a Will

Some of the benefits of having a Will include the following:

• It allows the Testator to direct the distribution of his Estate upon his demise – One of the greatest advantages of making a Will is the fact that testator gives direction as to the disposition of his property when he dies. This can easily put him at ease as to how his business and properties will be handled upon his death.
• Ability to avoid arbitrary distribution of one's Estate – when a person dies testate, he is able to avoid some rules which stipulates how your Estate (property, cash and other valuables) would be distributed. These rules could be customary/family laws or rules that may not conform to how you want your Estate to be distributed.
• Avoid the risk of overvaluing your assets for tax purposes. If a person dies testate, his Executors will be accorded the opportunity to evaluate the exact value of the Estate and this will form the basis for any taxes or dues payable. In the case where a person dies intestate, this responsibility will be performed by valuers appointed by the State and the risk exist that the Estate will be overvalued for tax purposes.

Drawbacks of a Will

• When a will goes through the probate process in the courts after the life of the testator, they become public record which anyone can access. This means that anyone can read the details of the court filings and learn about Estate assets as well as view the Will itself. This makes the private affair of an individual become public.
• Beneficiaries of the distribution from the Estate will to undergo a legal change of title for the assets upon transfer. Certain charges and taxes such as estate fee charges, probate costs, consent fee, stamp duties and capital gains tax usually arise in the course of perfection of title for the bequeathed assets. These charges may erode the value of the assets to be transferred.
• The probate process takes a long time before the wishes of the testator as stated in the Will is realised. The beneficiaries also face the risk of being presented with more than a Will and can therefore be enmeshed in prolonged court cases to determine the version of the Will that was validly made by the testator. This is one of the major setbacks in the use of Wills as a wealth succession mechanism. The offshoot of this is that also although the testator can dictate and specify how his assets are distributed upon death, there is no personal assurance that this will come to fruition.
• A will may not guarantee wealth succession by the next generations. Once the Estate of the deceased has been distributed among the beneficiaries, they are entitled to use the assets in a manner that they so desire. If the assets are not properly managed, there is the likelihood that the beneficiaries will lose all the wealth that has been bequeathed to them and their welfare may be endangered.

Private Trusts

A Private Trust entails the creation of a fiduciary relationship between three major persons – the settlor (the person that creates the trust), the trustees (the person that is charged with the management and administration of the Trust) and the beneficiaries (the individual or group of individuals for whom a Trust is created). In a Private Trust arrangement, the settlor transfers property (tangible or intangible) to the trustee, who holds it in trust for the beneficiaries.

In Nigeria, a Private Trust is created through a formal agreement known as the Trust deed, between the settlor and the trustee. The Trust deed is legally binding and its validity is not dependent on its registration with any statutory or government agency. The place of administration of a Trust is the place where the Trustees reside or carry on business, especially if the Trustee is a corporate entity. Thus, a Trust is deemed to be administered in Nigeria where the Trustee is resident or carries on business in Nigeria.

In a Private Trust arrangement, the Settlor is able to document his wishes in the Trust deed, which not only covers the transfer of ownership of assets but also the continuous management of such assets and the distribution of income generated from his Estate. For example, the Trust can manage liquid asset bequeathed to a minor based on the stipulations in the deed as to when and how the money should be given. The Trust can also be set up for specific purposes, such as to pay for a minor's education or to provide donations to a charitable organization over the course of a specified period.

Benefits of a Private Trust

• Trusts provide some form of asset protection. This means that if the beneficiary becomes bankrupt or is sued personally, assets held in the trust are protected against those claims because they do not form part of the beneficiary's property or assets.
• A Trust avoids probate - Probate can become a lengthy and costly process, which may not only delay distributions to your beneficiaries but also cut down on what they inherit. By placing your property in a Trust, however, you can avoid probate because the successor trustee distributes assets according to the Settlor's instructions without court intervention. This can mean a faster distribution to your heirs without any additional expenses to the Estate.
• A Trust protects your privacy - As mentioned above, one of the benefits of a trust is the avoidance of the probate process. A living trust is a private document between the parties involved and does not become part of the public record. In other words, no one can later go and search public records to find out more about the distribution of your Estate.
• A Trust provides certainty and peace of mind - When drawn up correctly, a trust sets out a clear plan to deal with all of your assets. This can help prevent you from unintentionally disinheriting someone, can help you provide care for a loved one with special needs into the future, and even protect assets from certain people. All of these things can give you peace of mind now, knowing that your estate will be handled exactly as you wish later. The existence of the trust can also provide certainty and comfort to your loved ones during an already stressful time because you've laid everything out for them.
• A Trust makes it possible for the Trustee to continue to manage the assets and generate income that will then be distributed to the beneficiaries. This was, the can continue to receive money into the future thereby preserving the well-being of the beneficiaries.

Drawbacks of a Trust

• Unfortunately, a trust does not come without its share of downfalls. Most importantly, a trust will cost more than a Will at the initial stage of planning and you have to provide more information up front. Furthermore, a trust contains more complicated documents than a Will and states that your assets must be assigned to the Trust.
• A Trust may be subject to abuse or breach of fiduciary duty by the trustee because there is no probate and no court oversight.

Conclusion

The information provided in this article is general in nature and not meant to address any specific circumstance. We therefore advise that you speak with professional to assist you navigate these issues and set up proper structures that are also tax efficient to help navigate these challenges.

Matters/issues relating to inheritance or the distribution of money/wealth can be a major source of conflict within families. Patriarchs/Matriarchs often assume that the current harmony within their family would perpetuate across the different generations. This is often not the case. Thus, one should endeavor to put measures in place to will minimize if not eliminate, any issues that would warrant disagreement amongst loved ones in relation to one's wealth.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.