Trusts are valuable tools in generational wealth planning. Their advantages include privacy – as they avoid probate, flexibility, asset protection from creditors and tax planning. There are, however, some key considerations to bear in mind before opting for a trust or selecting what type of trust to set up
What is a Trust?
A trust is a legal arrangement where one party (the settlor) transfers his legal right/interest in property (shares, money, land, building) to another (the trustee) who holds the property on behalf of and for the benefit of certain persons (the beneficiary).
Simply put, it creates a fiduciary relationship between the parties where the Settlor gives another party (the Trustee), the right to hold title to his properties or assets for the benefit of the beneficiaries. A legal document known as the Trust Deed defines the trust and how the terms and conditions of the trust are settled.
Proper documentation is important in a trust. All parties, as a matter of transparency, should have access to the terms binding the trust as well as all other dealings on the trust property/asset. It is therefore important to have a good understanding of the legal and regulatory expectations of all parties to a trust. In this edition we will be focusing on private and public trusts.
Classifications of Trusts
Trusts can be classified based on their purpose, duration, creation method, or the nature of the trust property or object. They can also be classified as testamentary or living trusts, discretionary or non-discretionary trusts, and simple or complex trusts.
Another classification of trusts includes public trusts and private trusts. Public trusts serve benevolent purposes, benefiting the public, religious, or charitable causes. They are open to inspection and subject to questioning regarding the trustees’ management and purpose.
Private trusts, on the other hand, have definite and specific individual beneficiaries. They are confidential and enforceable by the beneficiaries themselves, often used in family businesses. To create a private trust under Nigerian law, the settlor must have the legal capacity to do so.
For a private trust, three essential elements must be present: certainty of intention, certainty of the subject matter, and certainty of objects. The settlor must clearly indicate an intention to create a trust, the trust property must be identifiable, and the beneficiaries must be clearly stated or expressed. Charitable trusts have additional requirements beyond these three basic elements.
Differences between the Private & Public Trust
Public trusts have large and often uncertain beneficiaries, belonging to specific groups and mostly unknown. On the other hand, private trusts have limited and well-defined beneficiaries, enabling effective wealth transfer between generations in Nigeria.
Furthermore, private trusts mainly serve the purpose of benefiting human individuals (beneficiaries) based on family ties or other considerations. There is also the option of creating private trusts for non-human entities, such as non-charitable trusts or trusts for maintaining tombs, monuments, or specific animals.
Public trusts are usually overseen by a board of trustees, which can be expensive to maintain. Conversely, private trusts typically have a small number of trustees appointed by the Settlor, allowing for greater confidentiality. However, some jurisdictions like the U.K. now require mandatory disclosures, limiting the confidentiality of such trusts.
In Nigeria, while trusts offer great confidentiality, it can also be a great succession planning tool as it takes away the burden of writing a will, the registration process or the probate administration process. The Settlor in a private trust would have already provided for how properties will be managed or transferred to the beneficiaries.
Whilst creating a trust would provide for how a particular property should be managed and transferred, it may delay or push further down the line the perfection cost. It would not take away the legal requirements and necessary registrations or perfection documentation at the land’s registry needed to effectively transfer a landed property to the beneficiary and the antecedent costs.
Private trusts can be revocable or irrevocable (discretionary or non-discretionary). In a revocable trust, the settlor can easily change or terminate the terms of the trust any time after its formation.
In an irrevocable trust, the terms are absolute and cannot be changed without the consent of all the beneficiaries. Irrevocable trusts can also be classified into Irrevocable non-discretionary trusts and Irrevocable discretionary trust.
In an Irrevocable non-discretionary trust, it is impossible to withdraw the assets, even though the settlor has complete control over the trust. He decides which beneficiary gets which assets and how much.
For irrevocable discretionary trusts, on the other hand, the trustee gets to decide which beneficiary gets which asset and how much while the settlor only decides on the list of beneficiaries.
Trust vs Will: Key considerations
There are many potential considerations to weigh, both financial and non-financial, before deciding to set up a trust or a will. Below are some considerations that could help one decide whether to set-up a trust or make a will.
Taxation of Trusts: in Nigeria
The taxation of trusts relies on the control exercised and access to the trust assets by the settlor. Based on Nigeria’s Personal Income Tax Act (PITA), the settlor is to be exempted from bearing taxes where he/she is not in Nigeria throughout the calendar year or is away for less than 183 days in a 12-month period (Paragraph 2, Schedule 2, PITA 2021). Trusts are can also be chargeable to tax in the name of the trustees, who may be charged jointly or severally with the tax due in case of default.
Beneficiaries who earn income from the trust will be liable for personal income tax. Beneficiaries are taxed in proportion to the income received by each of them. Allowable deductions covering expenses relating to the trust and fixed annuities created by the trust must be considered before arriving at the taxable portion of the trust income. There is the Capital Gains Tax (CGT) consideration on the disposal of shares above a N100m threshold that trustees holding high-valued shares in their trust should consider.
The income of the trust which is either taxed in the hands of the settlor or beneficiaries or trustee is the income brought into and received in Nigeria. This offers a planning opportunity for offshore income.
It is also important to note that exemptions are available for certain income streams received in Nigeria. A foreign trust can hold assets situated in Nigeria but income from such assets may be subject to Nigerian taxes depending on how properly structured the trust is.
Care must be taken where the trust is registered in another country, and the settlor is resident in Nigeria to avoid creating a permanent establishment and tax exposure on foreign income. In the case of foreign immovable assets situated offshore, provided the beneficiaries are resident outside Nigeria, income from such assets will not be subject to Nigerian taxes.
Chargeable gains arising from the disposal of any trust asset shall be subject to tax only if brought into Nigeria. Where beneficiaries are Nigerian companies, foreign dividends, interest, and royalty will not be subject to Company Income Tax (CIT) if brought into Nigeria through government approved channels.
Foreign trusts are highly beneficial but not without its challenges depending on the structure and the tax residency of the settlor and the beneficiaries. A clear example is the Annual Tax on Enveloped Dwellings (ATED), an annual tax payable mainly by companies that own UK residential property valued at more than £500,000.
Read also: The essential building blocks for setting up a family foundation
This has made the UK unattractive and not exactly tax efficient for holding properties in a trust. Seeking periodic reviews from experts is advised as it is likely that tax regulations that impact trust assets, trustees, beneficiaries, and settlors will continue to change in the coming years both globally and back home.
Conclusion
Though wealth preservation and choosing the right vehicle that fits one’s purpose and plans can be a complex undertaking, it delivers clear rewards such as peace of mind for now, avoiding unexpected tax consequences, avoiding probate, succession planning, asset protection (e.g.from creditors) and security for one’s family down the line. Owners of foreign and locally-based properties/investments should be sure to consider which ownership, disposition arrangements and structures will result in the greatest global tax efficiency.
It is important for wealthy families and advisors to be informed and current on all of the tax rules and reporting requirements in jurisdictions where they play. When in doubt, consult an expert who can help navigate the complexities of a trust vehicle and its tax and regulatory implications in the local and international space.
How PwC can help
To have a more in-depth discussion about preserving your wealth using a trust vehicle or terminating an already existing one, please contact any member of PwC Private Wealth Services team below.
