My Family My Business Using Trusts without losing Value: Some Key Considerations July 2023 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. are enforceable by the beneficiaries. Private trust, by its very nature, applies more to family businesses. In creating a private trust, the settlor must have the legal capacity to create the trust, under the Nigerian law. An infant cannot hold a legal interest in land and as such cannot set up a trust except through his guardians or legal representatives but can create an interest in pure personalities and equitable interests in real property. What is a Trust? Except for charitable trust, the three basic elements of a private Trust are Certainty of intention, Certainty of the subject matter and Certainty of Objects. The settlor must expressly or impliedly indicate an intention to create a trust. The trust property must be clearly identifiable, and the beneficiaries must be clearly stated or expressed. 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 benefits 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. Settlor Legal Interest Trustee Beneficiary Interest Beneficiary 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 may be classified based on purpose, duration, creation method, or by the nature of the trust property or object. They may also be classified along the lines of when they are made (testamentary v living trusts) or by the powers of the trustee (discretionary or non-discretionary trusts) or the restrictions around assets (simple or complex trusts). There are other broad classifications of trust, which are the public trust and private trust. Public trusts are often made for a specific benevolent purpose of benefiting the public, usually for public, religious, and charitable purposes. They are open to inspection and the trustees’ management and purpose can be questioned. Differences between the Private & Public Trust In a public trust the beneficiaries are large, usually uncertain, may fall within a specific group and unknown, In a private trust, the beneficiaries are certain and known, they are limited and can effectively be used to transfer wealth from one generation to another in Nigeria. The major essence of a private trust is to confer benefits on human objects (beneficiaries) on the basis of filial or other considerations. Although there is also the possibility of creating private trust for non-human objects which are sometimes called non charitable trust or trust of imperfect obligations e.g. trust covering the maintenance of tombs and monuments or created for care of specific animals. A public trust is usually managed by a board of trustees which may be costly to maintain while in a private trust, the trustees are few and usually appointed by the Settlor. This tends to allow for greater confidentiality, although in some jurisdictions like the U.K, there are now mandatory disclosure requirements which tends to limit the confidentiality of such trust. 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 trust 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. Private trusts, on the other hand, are where the beneficiaries are definite and specific individuals. Private trusts are confidential and At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 152 countries with over 328,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com © 2023 PricewaterhouseCoopers Nigeria. All rights reserved. In this document, "PwC" refers to the Nigeria member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. Trust vs Will: Key considerations There are many potential considerations to weigh, both financial and nonfinancial, 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. 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. 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. 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. Contributors Esiri Agbeyi Private Wealth Services & Family Business Leader, PwC Nigeria Opeyemi Mabawonku Manager, Regulatory Compliance & Advisory Olaitan Adedeji Associate Director, Office of General Counsel/ Regulatory Compliance & Advisory Bukola Osikomaiya Senior Associate, Family Business & Private Client Services www.pwc.com/ng At PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 152 countries with over 327,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com © 2023 PricewaterhouseCoopers Nigeria. All rights reserved. In this document, "PwC" refers to the Nigeria member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
