Strategies Risking Your Wealth Preservation and Transfer

//Strategies Risking Your Wealth Preservation and Transfer

Strategies Risking Your Wealth Preservation and Transfer

Imagine not knowing that computers existed. In this day and age, you would endure unnecessary frustration and hardship when preparing documents with a typewriter instead of living your best life!

Think that couldn’t be you? Well, any asset owner who is unaware of, or unwilling to leverage asset preservation through Trusts, is in the same boat as someone who lives in the 21st century, yet fails to see that computers are more efficient than typewriters.

Here are two common ‘typewriters’ that steal wealth from asset owners.

    A Power of Attorney is a legal document authorizing a person to act as an agent for someone else. The person who donates the power is called the Donor, while the person to whom the power is donated is called the Donee or Agent.

    Sometimes, a person who is about to undergo a serious medical procedure (such as a surgery) is given a Power of Attorney document requiring their signature. With this document, the patient can appoint another person to make decisions on their behalf, should any complications arise which make the patient unable to do so by themselves. This is a practical example of the use of a Power of Attorney, similar to that utilized among asset owners. A Donor may appoint a spouse, lawyer or trusted person under a Power of Attorney and instruct such a person to take certain decisions concerning their Estate in the event of incapacitation.

    However, a Power of Attorney, no matter how well worded, is defective as a wealth transfer vehicle because it generally terminates by operation of law in the event of death, lunacy or bankruptcy of the Donor. Therefore, instructions contained in a Power of Attorney can only be carried out when the Donor is alive.

    According to the law, the only two situations under which a Power of Attorney may be irrevocable (still valid if the Donor passes away) are:

    1. Where the Power of Attorney is ‘Coupled with an Interest’
      This applies when the Donee is given the Power of Attorney to enable them secure the performance of an obligation. An example is where Mr. A owes Mr. B some money. Mr. A may appoint Mr. B as his agent under a Power of Attorney to collect rents from Mr. A’s rental properties, which would satisfy the debt. In such a situation, the death of Mr. A would not revoke the Power of Attorney, and Mr. B would still be able to use that Power of Attorney to keep collecting rents until the debt owed to him is satisfied.
    2. Where the Power of Attorney is ‘Given for Valuable Consideration’
      This applies when the Power of Attorney is given by the Donor in exchange for something of value from the Agent. An example is where Mr. A sells a parcel of land to Mr. B. In the event that Mr. A has received full payment from Mr. B but the title to the land is yet to be perfected by the regulatory authorities, Mr. A may simply appoint Mr. B under a Power of Attorney, giving him the power to use or sell the property as he likes. Since the Power of Attorney was given as security for the money paid by Mr. B over the land, the death of Mr. A would not invalidate it.

    Nigerian courts have affirmed these two principles in several decided cases. In the judicial matter of Chime v. Chime, the court held that where a Power of Attorney is given to secure a proprietary interest of the Donee or the performance of an obligation, it is irrevocable and will not be invalidated by the death, incapacity or bankruptcy of the Donor.  In any other situation, the death of the Donor would automatically invalidate the Power of Attorney by operation of law.

    This ironclad legal principle creates a significant danger for asset owners who create Power of Attorney in favour of a trusted Agent (such as a spouse or lawyer) with the hopes that such a person will carry out given instructions when the asset owner passes on. Since such Power of Attorney was neither given to the Agent to secure any property owed to him/her, nor to assure him/her that a particular obligation would be performed, the Power of Attorney terminates once the asset owner passes on leaving their assets subject to the laws of intestacy.

    What cannot be terminated by death or lunacy? Instructions contained in a Trust arrangement.

    It is common amongst asset owners in Nigeria to set up a private company as a front to hold all their assets. This is done by appointing their spouse(s) and children as directors, and therefore shareholders, of the company.

    The rationale is that if the asset owner passes away, their spouse(s) and children would have total control over how assets bought in the name of the company are utilized. While this may seem ingenious and attractive on the surface, the asset owner risks all by doing so.

    The Corporate Affairs Commission has the power under Sections 357 and 358 of the Companies and Allied Matters Act 2020 (CAMA) to investigate the affairs of any company at any time. Where the Commission finds a failure of substratum, i.e. a company that is not carrying on its business objects, the Commission has the power to strike out and dissolve the company from the register of companies under Section 692 of CAMA.

    It is important to note that once a company is so dissolved, Section 693 of CAMA declares all the assets of the company to be Bona Vacantia, i.e. belonging to the State. Interestingly, the same Section 693 of CAMA makes it clear that in vesting all the assets of such Company in the state, exception should be made for any asset held in Private Trust for a third party.

    Where the Commission cannot strike out and dissolve a company under a failure of substratum, the Commission may choose to petition the court under Section 571 of CAMA to dissolve the company. The court will dissolve the Company if it finds that such company is a bubble which was never intended to carry on business in a proper manner.

    Even when the Asset Holding Company is operating fully as a business enterprise, such a method of asset protection remains risky. Besides taxes and regulatory compliance issues that will deplete the assets, there is always the risk that a company would incur a heavy judgment debt from an aggrieved creditor that claims injury as a result of products or services of the company. In such a situation, the judgment debt would be settled from assets that were supposed to be preserved.

    Furthermore, in the event that a dissolution claim against the company succeeds, the shareholders of the company which were intended as the primary beneficiaries of the assets would rank low in the order of distribution of the Company’s assets under Section 657 of CAMA 2020.

Simple Trust

Computers are designed to perform multiple functions, and they make it infinitely easier to process documents. Are you still using a ‘typewriter’, when you could be using a secure Private Trust to de-risk your assets?

For more details on how to establish a secure Private Trust, see our previous article: Private Trust as a Viable Means of Wealth Preservation and Transfer.

2021-01-27T11:10:45+00:00 January 26th, 2021|0 Comments

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