In today’s fast-paced world, some people still use typewriters while others have embraced modern computers. Similarly, when it comes to preserving and transferring wealth, some stick to outdated methods, unaware of more effective alternatives.
One of such more effective means is a Trust arrangement but before we get into that, let’s explore two of some of the most commonly used but problematic approaches:
- POWER OF ATTORNEY
A Power of Attorney is a legal document that grants one person (the Donee or Agent) the authority to act on behalf of another (the Donor). Think of it as giving someone the power to make decisions for you in specific situations, such as during a medical procedure when you can’t decide for yourself.
It is this same concept that some asset owners have applied to their assets generally in which they appoint a spouse, lawyer or trusted person under a power of attorney and instruct such person to take certain decisions with respect to their properties if they pass away.
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 of power.
Hence, whatever instruction contained in a Power of Attorney can only be carried out when the Donor of power is alive.
While the law sometimes allows for an Irrevocable Power of Attorney which may still be valid if the Donor of power passes away, there are only two situations under which a Power of Attorney may be irrevocable:
(i) Where the Power of Attorney is Coupled with an Interest
A Power of Attorney is regarded as being coupled with an interest when the Agent who was given the Power of Attorney received it to enable him secure the performance of an obligation. An example is where Mr. A owes Mr. B some money. Mr. A then appoints Mr. B as his agent under a Power of Attorney to collect rents from Mr. A’s rental properties to satisfy the debt. In such 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.
(ii) Where the Power of Attorney is given for Valuable Consideration.
A Power of Attorney is given for valuable consideration when it is given by the Donor in exchange for something of value received from the Agent. An example is where Mr. A buys a parcel of land from 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 then appoint Mr. B under a Power of Attorney and give 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 revoke 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 owed to the Donee, then it is irrevocable and would not be invalidated by the death, incapacity or bankruptcy of the Donor. The court re-affirmed this legal principle in the case of Ajuwon v. Adeoti. In any other case, the death of the Donor would automatically invalidate the Power of Attorney by operation of law.
The above legal principle creates a legal problem for asset owners who create Power of Attorney in favor of a trusted agent such as a spouse or lawyer with the hopes that such person would carry out his instruction when he passes on. Since such Power of Attorney was neither given to the Agent to secure any property owed to him/her or to assure him/her that a particular obligation owed to him would be performed, the Power of Attorney terminates once the Donor passes on.
The reality therefore for asset owners who intend to secure their assets through Power of Attorney is that a Power of Attorney becomes worthless once the Donor of Power passes. The assets of the Donor of power would therefore be subject to the laws of intestacy.
It is however worthy of note that the instruction contained in a Trust arrangement does not terminate as a result of the death or lunacy of the Settlor.
- ASSET HOLDING COMPANY
Many asset owners in Nigeria create private companies to hold their assets, appointing family members as directors and shareholders. The idea is to give their spouse and children control over these assets after their passing.
While this may seem like a clever strategy on the surface, it comes with significant risks.
Under the Companies and Allied Matters Act 2020 (CAMA), the Corporate Affairs Commission has the authority to investigate any company’s affairs. If a company is found to be inactive or not fulfilling its intended purpose, CAMA allows for its dissolution. Once dissolved, all company assets become property of the state, with an exception for assets held in Private Trust for a third party.
This exception underscores the advantage and the strength of Private Trust. The consideration of the State always is to protect assets in a Private Trust even when other assets are being forfeited. Such consideration does not exist for assets placed in an Asset Holding Company.
Where the Commission cannot strike out and dissolve a company under a failure of substratum because of the time requirement, 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 or which has never carried on business in the usual manner. This was the decision of the court in the judicial matter of Re German Date Coffee Co.
Even if a company is operating as a legitimate business, it remains risky. Regulatory compliance, taxes, and potential legal disputes can deplete the assets. In cases of substantial debt or judgments against the company, these assets may be used to settle the liabilities.
Additionally, if a dissolution claim succeeds, shareholders rank low in the order of asset distribution under CAMA 2020, meaning they are unlikely to receive the intended benefits.
When all is said and done, it’s essential to stay informed about effective wealth preservation and transfer strategies. Outdated methods like Power of Attorney and Asset Holding Companies come with significant risks, while Private Trusts offer a safer and more reliable alternative. Make informed decisions to safeguard your financial future.