Taxation

T R U S T,
SETTLEMENT AND
ESTATE

DUKE ANAEMESIOBI ACA, ACTI, ACCA(In view)

 DEFINITION OF TERMS

1. Basis Period - Preceding year basis.

2. Person liable to Tax - in respect of income from an estate, trust or
settlement are:
• The beneficiaries, including any annuitant on their proportionate share in
the estate, trust or settlement’s income;
• The trustees or executor on the reminder, if any, after deducting all
amounts apportioned to the beneficiaries;
• The trustee or executor where the beneficiaries are infants; and
• The settlor or person creating the trust where”
3. Trust: An equitable obligation binding a person called the trustee to
deal with a property over which a control is exercised (which is called
trust property) for the benefit of persons (beneficiaries) of which he himself
may be one.
4. Settlement: A means by which the enjoyment of an estate or part of it
is transferred to another person, either through a disposition, trust, covenant,
agreement, arrangement or transfer of assets by reference to Trust Deed for
the benefit of persons specified.
5. Testator: A person making a will
6. Trustee: A person who is given the administration of a trust; a person who
held a property on trust for another. He may also be a beneficiary.
7. Beneficiaries: These are people that may benefit from the income of an
estate. They can be:
8. Legatee – a person to whom a legacy is bequeathed
9. Annuitant – a person receiving an annual payment from the estate which
may be charged on the income or capital of specific assets of the estate.

10. Estate: This is the aggregate of properties possessed by a person including

his goods, money and other types of possessions.
11. Executor: A person appointed by a person in his /her will to administer his
estate after his death.
12. Administrator: A person appointed by the court to administer the estate of a
person who died intestate or of a testator where an executor has not been
appointed or if appointed, does not act.
13. Administration Period: This is the period between the date of death and the
date the executor is able to set up a trust or distribute the residue of the
estate.
14. Life Tenant: The right of the person on the income or property held in
trust for life.
15. Settlor: a settlor includes a person by which a settlement was made or

entered into directly or indirectly and includes a person who has provided funds

directly or indirectly for the purpose of the settlement or has made with any

other person reciprocal arrangement for that person to make or enter into the

settlement.

16. Reminder Man: A person who has a right to the capital of the settlement
when the life interest terminates.
Total Income - The aggregate of all sources of income derived by the estate,
trust or settlement in any year of assessment. Expenses are deducted from total
profit.
Computed Income - This is the difference between the total income,
unrelieved losses and allowable expenses.

Connected Persons: Includes the husband or wife, brother or sister, ancestor,

linear descendant, uncle or aunt, nephew or niece related to a person who is the
trustee of settlement of any person who is connected with the settler
Chargeable Persons
The following are the chargeable persons in respect of settlement, trust or
estates:
1. Annuitant: Income derived from the estate by any person is chargeable
to tax on preceding year basis and the annuitant is entitled to personal reliefs
and allowances;
2. Beneficiaries, Trustees or Executors: Income derived from the estate
will be liable to tax on the preceding year basis. The beneficiary is entitled to
personal reliefs and allowances, but the trustee or executor will not receive any
relief or allowances; and
3. Settlor: The person who created the trust in circumstances where he can

direct the disposition of the income or the right therein.

Allowable Expenses
The following are deductible from the income of trust or estate:
a. Any expenses of the trustee or executor relating to the settlement, trust
or estate; such as fees but excluding amounts payable to beneficiaries.
b. Any annuity or fixed annual amount paid out of the income of the
settlement, trust or estate; and
c. Agreed capital allowances.
STEP BY STEP IN COMPUTING THE CHARGEABLE INCOME OF A
BENEFICIARY
1. Identify the sources of incomes for the Estate Trust Settlement
2. Sum up income from all sources to obtain the total income
3. Identify all allowable expenses
4. Determine the computed income by deducting Step 3 from step 2
5. Deduct discretionary payments to each beneficiary from step 4.
6. Deduct Step 5 from 4 to obtain the remainder of computed income.
7. From the remainder of computed Income, the amount distributed is allocated
as per trust deed.
8. The taxable or chargeable income of each beneficiary from the trust is the
sum of Step 5 to 7.
 N N
Income Earned x
Unearned x x
Deduct:
Authorized Expenses of Trustees x
Annuity of Fixed Amount x
Trustees or Executors Remuneration x x
Computed Income xx

FORMAT Less Loss Relief (if any) (x)

xx
Less Capital Allowance (x)
Expected Income Distributable Amount Due to each Beneficiary xx

A B C
N N N
Annuity of fixed amount x x x
Share of computed income x x x
Discretionary payments x x x
xx xx xx
 ILLUSTRATION ONE

Mr. Ada created a Trust many years ago for the benefit of his four children, Ade, Bintu, Mic and Dan. A legal
practitioner was appointed as the Trustee of his estate.

For the year ended 30 September 2016, the Trust income was N3,600,000. Each of the beneficiaries receive an annuity
of N180,000 per annum while administration expenses for the year was N60,000. The trustee is entitled to a
remuneration of 2.5% of the computed income.

Mr. Adaku instructed that discretionary payment of N25,000, N24,000, N22,000 and N20,000 be made to Ade, Bintu,
Mic and Dan respectively. In addition, 90% of the remainder of the computed income should be shared equally among
the four children.

As tax consultant, you have been asked to supervise the administration of the Trust.
REQUIRED:
• State the basis of assessment of Estate, Trust and Settlements.
• Compute the income of the Trust.
• Determine the amount due to each beneficiary.
ILLUSTRATION TWO

Dr Teddy died peacefully in hid sleep on 31st December 2015. He is survived by three children – Joe, Jay and Jane. Two
Trustees were appointed for the settlement created in favour of the children to ensure that they were not badly affected by
the demise of their father.

Details presented by the two Trustees for the year ended 31st December 2015 are as follows:

N’000
Rental income (gross) 360,000
Trading income 480,000
Interest on bank deposit 108,000
Sundry income 102,000

The following additional information is provided:

i. The interest income is from ABC Bank Plc ;
ii. Administrative and other expenses amounted to N36,000;
iii. Interest on debt repayment by the Settlement was N30,000;
iii. Interest on debt repayment by the Settlement was N30,000;

iv. Fixed annuity to beneficiary was N52,000 (Gross);

v. Under the terms of the Trust Deed, the Trustees made discretionary payments to John –
N35,000; Jones – N30,000 and Janet – N25,000;

vi. Each beneficiary is entitled to ¼ share of the net distributable income;

vii. Capital allowance for the year – N70,000;

viii. Trustees’ remuneration:

• Deed: Fixed amount of N30,000 each plus 2.5% of computed income; and

ix. The children have no other income.

In view of agitation by the extended family recently, you have been contacted as a tax consultant to compute the following:

a. Income tax payable by the Trustees on the Trust income.

b. The amount due to each beneficiary of the Settlement.