Estate Planning is all about planning for risks such as ill health, inability to earn income, untimely death, etc. It is also about the transfer of property, either during life or death, the methods used, and the risks associated with those methods.
In 2014, the Enhancing Financial Innovation and Access (EFInA) survey studied household dynamics in Nigeria and listed the financial risk with the greatest impact on household finances to include: serious illness of a household member (33.6%) and death of a relative/household member (27.7%). A household’s biggest financial risks are the “breadwinner” falling ill or dying.
How to protect income, and how to transfer of assets
Let’s start with protecting income. The most common way to hedge against a loss of income is to buy insurance. You can buy insurance to cover your assets; for example, you buy a home or car insurance. You can even insure your home appliances.
Meanwhile, insurance has a cost, that is the premiums paid. Therefore, do not insure what will become obsolete within the lifetime of the cover or pay to insure when the premium is more than the value of the assets. This is simple enough. The main risk here is to choose an insurance company that will pay premiums when the insured event eventually occurs. One of the most important assets to protect via insurance is your ability to earn, this is done via disability and life insurance.
Understanding disability or loss of income insurance covers
Disability Insurance or loss of income insurance covers you in the event you cannot work or perform your current occupation because of illness or injury. Disability Insurance is extremely important for a business with a key owner or single owner, as the EFInA study shows the biggest financial risk to a household is the incapacitation of the breadwinner. Getting disability insurance ensures you don’t lose income when you are sick for a long period of time.
If you’re an employee, There is a new Employee Compensation Act that mandates disability insurance. Ask your employer about this.
Health Insurance is another protection to take, especially as you grow older. For a fixed premium, you’re protected from extraordinary health care expenses that will completely distort your budget. Buy health insurance, put the cost of premium in your cash budget that protects your cash flow should you fall ill.
Let’s talk about Life Insurance
Another way to protect against loss of income is to buy life insurance. The whole idea of life insurance is to ensure the income of the breadwinner is not impaired. This is extremely important. You want to buy a life cover that ensures that your dependents do not suffer a loss of income if anything happens to you. You can also buy a life policy linked to an education option that pays the sum assured towards the education of identified wards. If you have a Retirement Saving Account, then your employer must take a Group Life Insurance cover for you of three times your remuneration. Make sure you identify a fit and proper next of kin and ensure the premiums are paid by your employer.
Now, Let’s Discuss Transfer of Assets
Assets can be transferred from the owner to a beneficiary via many methods. A well-planned asset transfer prevents dissipation of assets. The very first thing to do is to ensure all your assets are properly registered and legal. There are three main circumstances under which assets are transferred;
No Will: This has to do with assets transferred Intestate, i.e. assets transferred without a formal will or instruction of the owner. The assets will then be transferred in line with the governing laws of the state. If you don’t have a will, your assets will be administered and shared to your identified beneficiaries by the court-appointed Administrator. You want to avoid this. Also, not a Next of Kin designation is not enough, be specific how you want your assets to be transferred by writing a proper will.
[READ THIS: Why do I need insurance coverage?]
A Will: Assets can be transferred according to your instructions as stated in a Will. This allows assets to be transferred to beneficiaries according to the wishes of the owner, including the appointment of an Executor to the Will
A Trust: A trust is an arrangement whereby assets are transferred by an individual or a corporate, to a Trustee, to be held by the Trustee for the benefit of certain beneficiaries. Trust can come in effect even when the owner of the assets is still alive, this is called a Living Trust. The Trustee can also be a corporate Trustee.
The cost of a Trust is usually more expensive than a Will. However, a Trust offers the advantage of avoiding Probate, are more private and cannot easily be challenged. Trusts are also more flexible than wills. Other methods to transfer assets are the making of gifts to beneficiaries.
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Note that Probate is the Court process by which a Will is proved valid or invalid. When a person dies, the estate must go through Probate. This Probate process is overseen by a probate court.
When you do your Net worth review exercises and there is an increase in your Net worth, always update your will or Trust to capture the new assets.
To close, remember that what you’re protecting is not only your ability to earn money but to protect your budget from extraordinary events. Not buying vehicle insurance, for instance, can expose your budget to irreparably loss should anything happen to your car.
To summarize, from income, you first protect, then create an emergency fund then you can invest.
Question: Have you written a Will or Trust for your assets?
How MSMEs can get easy access to finance
MSMEs must take the following steps for loan readiness.
MSMEs are considered the backbone of the Nigerian economy. In 2019, they made up 90% of all registered businesses, contributed more than 50% of the country’s nominal GDP, and employ 84% of its labour force. Despite this, MSMEs were the recipients of less than 5% of all credit granted by the banking industry.
One reason for this is self-selection by MSME owners. Many MSMEs refuse to apply for loans from banks due to a fear of rejection and a belief that banks charge exorbitant fees and request hefty collateral before giving loans to MSMEs. Now more than ever, in this era of cashflow-based lending and low-interest rates, this harmful myth is costing businesses access to finance that they need to scale.
Another reason is the MSMEs’ lack of loan readiness. Unlike large companies, small business owners do not prepare themselves before applying for loans. This causes them to make many mistakes that discourage banks from lending to them due to a fear of non-repayment.
In order to overcome this hurdle and join large businesses in taking advantage of the low-interest climate, MSMEs must take the following steps for loan readiness:
1. Maintain financial records – Research shows that 69% of MSMEs in Nigeria do not keep detailed financial records. As a business owner, you must ensure that funds pass through your business account. Your business’s financial records as reflected in your bank statement will help your bank determine your repayment capacity. This is important, whether you want a collateral-free or collateral-based loan.
2. Use narrations for transfer into personal accounts – Again, always use your business account for business funds. However, if funds must be paid into your personal account for any reason, then ensure that those payments have a narration that reflects the purpose of the payment. For example, Two shirts purchased. This helps isolate business funds from personal when computing your turnover in order to determine your loan amount and repayment capacity.
3. Know what you want – Always know exactly how much you want and what you want it for. If your account officer asks you how much you want and you say “any amount you can give me”, they automatically assume you have no plan for the money or a plan for repayment. Before approaching your bank, determine how much you need and how much you can repay per month, using your monthly income.
4. Have a repayment plan – Always have a plan for repayment. Know how much you can afford to part with per month. Note however that your repayment plan might not align with that of the bank. Banks prefer not to take more than 33% of your monthly income in loan repayments, so your loan repayment period will probably be dependent on how much you can pay per month. Regardless, a well-thought-out repayment plan will build confidence in your repayment ability.
5. Engage your account officer– It is important to have an engagement with your account officer before applying for the loan. Instead of just writing a loan application letter to the bank and waiting for a response. Armed with your financial statement and your knowledge of how much you need and for how long, visit your account officer and have them work with you in getting your loan.
Ese Atakpu is a writer and banker.
AFEX raises $50 million to Finance Agri-SMEs in Nigeria
The $50 million Agri-SMEs fund is expected to bridge the funding gap between lenders and borrowers in the agric sector.
AFEX Commodities Exchange Limited (AFEX), a private commodities exchange company, has announced the first Warehouse Receipt Backed Commercial Paper in Africa. The paper has tech-enabled operations and a 24-hour fast cash turnaround for borrowers.
This was disclosed by AFEX in a statement issued and seen by Nairametrics on Thursday.
The $50 million Agri-SMEs fund is expected to bridge the funding gap between lenders and borrowers in the Nigerian agricultural sector with a commodity-backed instrument – for the first time.
Ayodeji Balogun, CEO, AFEX, stated, “The AFEX financing deal will help eradicate the high cost of procurement incurred by processors by deploying a discounted value of a warehouse receipt distributed among five leading players in the Food and Beverage, Trading Poultry and Animal Feed segments in Nigeria.
“The receiving companies are top 10 players in their respective segments. They have now been enabled access to a tool for managing price volatility, enabling up to 30% direct savings on prices.
“With our vision to reach a cumulative total of over $5 Billion in investment to the agriculture sector over the next five years, this financing deal is right on track to achieve this goal.’’
He added that as AFEX move towards building a derivatives market in Africa, “we want to be able to reduce exposure to price risk for stakeholders, by enabling them to hedge their positions and trade in commodity derivatives.”
Why it matters
- The warehouse receipts, which can then be transferred from commodities to a financial asset and listed under the borrower’s portfolio on the AFEX trading platform, will create a sustainable funding structure and address underfunding in the Nigerian agricultural sector.
- With the warehouse receipt system linked to financiers, the system allows financiers value and marks the commodities’ price to market on a real-time basis.
What you should know
- AFEX’s mission is to provide low-risk working capital facility for stakeholders in the Agro sector, in a way that is transparent and has a very high viable investment return.
- As a licensed commodities exchange and warehouse receipt system operator, it deploys a warehouse receipt system and collateral management infrastructure to increase market confidence for both lenders and borrower.
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