THE PRODIGAL FATHER

Succession Planning Through Lifetime Gifts

Abstract

“A good man leaves an inheritance to his children’s children”[1]. But parents have the discretion, the timing and method of giving. In this article, Daniel Musyoka, Audrey Diru and Peter Juma explore succession planning through lifetime gifts, commonly known in Latin as ‘gifts inter vivos’ which translates to ‘while alive or between the living’. At the end, they take the view that while lifetime gifts can be very useful in passing wealth from one generation to the next, they should be well-thought-out and legal advice sought before signing away what one has worked so hard to acquire. Stories abound all over the world, including Kenya, of children who have turned against their parents or simply squandered their hard earned wealth.

1. Introduction

When Vijaypat Singhania gifted control of the Raymond Group, a well-known Indian conglomerate, to his son Gautam in 2015, he intended to keep his billion-dollar textile empire in the family. Unfortunately, their relationship disintegrated spectacularly as the father accused the son of kicking him out of an exclusive apartment and the company offices. The father sued his son in Bombay High Court seeking possession of the apartment. He claimed that, after giving up all his shares in Raymond in favour of Gautam, he was left to fend for himself and was living in a rented house in Mumbai.  There is a sad video of the father where he regrets the decision which he claims was made because of emotional blackmail”. The same can be assessed through https://www.youtube.com/watch?v=_CTUa27XojE .  

Some of the well-known family businesses worldwide are BMW, Nike, Roche, Tata Group and Walmart. In Kenya, we have NCBA Bank, Naivas Supermarket, Ramco Group, Bidco Group, and UAP Insurance. They range from small and mid-sized organizations to multinational corporations.

There is no doubt that family-owned businesses make a substantial contribution to economic development.  Arguably, the biggest threat to the survival of family businesses is succession planning. According to Credit Suisse [2], succession planning is significant to family businesses,

“not least owing to the relevance and involvement of founders and their families in the running of their companies. This includes decisions relating to whether ownership should be passed to existing family members in order to preserve the family legacy or in fact to non-family members, which may be in the best interest of the business itself.”

According to the same Credit Suisse report[3], India ranks third in the world for the number of family owned conglomerates, behind China and the United States.

What Vijaypat Singhania experienced is every parent’s worst nightmare. Parents fear losing control of the assets especially if the parent later needs the assets for his/her own financial security. The other fear is that the child squanders the wealth as the parent watches helplessly.

In April 2024, we started a series aimed at exploring five methods of succession planning.  These are through; joint ownership, lifetime gift, company, trust and will. The first article was an overview of these methods.[4] The second article discussed joint ownership, which is most appropriate for couples.[5] This third article discusses succession planning through lifetime gifts, which aims at passing wealth from one generation to the next.

• Historical and Contemporary Perspective of Lifetime Gifts

In ancient Rome, it was believed that a person was insane if they gave away their wealth to someone outside their family while still alive.[6]  By the 1850s, common law courts had developed regulations governing such gifts requiring elements such as capacity, intention, delivery, and acceptance for a gift to be valid.[7] Challenges to the validity of a lifetime gift under common law could be based on the absence of these elements. A gift could also be challenged on grounds of coercion or deceit.

The Holy Bible[8] records the well-known parable of the prodigal son, in which the younger son asked his father for his share of his inheritance. What was shocking is that, in Jewish culture, a father did not distribute his wealth until he was ready to retire and no longer desired to manage his estate or when he was going to die. His request was extremely disrespectful and suggested that he wished his father were dead. Interestingly, his father gave him what he wanted. We know the son squandered the inheritance in a lavish lifestyle and came back to the father penniless.

Contemporary legal systems have established ways to regulate the practice of making lifetime gifts.

• What is a Lifetime Gift?

Lifetime gifts are typically given out of feelings of affection, respect, charity or similar impulses rather than as a result of any moral or legal obligation. This means the donor, the person giving out the gift, is free to make a gift to any donee, the recipient of the gift, as he/she desires.

Black’s Law Dictionary defines a gift as the voluntary transfer of property to another made without compensation. The Law of Succession Act, Cap 160, Laws of Kenya (‘the Act’) does not explicitly define lifetime gifts. However, section 42 of the Act contemplates lifetime gifts and provides that gifts to a beneficiary during a deceased lifetime do not form part of the estate. The gift is only accounted for when determining the beneficiary’s entitlement to the estate potentially reducing their share during distribution. This means lifetime gifts cannot be included in the donor’s will for simple reason that such gifts no longer form part of their estate.

In the case of Re Estate of the Late Gedion Manthi Nzioka (Deceased)[9] thecourt definedlifetime gifts as the gifts made between living persons. While testamentary gifts take effect after the donor’s death, lifetime gifts are perfected and take effect during the lifetime of the donor and the donee.[10]  The chief distinguishing factor between lifetime gifts and gifts made in contemplation of death is that, whereas the former is absolute and takes effect atthe present time, the latter is revocable and takes effect at afuture time.

Lifetime gifts can encompass diverse types of properties such as cash, vehicles, jewelry or artwork and immovable property like land, real estate, and company shares.

• Elements of a Valid Lifetime Gift

The following elements must be present to have a valid gift:[11]

1. An intention to donate (animus donandi/donative intent)
2. Acceptance of the gift by the donee;
3. A sufficient act of delivery/transfer; and
4. Donor must divest himself of the property.

• Analysis of the Elements
• Intention to Donate

The donor must intend to immediately transfer title from himself to the donee. Intent to transfer mere possession of the property is not sufficient. This means, a valid inter vivos gift should not be conditional on the death of the donor – the donor must be immediately and unconditionally bound by the inter vivos gift.

In Lubberts Estate Re[12], cited with approval in Re Estate of Godana Songoro Guyo (Deceased)[13] [2020] the court emphasized that an inter vivos gift exists if the donor, while alive, intends to transfer unconditionally legal title to property and either transfers possession of the property to the donee or some other document evidencing an intention to make a gift and the donee accepts the gift.

1. Acceptance of the Gift by the Donee

The donee cannot be compelled to accept a gift against their will. In such a case where the donee rejects a lifetime gift, the donor simply takes it back to do with it as he/she pleases.

1. Sufficient Act of Delivery / Transfer

There must be proof that the donor successfully delivered the gift during his/her lifetime. This is typically demonstrated by showing that the donor transferred possession to the donee in such a way that the donee could use the gift immediately.

The Court of Appeal in Registered Trustees Anglican Church of Kenya Mbeere Diocese v David Waweru Njoroge [2007] eKLR held that “a gift of registered land becomes effective upon execution and delivery of the transfer and cannot be recalled thereafter even though the donee has not yet been registered as proprietor… Although the land is still registered in the name of the respondent, he is in the circumstances of this case, a bare trustee for the transferee having transferred the whole of his beneficial interest in the land…”

In Re Estate of Godana Songoro Guyo (Deceased) (Supra) the Court quoted Odunga’s Digest on Civil Case Law and Procedure Vol (III) Page 2417 at paragraph 5484 (d) e – 1 thus:

“Generally speaking, the moment in time when the gift takes effect is dependent on the nature of the gift; the statutory provisions governing the steps taken by the donor to effectuate the gift. …Equity will not come to the aid of volunteer and therefore, if a donee needs to get an order from a Court of equity in order to complete his title, he will not get it. If, on the other hand, the donee has under his control everything necessary to constitute his title completely without any further assistance from the donor, the donee need no assistance from equity and the gift is complete. It is on that principle that in equity it held that a gift is complete as soon as the donor has done everything that the donor has to do that is to say as soon as the donee has within his control all those things necessary to enable him, complete his title. Where the donor has done all in his power according to the nature of the property given to vest the legal interest in the property in the donee, the gift will not fail even if something remains to be done by the donee or some third person. Likewise, a gift of registered land becomes effective upon execution and delivery of the transfer and cannot be recalled thereafter even though the donee has not yet been registered as a proprietor. (See Shell’s Equity 29ED Page 122 paragraph 3)”

In Re Estate of Chesimbili Sindani (Deceased) 2021 eKLR. Musyoka J held that where the Deceased had given possession of the property to another and signed a transfer in his favour, but died before the transfer was registered, the gift became complete and did not form part of the deceased’s estate.

1. Donor Must Divest Himself of the Property

Failed inter vivos gifts cannot be saved posthumously since imperfect gifts cannot be perfected after the donor has passed away.

The Ontario Court of Appeal in Kavanagh v Lajoie[14]  stated that:

‘…for a gift to be valid and enforceable it must be perfected. In other words, the donor must have done everything necessary and in his power to effect transfer of the property. An incomplete gift is nothing more than an intention to gift.”

• Conclusion

Gifts inter vivos is a useful tool in succession planning, especially in family businesses or if a parent wants to settle his child in life.  Yet, loss of control and fear of misuse of assets is what makes inter vivos gifts unattractive. It all boils down to trust between the parents and children. Trust takes time to build, sometimes a lifetime.  If you are not sure, consider retaining a life Interest: that is gift the asset but retain a life interest in it. This means you can continue to use and benefit from the asset during your lifetime, and the full ownership transfers to the beneficiary only after death. Alternatively, consider other methods of succession planning like trusts, wills.  

What is clear is that giving out your assets to your children in your lifetime requires serious evaluation of your personal and family circumstances at the time and your prognosis of what the future portends. Then seek legal advice to prepare documents which suit your circumstances.

[1]  Proverbs 13:22

[2] September 2017

[3] Supra

[4]https://mmcasafo.com/news/when-the-roll-is-called-up-yonder-5-ways-to-put-your-earthly-affairs-in-order/

[5] https://www.linkedin.com/posts/mmc-advocates-muriu-mungai-and-company-advocates-_the-phrase-the-two-shall-become-one-originates-activity-7201102722077540353-9u_N

[6] Edward Gibbon, The History of the Decline and Fall of the Roman Empire (London: Strahan & Cadell, 1776-1789). Gibbon argues that the Romans were vested in curtailing gifts inter vivos for tax reasons – They had an inheritance tax, but no gift tax.

[7] Kimberly A. Whaley and John E.S. Poyser, ‘Inter Vivos Versus Testamentary Undue Influence: Origins, Differences and Recent Developments’ (2021) 40 Estates, Trusts and Pensions Journal 269.

[8] Luke 15:11-31.

[9] [2015] eKLR

[10] Essential Elements of Gifts https://gifts.uslegal.com/essential-elements-of-gift/

[11] Kimberly A. Whaley, ‘Attacking and Defending Gifts’ (2017) Law Society of Prince Edward Island https://www.welpartners.com/resources/WEL-Attacking-and-Defending-Gifts-PEI.pdf 

[12] [2014] ABCA 216

[13] [2020] eKLR

[14] 2014 ONCA 187