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WHEN THE ROLL IS CALLED UP YONDER – 5 ways to put your earthly affairs in order

2024-04-19

WHEN THE ROLL IS CALLED UP YONDER – 5 ways to put your earthly affairs in order

INTRODUCTION
Jim Reeves, the distinctive country music maestro of the 50’s and 60’s, sang, “this world is not my home I’m just a-passing through”. Irrespective of your belief in the hereafter, you would like your earthly possessions, which you worked so hard to acquire, to be taken care of and your remains well interred.
Cumulatively, your earthly possessions is called “estate”. Yet experience has shown that most of us either do not plan how our estate is managed after we depart or plan well. Why? First, it is because we don’t want to think about death. Second, our loved ones also don’t want us to talk about it. Third, many of us do not understand what is meant by estate planning and what it entails.
Estate planning is therefore the process of planning, during one’s lifetime, of how one’s assets are to be managed and liabilities settled upon death.
A. Why the article?
The authors will introduce 5 ways of estate planning. In subsequent articles, they will delve into the details of each. For ease of memory, we acronymise them as JL-CTW to stand for:
a. J- Joint ownership
b. L- lifetime gift
c. C- company
d. T- trust
e. W- will
What happens when you don’t plan your estate? The estate is administered by the court under the Law of Succession Act. This is called intestate succession. The authors will also interrogate key aspects of intestate succession.
B. INTRODUCTION OF THE 5 WAYS OF ESTATE PLANNING

  1. Joint ownership
    If you own a property jointly with another person, it means that on your death, the surviving owner automatically becomes the owner with little or no expense and without going through probate or intestate succession process. Properties which can be jointly owned include land, bank accounts, shares and cars. Joint ownership works well with spouses and children. Take an example of a bank account, if one person dies, or is incapacitated or hospitalised, the other owner can still access the money in the bank account without the need to go to court.
    Joint ownership can be contrasted with ownership (tenants) in common. This is a form of ownership where each owner holds an undivided interest in property but in specified proportion, say 50:50. This means on death, the interest of the deceased owner does not terminate on his/her death. In other words, each has a separate and distinct title to their interest in the property which forms part of his estate and is subject to probate or intestate succession.
    Besides avoiding probate (where there is a will) or intestate succession, which can be time-consuming, costly and intrusive, the property which is jointly owned is not available to creditors of the estate.
    However, the decision to transfer a property should not be made lightly. Some of the factors to consider include income tax implications and loss of control over assets. In other words, seek legal advice.
  2. Lifetime Gifts
    The legal word for this is gifts inter vivos. This entails transferring the property as a gift to the beneficiary during the lifetime of the donor. The requirement of the law for such gifts are that they are transferred by an appropriate transfer document. On transfer, the gift is no longer the property of the deceased and is therefore not available for distribution though testate or intestate succession although it may be taken into account during distribution of the estate to the dependants.
    The key takeaway is that a mere promise, whether written or oral, or an unfulfilled intention, is incomplete and imperfect. Therefore, the Court will not compel the intending donor, or those claiming under him, to complete and perfect it.
    Some advantages of gift inter vivos are that the asset is no longer part of the deceased’s estate. This saves on probate fees and the beneficiary will receive the asset much sooner than if it went through the estate administration process. In addition, there can be great sentimental value in gifting before one’s death as they are able to watch their loved ones enjoy the gift.
    However, some drawbacks include the loss of control over the assets. This is because, once an inter vivos gift is made, the donor loses control over the gifted assets. This can be problematic if the donor’s financial circumstances change. Also, it can be painful to watch the recipient mismanage the gifted assets.
  3. Will
    A will is a legal declaration by a person of his wishes or intentions regarding the disposition of his property after his death. This means it takes effects after the death of the person writing the will, in law known as the testator, and the asset is transferred to the beneficiary to deal with it as he or she deems fit.
    Some of the advantages of a will are:
    • Flexibility: the testator determines who gets what based on his his wishes, which do not have to be objective. This could be on the basis of love and affection, specific needs of the beneficiary etc; and
    • One can donate to charity.
    • However a will can be invalidated if the testator is shown not to have been of sound mind when he made the will or the same was not made freely, that is by fraud, coercion, undue influence or mistake. Such a will is void, that is, as if it does not exist.
      Another key requirement of a valid will is that it should be signed by the testator (by some other person in the presence and direction of the testator) and signed by two (2) or more competent witnesses.
      Can one make an oral will? Yes. However, the same is only valid if it is made in the presence of two witnesses and the testator dies within three (3) months of the making of such Will. However, members of the armed forces or merchant marines during a period of active service are exempted from this time cap if they die during that period of active service.
      One key advantage of a will is that the testator can dictate the place of burial or other means of interring the body, including cremation, donation for medical purposes.
  4. Trust
    A trust is a legal framework by which a party enables another party, the trustee, the right to hold and manage the property or assets for the benefit of another, the beneficiary. The primary objective of a trust is to create or preserve wealth for future generations. Typically, a trust creates a legal relationship between the settlor, that is the person transferring the property, the trustee, that is the person who is appointed to hold the property for the benefit of a third party and the beneficiary, that is the third party who receives the benefit of the property transferred.
    The trust will therefore contain:
    i. the objects of the trust;
    ii. the properties held under the trust;
    iii. the power of the trustees; and
    iv. the administration of the trust.
    Trust -vs- a Will
    Unlike wills, trusts are operational during the lifetime of the settlor and as soon as the same are registered. Some can be operational on death. This means that the trust properties are not subject to probate as they are no longer considered as part of the settlor’s estate. Also, trusts are more difficult to contest than wills. This makes trusts a choice for people who are concerned about family disagreements over inheritance. Other advantages of a trust include:
    i. privacy since trusts are not a matter of public record, unlike wills;
    ii. Once incorporated, the trust gains a separate legal personality which protects the assets from creditors upon death. For wills, creditors may sue the Estate in a bid to recover debts owed by the testator;
    iii. Trusts can protect generational wealth;
    iv. Trusts can also safeguard against spendthrift beneficiaries; and
    v. Tax benefits- exemption from stamp duty and capital gains tax on the transfer of properties to the trust. Where trust funds are expended exclusively on a beneficiary’s education, medical treatment, or early adulthood housing, they are also tax-exempt.

Disadvantages of a Trust
i. Depending on the size of the estate, setting up a trust can be complex and costly.
ii. Once the trust is operational, it would ordinarily attract administrative costs.
iii. Loss of ownership of assets, as they are transferred to the trust.
iv. After the settlor dies, it is assumed the trustees will have the vision of the settlor, will be accountable to the beneficiaries, and the beneficiaries will cooperate. Experience has shown otherwise.

5. Limited liability company
In law, a limited liability company is a separate legal entity separate from its directors and shareholders. In Kenya, we are all too familiar with family businesses which collapsed after the founder died due to sibling wrangles. This means it is not enough to just set up a company and give shares to children. This is because it is often difficult to make a distinction between ownership and succession management.
However, if managed well, a company can be a useful tool of transferring assets to the younger generation so that they can get involved in its management as early as possible. The challenge comes if you are not ready to hand over control of your business or you may feel that your children aren’t yet ready to run the company. Sometimes, the children’s interest may not converge hence creating fatal conflicts. If you start early enough, and with proper structures, it is possible to identify which of your children have the interest and have what it takes to run the business on their behalf and on behalf of all their siblings, including those who may not be involved in the day to day running of the bossiness. Advantages of a well-crafted family company include:-
i. protecting your assets from potential creditors because a company is distinct from its directors.
ii. It is a smooth ownership transition which avoids probate succession;
iii. minimises tax liabilities for your heirs.
C. CONCLUSION
Whether to use any of the 5 ways is your choice, which should be informed by the size of the estate, the level of control the owner of the assets would like to maintain, and the nature of the assets. It is also possible to use more than one of the 5 ways at the same time. We must however underline two things; that none of the 5 ways is foolproof and one size does not fit all.
One more thing, the chances of success of either of the 5 ways are directly proportional to the trust and friendship you have built with your spouse and children over the years. So, start early.
Our legal experts are available to discuss with you to come up with the best that suits your personal circumstances.

Daniel Musyoka, Karen Muthee & Solomon Opole