It shouldn’t always be drama when transferring wealth to the next generation: Banker and lawyer share tips on legacy planning

This is an article that came out of a very sobering discussion where one of the bottom lines was that all human beings reach a stage where they can’t push their bodies anymore.

Kenya is 60. Equally, the blossoming flowers of the newly minted Republic of Kenya, the men and women who found a way to create wealth that could transcend generations, are now slowing down. A time has come for them to hand over the reins to their descendants.

As a matter of fact, post-colonial Kenya is witnessing its most significant wealth transfer. This has happened for hundreds of years in other countries but in Kenya, we are living in a period of one of the most significant wealth transfers.

Sadly, we have already seen some mistakes happen across Kenya.

Take this example: By August 2021, when the Unclaimed Financial Assets Authority last issued a statement on how much it had in sums surrendered by banks and other institutions that had no takers, there was a whopping Sh51 billion lying unclaimed.

Some of these unclaimed assets included safe deposit boxes in banks. And given that the authority deals with cash or near-cash assets like deposits and shares, there is much more out there left by people who have departed and are scattered, likely because of improper legacy planning.

An archetypal affluent Kenyan family led by Mr and Mrs Fanaka is featured in this discussion. The Fanakas are both c-suite leaders in their late forties and are parents to three teenagers. The two of us gave them advice on how to do succession right in various areas:

Mr and Mrs Fanaka have little to no idea of what legacy planning is, even though they have a significant amount of wealth while their age is running.

PAUL HAD THIS TO SAY: Legacy planning is simply saying, ‘I want my family to start from somewhere. I don’t want them to start from where I started from long ago. Therefore, I need to set up something so that they have a base on which they will build.’

The people who take legacy planning seriously are those who have realised they won’t live forever. Someday, you will have to call it quits or God will tell you to do so. So, what do you really want to be remembered for?

For others, it’s around businesses. They have built a business, or they see this business as a legacy plan, and they are saying, ‘I need this thing to continue into the future.’

And they are thinking about how the business transitions beyond them. Also, some people have now started becoming conscious about certain bigger causes like the environment, healthcare, or education.

There are quite a lot of pitfalls so far. We’ve seen a lot of accidents in this space so far. The reports are all over.

There are families where the transfer has not happened, or it was acrimonious, there was a lot of waste in the process, it was public so everybody got to know that it was not working.

And of course, there are many others who are silent, where people are struggling with those things. That is why we need to have the conversation now.

What we are experiencing now is the first – and most significant yet – wealth transfer happening. That’s what we are experiencing now.

We haven’t quite done this before. We started in the 2000s, but you see now people handing over wealth to the next generation. In Europe or America, it’s been hundreds of years.

ANNE’S REACTION WAS: Legacy planning, also known as estate planning, involves preparing for the transfer of assets and wealth to loved ones after death.

It goes beyond traditional estate planning by encompassing values, family narratives, and charitable giving. Legacy planning is important to navigate the complex probate process, minimize taxes, and ensure a strong financial legacy.

By working with financial professionals and estate planning advocates, individuals can create a comprehensive plan tailored to their unique circumstances.

Legacy planning allows individuals to leave a lasting impact on their loved ones and society as a whole, providing financial security and a positive influence for future generations.

Getting Started with Legacy Planning

The initial step in legacy planning involves gathering information about all assets and their locations, including investments, real estate, and insurance policies.

Individuals should also consider their specific preferences regarding beneficiaries, charitable donations, and advance directives for medical care.

Seeking expert assistance is highly recommended due to the unique nature of each person’s financial situation and the variations in laws and tax regulations.

Financial advisors and estate planning advocates can provide specialized guidance tailored to individual circumstances.

They can help individuals navigate legal complexities, optimize tax efficiency, and ensure that their legacy plan aligns with their values and long-term goals.

The Fanakas have always been jittery about having a joint bank account. They fear it may open a can of worms later in life.

PAUL RESPONDED: Joint accounts are among the most efficient ways of transferring wealth. The decision to have a joint account changes a whole lot from a wealth transfer perspective.

This is because when money is held in a joint account– and it could be someone with their son, daughter, wife, etc – the moment something happens to the person, the surviving persons take over.

And that transfer happens so seamlessly because you don’t have to go to any court. All you need is the death certificate and that’s it.

You bring it to the bank and voila! The transfer has happened. That is one of the most efficient ways of transferring wealth that I know; when you are dealing with assets that are in liquid or near-liquid. It becomes very, very easy.

A joint account is necessary. Everybody should have it. And you can do anything with it. You can have it like a form of container then you decide: what assets do you want to put there? If you want the joint account to have joint fixed deposits, fair game.

If you want to have a joint mortgage, so be it. If you want a joint investment, so be it. So, you decide. And you can decide the format you want the joint accounts to be: ‘This one will be with my son, this other with my daughter, or my with my spouse.’

ANNE QUIPPED: Joint accounts are critical because if you don’t have them, you need a court order to be able to access the funds in those accounts if the person is incapacitated.

If the person has died, then you must wait for the probate (formal succession) process to go through so you can access their account because you’ve been given the court’s authority to do so.

The Fanakas have a Will deposited with a lawyer. They believe this will avert property-related disputes when they are gone.

ANNE SAID: That is commendable. A Will is a requirement under the laws of Kenya. And when you don’t have a Will, we say that you have died intestate. When you have died with a Will, you die testate. That means you’ve died having put down your wishes.

And this is critical. The importance of a Will is that other than you writing down your personal wishes, you’re also able to capture the assets that you have.

And if you’re even sentimental, you can give directions to your family members on what to do with those assets. So, your assets won’t have to go through Probate.

The Will also captures what your assets are and where they are or even who the assets may be held by and thus they won’t have to go to the Unclaimed Financial Assets Authority as there will be a trail for your loved ones to follow to secure them.

The amount of turmoil you’ll save your family is immense, just because you said what you want. Many family members want to respect what the person who wrote their wishes said.

Besides Wills, other people are using Trusts. A Trust is essentially a document that is prepared between the Testator – that is the person who writes the trust – and the Trustees, the one(s) who carry out the wishes of the Trust. It’s like a contract document.

In that kind of contract document, you name the Beneficiaries, and only those people named in the document benefit but in a Will, there are rules under Section 29 of the Law of Succession as to who can inherit your property.

So, one of the small distinctions between a Will and a Trust is that the Will is governed by the law of succession and a Trust is governed under the Perpetual Trustees Act. They have different rules.

When you have complexities in families, for instance when you have underage children and you want to leave certain people in charge of those children, or in a polygamous family or family members who are disabled and need long-term care you want to make sure that those funds are used for a specific purpose or persons, then you can use a Trust.

The Fanakas have some insurance, but they are not sure about taking life insurance.

PAUL OBSERVED: Insurance is also a very efficient way of transferring wealth. And you may want to specifically say, ‘I’m taking out an insurance policy and the beneficiary is so-and-so.’

And the beauty of insurance is that it’s very specific and it’s very efficient, even from a tax perspective.

There is a certain tax allowance for the premiums you pay, for long-term plans, and a transfer is very efficient because it goes straight to the desired persons and rooms for challenging such in court are usually very limited.

ANNE NOTED: You cannot talk about legacy planning without talking about protection. A lot of legacy planning is also taking care of your risks. And what kind of risks do you have? You have risks in your assets and on your life.

You also have the insurances that you buy to ensure your children finalise their schooling, you ensure there is money for the family and your family continues being wealthy.

A key thing that happens in the West is that you make sure that each family member has a life insurance policy.

And in the kitty that you have, when one of them passes away, their life insurance policy continues to add on the kitty that the family already has.

So, if you’re already at Sh100 million, my life is also insured at another Sh100 million. So, at the time of passing away, and we are five family members when we all pass away, we leave each of us another Sh100 million each and our children then will have Sh500 million.

So, insurance is a powerful tool for growing wealth, not only protecting wealth but also growing it. So, that’s a key thing in terms of how we look at insurance, not only for protection but also for wealth growth.

There will be no one to withdraw money from Mr or Mrs Fanaka’s accounts in case they fall critically ill and need urgent care.

ANNE SAID: We normally advise our clients: even if you don’t trust your family so much and you want to be in control of all the funds, at least make sure that there is a medical account in the event that insurance has failed, that there is a medical account that you’re running that trusted family members can access; an emergency fund or medical fund in case somebody needs a quick admission or a flight out of the country because somebody is unwell.

So, have an account that can be accessed by yourself and two other family members. In those accounts, if you don’t trust everybody, you can at least have them countersign and then your fears can be allayed that there is a safety net with numbers.

Also, there is something we call the Power of Attorney for Health. Usually, if you are unwell and you’re incapacitated, you will need a court action to get somebody to make decisions on your behalf if you cannot do so on your own.

So, you find people fighting over someone who is sick. It’s because if they control you, they control your money. So, when you have the Power of Attorney for Health, you can choose the person who can care for you. And you know that person loves you.

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That is Fanaka’s situation and that is the advice we gave. It is our hope that it has enlightened you all. What’s your situation when it comes to legacy planning? Talk to us. We can help you think about it thoroughly and objectively.

We are here to ensure you don’t do it the wrong way and that you have the right structure. Start off with sending an email to [email protected] and we’ll take it from there.

Paul Njoki is the Head of Affluent Banking and Wealth Management for Kenya and East Africa at Standard Chartered.

Anne Mugwere-Agimba is a Certified Trusts and Estate Planner, Senior Partner at Agimba & Associates Advocate.