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Family business owners have a keen interest in sustaining the business as a family asset and as a legacy, according to PwC’s 2020 East Africa Family Business Survey. Estate planning is an important component for family business owners and their families to consider since it speaks directly to how certain assets will be preserved, managed or distributed. As part of an overall succession plan, estate planning clarifies how these assets will be passed on to the next generation or otherwise distributed.
For their East Africa Family Business Survey Report 2021, PwC, spoke to Sim Katende, an Advocate of the High Court of Uganda and a partner at Katende, Ssempebwa & Company Advocates about estate planning and why it is an important aspect of the overall succession planning process.
FOLLOW THIS LINK FOR THE FULL REPORT: https://www.pwc.com/ug/en/publications/east-africa-family-business-survey.html
What is estate planning, in general terms?
In East Africa, an estate planning process would generally begin with a conversation within the family, with an attorney or a trusted business advisor. For a variety
of reasons, the founder and/or owner would want to take action and ensure that his or her assets pass on to others – typically, other family members – in a predetermined way. Although estate planning can bring to the fore some uncomfortable emotions, it is an important aspect of succession planning. We have seen cases where a lack of an estate plan has created friction within families and it was avoidable, had the proper planning been done.
What are the typical components of an estate plan?
Typically, estate planning is accomplished through the making of wills and/or setting up a trust(s). Wills are usually the primary document in estate planning. A will
is a written legal document detailing the wishes and intentions of the individual, such as the family patriarch (in legal terms, the testator). It would document the testator’s assets and how they want those assets distributed, naming their heirs and the executors who will implement their wishes.
There are two kinds of wills i.e a living will and a testamentary will. A living will, declares and implements the testator’s intentions whilst they are still alive and a testamentary will, takes effect after the testator has passed on. At that point, the testator’s executors apply to the Courts of Law to secure Letters of Probate which authorise them to manage the estate. Even when this process is uncontested, it can take up to 12 months in Tanzania and Uganda and 18 months in Kenya, during which time the beneficiaries may not have access to the assets of the estate.
THE 4TH ANNUAL PEACE CONCERT: How Rotary is empowering communities through peacebuildingA trust, on the other hand, establishes a structure for administering the assets of the owner (or settlor) through a board of trustees. Trustees hold the legal title to the settlor’s assets for the benefit of the beneficiaries and provide legal protection by ensuring that those assets are distributed as the settlor intended and according to the trust deed and the governing local law. Living trusts allow the settlor to maintain control of their assets and for a successor trustee to step in as needed, such as if the settlor becomes incapacitated. Certain tax benefits apply to living trusts, which also allow for the smoothest continuity of ownership across generations and fewer delays.
Unlike assets bequeathed to individuals, a trust will continue to operate and its beneficiaries can continue to benefit from the trust’s assets even if one or more of the beneficiaries pass on.
Why is estate planning important?
There are many benefits to estate planning, including protecting the interests of the owner and ensuring that their wishes are carried out. Estate planning allows them to choose how their finances and assets are managed, should he or she become incapacitated or pass on suddenly, and it protects beneficiaries including those who may be minors, elderly or disabled. Estate planning also protects the family’s wealth for future generations and a trust can help protect assets from bad decisions, physical and mental infirmity, outside influences, creditor problems, divorce and other challenges.
Estate planning also helps to prepare future generations to receive and manage wealth or other assets, and it can help to secure the owner’s legacy. Philanthropic intentions can be implemented through a family foundation or charitable trust. In jurisdictions with inheritance tax regimes, proper planning can help to reduce the tax burden on the estate and/or the heirs.
In East Africa, only Tanzania currently has a semblance of an inheritance tax.
There are a number of pitfalls that families can avoid, such as naming the wrong trustees, failing to update estate planning documents regularly or simply not taking the time to think through the relevant issues.
Many family businesses do not survive from one generation to the next. The right approach to estate planning will vary amongst founders and families, but it is never too early to start the succession planning process.