SUCCESSION PLANNING IN FAMILY-OWNED BUSINESSES: A Legal Expert View On Effective Estate Planning

First of all, what is estate planning? 

Estate planning encompasses determining how your assets Will be preserved, managed, and distributed after your death or if you become incapacitated. Every family business needs to undertake succession and estate planning to ensure their businesses Will survive from one generation to the next.

What Does Estate Planning Involve?

In East Africa estate planning is most often done through making Wills and /or setting up a Trust(s).

A Will is a written legal document detailing, amongst others, a testator’s wishes of what should happen after his/her death, listing the assets they own, and how they would like those assets to be distributed and naming their heirs and executors who Will implement their wishes. Wills are usually the primary document in estate planning.

There are two types of will – a living Will, where one declares and implements their intentions while they are still alive and a testamentary Will that takes effect after they die. When the Will maker passes on, his executors apply to the courts of law to secure letters of probate which authorise them to manage the estate. Even in uncontested cases, depending on the jurisdiction, this process can take up to twelve months in Uganda and Tanzania and eighteen months in Kenya during which time the beneficiaries may not have access to assets of the estate.

In instances where one dies without a Will, the next of kin would apply to the Courts for Letters of Administration allowing them to administer the Estate. This process would involve family members sitting and having to agree on who becomes the Administrator(s)- usually the wife and/or older children. This is fertile ground for disputes which can tear a family apart with long drawn-out court cases and negative publicity. The resultant inability to make key business decisions could also significantly devalue the estate. Where no agreement is reached on who should be the Administrator, the law provides that the Administrator General would take over the management and distribution of such an estate, usually resulting in the sale of the family business. 

A Trust puts a Settlor (owner)’s assets under the control of a Board of Trustees who can act in his/her place for his/her beneficiaries once he/she passes away. The Trustees hold the legal title to the assets for the benefit of the beneficiaries. Trusts provide legal protection for the settlor’s assets, ensuring those assets are distributed according to the wishes of the settlor and are governed by the terms of the Trust Deed and the governing local law which in Uganda is the Trustees Incorporation Act Cap 165 (as amended), in Kenya the Trustees Act Cap 167 and in Tanzania the Trustees Incorporation Act No. 10 of 1999. 

Typically, one can have either a Testamentary or a Living (Inter Vivos) Trust. Testamentary Trusts take effect upon one’s death and usually appoint Trustees to protect the interests of minors or dependents like elderly parents who may be unable to manage themselves and their inheritances at the time of the Settlor’s death.  

Living Trusts allow one to maintain control of their assets during their lifetime and allow a successor Trustee to step in when one becomes unable to manage their affairs. Aside from potential tax benefits, Living Trusts allow for the smoothest transition if one becomes incapacitated.

Since the assets are transferred while the Settlor is alive there is no need to transfer them when the settlor dies. This allows beneficiaries to have immediate access to the assets and eliminates delays associated with getting Letters of Probate or Administration. As a bonus no creditors, divorcees or unhappy dependants can lay claim to any of those assets. This minimises potential disputes and ensures continuity of ownership across generations. 

Why Is Estate Planning Important?

The benefits of estate planning include: 

1. Self-preservation: Planning protects the Settlor and his assets in the event he becomes incapacitated and can’t make decisions for himself while he is alive. Are you sure your spouse and children Will make decisions in your best interests if you were alive but incapacitated?
2. Disposal of wealth in the manner you wish as opposed to intestacy (dying without a Will) where the Government decides how your estate is carved out – several years, several family wrangles and several court cases later. 
3. Minimizing Family wrangles: An estate plan Will enable you to choose who controls your finances and assets if you become mentally incapacitated or after you die.
4. Protection of Beneficiaries: Protection of minor or special needs beneficiaries like elderly parents.
5. Protection of family wealth: Assets that you place in a Trust are not owned by you or your heirs and beneficiaries. This means even adult beneficiaries can enjoy the use of your assets but are protected from bad decisions, physical and mental infirmity, outside influences, creditor problems and divorcing spouses.
6. Protection of generational wealth: Trust beneficiaries have a vested right to the assets, but the assets Will not necessarily form part of their respective estates should they pass away in future. The death of one beneficiary does not impact the operation of a Trust. Unlike assets bequeathed to individuals, your remaining beneficiaries continue enjoying the assets of the Trust ensuring secure uninterrupted succession.
7. Preparing future generations for the wealth they Will receive: Developing the next generation to be effective stewards of the family wealth.
8. Philanthropy: How do you want the world to remember you when you die? Your philanthropic intentions can best be implemented in future through a family foundation or charitable Trust – think Gates Foundation, Rhodes Scholars etc.
9. Reduces the tax burden on the estate: This is more important where family wealth is stored in jurisdictions with inheritance tax regimes. With estate planning, assets can be transferred to heirs with an eye towards creating the smallest possible tax burden. In East Africa, only Tanzania has a semblance of inheritance tax and therefore if you are domiciled in Tanzania this would be a consideration.

What Are The Common Pitfalls In Estate Planning And How Does One Avoid Them? 

Failing to make a Will could result in any or all of the following:

• Naming the wrong Trustees: Ensure that the person/persons named as Trustees have the required knowledge in the administration of estates. Furthermore, appoint a Protector who has the power to dismiss wanton Trustees and appoint others.
• Assets Will be controlled by others: If you place your assets in a Trust, it’s argued that there is a loss of ownership or control over these assets as Trustees will now be responsible for how those assets are used or distributed. If the Settlor is also the Protector during his lifetime this would mitigate this exposure.
• Not updating estate planning documents regularly or considering significant changes in the law: Simplediligence beginning with regular updating of documentation and consultations can avoid this.
• Failure to make provisions in case of changes or death of beneficiaries, impact of marriages or divorces on age-based distributions, to plan for creditors etc.  The right Trust Deed should address most contingencies.

Many family businesses do not survive from one generation to the next. While the right approach will vary from founder to family to business, the right call is for the founders to address Succession Planning now. 

Disclaimer: This article provides general information only. It is not intended to provide advice concerning any specific set of facts, nor is it intended to advise on all developments in the law.