ESTATE PLANNING IN KENYA
This is the process of designating who will receive your assets and handle your responsibilities after your death or incapacitation. One goal is to ensure beneficiaries receive assets in a way that minimizes estate tax, gift tax, income tax and other taxes. It involves the process of anticipating and arranging for the disposal of an Estate.
Estate planning typically attempts to eliminate uncertainties over the administration of a Probate and maximize the value of the estate by reducing Taxes and other expenses. Estate planning is an ongoing process and should be started as soon as an individual has any measurable asset base.
As life progresses and goals shift, the estate plan should shift in line with new goals. Lack of adequate estate planning can cause undue financial burdens to loved ones (estate taxes can run as high as 40%), so at the very least a will should be set up even if the taxable estate is not large.
THE BASICS OF A GOOD ESTATE PLAN
A good estate plan should include properly setting up ownership of assets, designating beneficiaries where possible. In addition to financial matters, an estate planning should also consider the guardianship of any minor children, medical treatment planning and executing one or more estate planning forms such as:
RELEVANT STEPS TO TAKE IN ESTATE PLANNING
1. Inventory of assets and other stuff
It is important to inventory the tangible and intangible assets, then estimate their value.
|Tangible assets||Intangible assets|
|Homes, land, or other real estate vehicles including cars, motorcycles or boats, Collectibles such as coins, art, antiques or trading cards, Other personal possessions||Checking and savings accounts certificates of deposit, Stocks, bonds and mutual funds Life insurance policies, Retirement plans individual retirement accounts Health savings accounts Ownership in a business|
2. Account for family needs
Once there is a sense of what’s in your estate, think about how to protect the assets and family after you are gone.
3. Establish your directives
A complete estate plan includes important legal directives.
4. Review your beneficiaries
The will and other documents may spell out your wishes, they may not be all-inclusive.
5. Note the various estate tax laws
Estate planning is often a way to minimize estate and inheritance taxes. But most people won’t pay those taxes.
In some jurisdictions, only very large estates are subject to estate taxes. Some have estate taxes. They may levy estate tax on estates valued below the federal government’s exemption amount. While others have inheritance taxes. This means that the people who inherit your money may need to taxes on it.
6. Weigh the value of professional help
Whether you should hire an attorney or estate tax professional to help create your estate plan generally depends on your situation.
7. Plan to reassess
Life changes. So should your estate plan.
A comprehensive estate plan should consider what happens in the event of both death and disability.It should take into consideration what you want to happen to your property upon your death, the financial well-being of your family, the degree to which probate can be avoided, and how to eliminate or minimize estate taxes.
These goals can be accomplished through various means:
It’s important to draft a durable power of attorney (POA), so an agent or a person you assign will act on your behalf when you are unable to do so yourself. Absent a power of attorney, a court may be left to decide what happens to your assets if you are found to be mentally incompetent, and the court’s decision may not be what you wanted.
This document can give your agent the power to transact real estate, enter into financial transactions, and make other legal decisions as if he or she were you. This type of POA is revocable by the principal at a time of his or her choosing, typically a time when the principal is deemed to be physically able, or mentally competent, or upon death.
A number of your possessions can pass to your heirs without being dictated in the will. This is why it is important to maintain a beneficiary—and a contingent beneficiary—on such accounts. Insurance plans should contain a beneficiary and a contingent beneficiary as well because they might also pass outside of a will. Named beneficiaries should be over the age of 21 and mentally competent. If they aren’t, a court may end up getting involved in the matter.
A letter of intent is simply a document left to your executor or a beneficiary. The purpose is to define what you want to be done with a particular asset after your death or incapacitation. Some letters of intent also provide funeral details or other special requests. While such a document may not be valid in the eyes of the law, it helps inform a probate judge of your intentions and may help in the distribution of your assets if the will is deemed invalid for some reason.
A healthcare power of attorney (HCPA) designates another individual (typically a spouse or family member) to make important healthcare decisions on your behalf in the event of incapacity.If you are considering executing such a document, you should pick someone you trust, who shares your views, and who would likely recommend a course of action you would agree with. After all, this person could literally have your life in his or her hands.
While many wills or trusts incorporate this clause, some don’t. If you have minor children or are considering having kids, picking a guardian is incredibly important and sometimes overlooked.
Make sure the individual or couple you choose shares your views, is financially sound, and is genuinely willing to raise children. As with all designations, a backup or contingent guardian should be named as well.
Absent these designations; a court could rule that your children live with a family member you wouldn’t have selected. And in extreme cases, the court could mandate that your children become wards of the state.
PLANNING FOR ESTATE TAXES AS PART OF ESTATE PLANNING
The taxes applied on an estate can considerably reduce its value before assets are distributed to beneficiaries. Death can result in large liabilities for the family, necessitating generational transfer strategies that can reduce, eliminate, or postpone tax payments.
During the estate-planning process, there are significant steps that people can take to reduce the impact of these taxes.
Another strategy an estate planner can take to minimize the estate’s tax liability after death is by giving to charitable organizations while alive. The gifts reduce the financial size of the estate since they are excluded from the taxable estate, thus lowering the estate tax bill.
As a result, the individual has a lower effective cost of giving, which provides additional incentive to make those gifts. And of course, an individual may wish to make charitable contributions to a variety of causes.
Estate planners can work with the donor in order to reduce taxable income as a result of those contributions, or formulate strategies that maximize the effect of those donations.
This is another strategy that can be used to limit death taxes. It involves an individual locking in the current value and thus, tax liability, of their property, while attributing the value of future growth of that capital property to another person.
Any increase that occurs in the value of the assets in the future is transferred to the benefit of another person, such as a spouse, child, or grandchild.This method involves freezing the value of an asset at its value on the date of transfer.
Accordingly, the amount of potential capital gain at death is also frozen, allowing the estate planner to estimate their potential tax liability upon death and better plan for the payment of income taxes.
Life Insurance in Estate Planning
Life insurance serves as a source to pay death taxes and expenses, fund business buy-sell agreements, and fund retirement plans.
If sufficient insurance proceeds are available and the policies are properly structured, any income tax on the deemed dispositions of assets following the death of an individual can be paid without resorting to the sale of assets.
Proceeds from life insurance that are received by the beneficiaries upon the death of the insured are generally income tax-free.
Education funding strategies
A grandfather may encourage his grandchildren to seek college or advanced degrees and thus transfer assets to an entity, for the purpose of current or future education funding.
That may be a much more tax-efficient move than having those assets transferred after death to fund college when the beneficiaries are of college age. The latter may trigger multiple tax events that can severely limit the amount of funding available to the kids.
THE BENEFITS OF ESTATE PLANNING
A basic estate plan addresses what happens to your property and your children when you die. But estate plans can go even further. They can also plan for your incapacitation, such as if you’re in an accident or become ill and can no longer take care of your own affairs.
Estate plans are not a single document, but a whole collection of documents that you put together to deal with a variety of circumstances. Estate planning helps you avoid many unfortunate situations, and while it can take some time and money upfront, you can avoid many worse problems later on.
If you plan ahead, you can minimize the amount of your estate that goes to the government and maximize the amount that goes to your beneficiaries.
Clever structuring of flexible retirement accounts can help funnel more tax-free money to your heirs, while other tax-planning strategies such as strategic charitable giving can help you mitigate the tax bite.
Your family may normally get along well, but it’s still wise to write a will so that things remain that way. The possibility of a cash grab may rile up some relatives, while others may hide a sentimental treasure that they hope goes unnoticed. Regardless of your wealth, careful estate planning helps prevent your family from squabbling, whether it’s a little tiff or an all-out lawsuit.
Intention to give out a gift may exist but unless it’s written out in the estate, anyone can make a dash for it. An estate plan ensures your assets go to the person you want to have them.
By clearly spelling out your wishes – often with the help of a lawyer – you can help your loved ones remember you fondly or at least get what you intended.
Set up your estate right – think, a well-crafted trust – and you’ll sail through probate court, likely the most annoying and time-consuming step of the entire process.
Because of the ease of using a trust, more and more people are doing an end-run around the hassles of probate and setting up their assets this way. Plus, you don’t need as much as you might think to make it worthwhile.
Trusts can also be a valuable way to ensure that your money stays in the family. Structured correctly, a trust can keep a profligate nephew from blowing your lifetime of hard work in a generation. It may also keep money in the family, if a spouse tries to extract some of it.
A good estate plan can also protect your heirs in a number of ways. If your children are minors, your estate plan can instruct who will take care of them and how they will receive money.
It can also protect heirs from recrimination, if a relative would otherwise accuse them of stealing. A living will can also help heirs avoid some of the difficult health decisions during a parent’s end of life.