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:
- Financial Directives
- Medical Directives
- A Will
- A family trust
- Durable power of attorney
- Beneficiary designations
- Letter of intent
- Healthcare power of attorney
- Guardianship designations
- long-term care insurance to cover old age
- A lifetime annuity and life insurance.
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.
- Life insurance. This may be important if you’re married and your current lifestyle and monthly mortgage payment requires dual incomes. Life insurance may be even more important if you have a child with special needs or college tuition bills. You can get these from registered insurance companies in Kenya.
- Name a guardian for your children and a backup guardian, just in case when you write your will. This can help sidestep costly family court fights that could drain your estate’s assets and ensures that your children are well taken care of incase anything happens.
- Document your wishes for your children’s care. Don’t presume that certain family members will be there or that they share your child-rearing ideas and goals. Don’t assume a judge will abide by your wishes if the issue goes to court.
3. Establish your directives
A complete estate plan includes important legal directives.
- A living trust might be appropriate. With a living trust, you can designate portions of your estate to go toward certain things while you’re alive. If you become ill or incapacitated, your selected trustee can take over. Upon your death, the trust assets transfer to your designated beneficiaries, bypassing probate, which is the court process that may otherwise distribute your property.
- A living will or medical care directive, it spells out your wishes for medical care if you become unable to make those decisions yourself. You can also give a trusted person medical power of attorney for your health care, giving that person the authority to make decisions if you can’t. These two documents are sometimes combined into one, known as an advance health care directive.
- A durable financial power of attorney allows someone else to manage your financial affairs if you’re medically unable to do so. Your designated agent, as directed in the document, can act on your behalf in legal and financial situations when you can’t. This includes paying your bills and taxes, as well as accessing and managing your assets.
- A limited power of attorney can be useful if the idea of turning over everything to someone else concerns you. This legal document does just what its name says: It imposes limits on the powers of your named representative. For example, you could grant the person the power to sign the documents on your behalf at the closing of a home sale or to sell a specific stock.
- Be careful about who you give power of attorney. They may literally have your financial well-being and even your life in their hands. You might want to assign the medical and financial representation to different people, as well as a backup for each in case your primary choice is unavailable when needed.
4. Review your beneficiaries
The will and other documents may spell out your wishes, they may not be all-inclusive.
- Check your retirement and insurance accounts. Retirement plans and insurance products usually have beneficiary designations that you need to keep track of and update as needed. Those beneficiary designations can outweigh what’s in a will.
- Make sure the right people get your stuff. People sometimes forget the beneficiaries they named on policies or accounts established many years ago. If, for example, your ex-spouse is still a beneficiary on your life insurance policy, your current spouse will get the bad news and none of the policy’s payout after you’re gone.
- Don’t leave any beneficiary sections blank. In that case, when an account goes through probate, it may be distributed based on the state’s rules for who gets the property.
- Name contingent beneficiaries. These backup beneficiaries are critical if your primary beneficiary dies before you do and you forget to update the primary beneficiary designation.
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.
- If your estate is small and your wishes are simple, an online or packaged will-writing program may be sufficient for your needs. These programs typically account for tax and compliance requirements and walk you through writing a will using an interview process about your life, finances and bequests. You can even update your homemade will as necessary.
- If you have doubts about the process, it might be worthwhile to consult an estate planning specialist and possibly a tax advisor. They can help you determine if you’re on the proper estate planning path, especially if you live in a state with its own estate or inheritance taxes.
- For large and complex estate it is important to think of special child care concerns, business issues or non-familial heirs.
7. Plan to reassess
Life changes. So should your estate plan.
- Revisit your estate plan when your circumstances change, for better or for worse. This may include a marriage or divorce, birth of a child, loss of a loved one, getting a new job or being terminated.
- Revisit your estate plan periodically even if your circumstances don’t change. Although your situation may be the same, laws may have changed.
- It will take some effort to revise your plan, but take heart. The need to revise means you’ve already avoided the biggest estate planning mistake: never drafting a plan at all.
VARIOUS METHODS OF ESTATE PLANNING
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:
- Estate Plans With Wills – A last will and testament is the best-known part of an estate plan. A will lets you decide who gets your property when you die. You can use a will to name a guardian for your young children. You can name your executor, the person you want to handle your affairs and oversee the probate process. However, until you die, a will is not a legally binding document. Therefore, most estate plans are more extensive.
- Estate plan with Trusts – You can also include a trust in your estate plan. When you create a trust, you transfer ownership of your personal assets and real property to it. When you die, the trustee distributes your property according to your directions, just as an executor would do if you bequeathed assets in a will. The greatest difference between wills and trusts is that trust assets don’t have to go through the probate process to transfer property to your beneficiaries. Many people include both wills and trusts in their estate plans. A “pour over” will sends to your trust any property you didn’t already include.
- A living Trust– There are three parts to a living trust: creator, trustee (manages assets), beneficiary. Strongly consider naming yourself a trustee for control over assets. A living trust can be used as a substitute for power of attorney. You can determine when assets are passed on to a beneficiary; it doesn’t need to be immediately upon your death. A disgruntled heir can challenge a trust (a disgruntled heir can also challenge a will). You can fund a living trust at your desired pace. A living trust is revocable while you’re alive, but irrevocable when you’re dead. Furthermore, you can use a living trust regardless of the size of your estate.
- The Powers of Attorney – Estate plans can also address what will happen if you become incapacitated. Most trusts name a successor trustee, who will manage the trust if the person who created it can no longer do so. Wills can’t do this, however, because they don’t have any power until you die. If you use a will as the basic part of your estate plan, you should create powers of attorney, which will allow a trusted friend or relative to manage your financial affairs for you if you are incapacitated.
- Health Care Directives – Your estate plan can also include directives regarding your life and your health. Powers of attorney can address both your financial affairs and health care decisions if you’re incapacitated. You can also add a living will to your estate plan. A living will explains whether you want your life to be artificially prolonged if there’s no chance for your recovery. A health care proxy or power of attorney for health care names someone to make that decision for you.
- Durable Power of Attorney
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.
- Beneficiary Designations
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.
- Letter of Intent
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.
- Healthcare Power of Attorney
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.
- Guardianship Designations
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.
Cutting the tax effects of charitable contributions
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.
Prevents family squabbles
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.
Clarifies your directives
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.
Avoids the time and expense of probate court
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.
Keeps your family assets together
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.
Protects your heirs
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.