By Victor Orandi and Matthew Magare

In Kenya, ultra high net-worth individuals are defined as those having a net worth of more than Ksh. 3 billion. In 2018, the number of such individuals increased to 125. Meanwhile, by 2023, a 24% increase is expected amongst those whose worth exceeds Ksh. 100 million.^[1]It is estimated that Ksh. 5 trillion of this wealth is held in offshore jurisdictions. This concentrated wealth held by a few very wealthy families requires a robust succession process.

The concern of this super-rich class is that their wealth effectively transfers to future generations and compounds in value. These two objectives promote the establishment of family offices as a suitable vehicle to manage wealth through generations.

Family offices are advisory firms that manage the wealth of ultra-high net worth individuals. The family office is staffed with professionals such as financial advisers, lawyers, accountants and tax consultants. They provide a range of services, including wealth management, estate planning, financial planning, family financial literacy, succession planning, legal and tax services. Their primary role is to manage risk, grow wealth and create and maintain a legacy for the successors of the wealthy.

The emergence of family offices seeks to address the weaknesses of traditional succession planning. Traditionally, the creation of wills and trusts has been the staple. However, these estate planning tools have their own unique challenges and limitations.

A will represents the deceased last wish as to how his/her property will be distributed to family and other dependants upon their demise. A well-drafted will side steps family disputes as it clearly lays out the deceased last wishes. In the absence of a will, numerous inheritance disputes may be lodged with the courts by beneficiaries. These disputes are lengthy, messy and often unsatisfactory. Even where the will is not challenged, the estate can be diminished in the months before confirming the grant of probate. Thus a will in and of itself may not be an effective estate planning tool.

Trusts can also be formed to safeguard family property and enable the successful transfer of the property to the intended beneficiaries. Trusts are created through a trust deed, which sets out the duties and powers of trustees. They are used to move money or property to a person or institution (trustee) to benefit another person (beneficiary). This estate planning method avoids lengthy succession procedures applied by courts, which may cause a delay in managing or distributing the deceased property appropriately. Trusts also aid in asset protection against matters such as divorce proceedings and creditors’ claims, amongst others. However, the nature of trusts strips the control capacity from the creator of the trust and the beneficiary. They also don’t offer many tax advantages as they are subject to taxes such as capital gains tax, income tax and VAT due to their separate legal status. Trusts thus bear significant limitations in intergenerational wealth transfer.

Family offices provide an expandable estate planning method as they incorporate wills and trusts in the management, preservation and growth of the family wealth. They offer services such as creating wills, facilitating gifts during a lifetime, and company succession plans. Family offices may also maintain a charitable portfolio in accordance with the values and focus of the benefactors.

Family offices establish the financial worth of an estate easing the planning process. This is achieved through gathering and analyzing data based on the client’s cash flow and debt, ascertainable investments, insurance covers, taxes or any other information relevant to the client’s financial position. This information will assist the family in meeting the set objectives in wealth management, such as creating investment plans and other capital raising ventures workable for the family.

Family education is an important aspect of a family office. It educates family members on financial prudence factoring in family values and objectives. This minimizes inter-generational disputes with respect to family wealth. The offices provide asset protection services securing the transfer of wealth through generations.

In tax planning, the location of the family office and the nature and location of the assets and investments determine the taxes payable. Family offices can also be subject to specific tax exemptions depending on the business transactions involved. This includes an assessment of double-tax treaties available between two jurisdictions.

The costs of running a family office vary informed on the professional fees, taxation and other administrative fees.  Families should factor in the nature of their investments in financing a family office. Other factors to consider is the number of family members, tax jurisdictions and premises location.

Family offices may operate as limited liability companies, thus subject to the companies laws. Similarly, the professional staff and consultants who constitute a family office are bound by professional ethics regulations specific to their practice area.

Families now desire to have greater control over their investments and trust affairs while reducing their overall involvement. Family offices provide this opportunity. Family offices, on the large part, minimize succession disputes. By involving professional staff, various risks such as wastage and mismanagement of the estate are diminished.  Oftentimes, the wealth of the family increases exponentially under a well-managed family office.

^[1] The Wealth Report 2019