Why inheritance disputes are  on the rise

Before rags-to-riches business mogul and veteran politician Njenga Karume died three years ago, he knew he had laid out the best plans to secure his business and family legacy.

Mr Karume’s mind about how it was all going to work out was laid out in an entity he had formed for perpetuity – The Njenga Karume Trust.

On May 3, 2011, he made the decision of his life. After his death, the Njenga Karume Trust would take his place to “provide maintenance, education and advancement of life of the beneficiaries who are individual persons”.

The Trust would also advance the business prospects and interests of his massive empire, estimated today at about Sh100 billion.

He even took the trouble to detail the circumstances in which the supposedly water-tight plan could be terminated. This could only be done by him, by the Trustees with his concurrence or at the expiry of 75 years after the document was written.

To the trustees, he had signed off his wishes. Things seemed to be going on smoothly after his death in February 2012, prompting favourable media coverage.

“One year after tycoon Njenga Karume died, his empire remains calm and steady — making a big statement in a country where succession has proved a hard nut to crack for the wealthy,” wrote the Business Daily on February 24, 2013.     

Today, those well laid out plans appear to be coming unstuck. A vicious legal battle is unfolding in the courts after a breakdown of trust and communication between the trustees and some of the beneficiaries.

Some of Mr Karume’s children accuse the trustees of running down the empire, of skullduggery, of plain dishonesty, of neglecting the education and medical wellbeing of some of them and plain vandalism.

But the trustees have denied any wrongdoing and accused some of the late tycoon’s children of malice.  

The empire could well be crumbling if the differences remain unresolved. And the drama could play out in court for years — hardly a situation Mr Karume would have desired when he signed on the dotted line, stating how his business empire should be run when he’s gone.

NOT ALONE

The Karumes are not alone.

According to an article in the Harvard Business Review, the problem of creating and sustaining family legacy over business and property is a worldwide challenge.

“It’s no secret that family businesses can struggle with governance, leadership transitions, and even survival,” says the article published in the journal.

They list a few high-profile examples:

Banco Espírito Santo was rescued by the Portuguese government last year following the resignation of its CEO, the great-grandson of the bank’s founder, amid allegations of financial improprieties.

The Doosan Group, a South Korean conglomerate, was thrown into turmoil when the clan that runs it replaced one brother with another in the chief executive role.

Fiat, the Italian auto group run by the heirs of Gianni Agnelli, went through five CEOs and three chairmen in two years before bringing in an outsider to run the show.

And in the United States the New England grocery chain Market Basket faced employee protests and lost $583 million in sales as two cousins — one a board member, the other the chief executive, both grandsons of the founder  —  publicly vied for control of the company.

“Although we’ve also heard numerous family-enterprise success stories, cases of harmony, health, and longevity seem to be exceptions to the rule,” write the authors of the article.

They also cite research by the Family Business Institute, a consultancy firm that has found that only 30 per cent of these organisations last into a second generation, 12 per cent remain viable into a third, and 3 per cent operate into the fourth generation or beyond.

“Even those that do continue often see their value decline significantly when power changes hands at the top,” says the article.

Back in Kenya, Bookpoint, one of Nairobi’s oldest bookstores opened in the 1930s, shut down last year over what a manager at the shop attributed to a family dispute.

Then there is the family of former Attorney-General Mathew Guy Muli that was in the news in April 2014 over a bitter dispute about the control of the property he left behind under Mukengesya Holdings.

Nasty salvos flew between family members — Transport Principal Secretary Nduva Muli (now suspended over corruption allegations) and his sisters Justice Agnes Murgor, Ms Nthanze Muli and their mother Mrs Evangeline Celeste Muli — before the matter was finally arbitrated and settled.

ANOTHER EXAMPLE

Another example that captured public attention involved the family of tycoon Gerishon Kirima, which started even before his death in December 2010. The matter, which turned violent at some point, was in court until 2013.  

The family of former spy chief James Kanyotu is also in court in a sensational battle for the control of billions of shillings worth of property that he left behind.

The dispute is turning out to be a mega show of betrayal among putative family members, with a mother turning against her children, and the children turning against each other.

The latest row erupted after a DNA test by Dr John Mungai revealed that some of those claiming a share of the legendary spymaster’s billions are not his real children. The details emerged in court recently.

The scramble for Kanyotu’s wealth started after his death in 2008, with some women claiming he had children with them and others saying they were his children born out of wedlock and sought to be considered as beneficiaries.

But occupying the pride of place for longevity is the Mbiyu Koinange family dispute which has been engaging the courts for at least 34 years. The family is currently awaiting a court decision about how the wealth left behind by the powerful Jomo Kenyatta-era cabinet minister should be divided.

Advocate Anne Mugwere-Agimba, who has conducted research on succession matters in Kenya, says there is a serious crisis affecting all strata of society.

“It’s really bad. Nine out of 10 families do not have a succession plan. The major reason is because families are afraid of talking about finances at home. The common theory with parents is that you look for your own money. Among some communities, there is the theory that you do not divide your wealth when you are alive,” says Ms Agimba.

A dramatic rise in premium on land, she explains, has also overwhelmed some families who struggle to manage the windfall left behind. And despite the perception that only the rich are affected, the poor have not escaped the clutches of such disputes. 

“In courts, succession matters are overwhelming from the poor to the rich. The land crisis exacerbates the problem. Issues of complicated families, step families, adopted children who just grow up in families while their matters are not formalised and children born through mpango wa kando (mistresses) is also contributing to this problem. It’s a total crisis,” says Ms Agimba.

According to Senior Counsel Paul Muite, some of the very wealthy people have very little confidence or trust in their families.

“Some of them trust crooked lawyers, crooked business associates and shadowy banks. When some die, the family has no idea where the money or property is because some of it is even in the name of nominees,” says Mr Muite.

He adds that “they concentrate so much on making wealth that they have very little time to nurture their families”, leaving the children with a capacity challenge to manage and grow the assets.

“And because when they are alive they notice that, they try to run businesses and assets from six feet under by creating perpetual trusts. You tie the hands of your beneficiaries in a manner in which in your own mind, you will run your affairs after you are gone,” says Mr Muite.

He explains that there is a law that places a limit on how long an estate can be run in trust before it is distributed to the surviving beneficiaries.

“In Britain, where we borrowed our legal system from, they passed a law that we also have: it’s the rule against perpetuity to limit the timelines or the number of years that you are permitted to tie down your estate and your beneficiaries so that you cannot do it in perpetuity,” he says.

He proposes that those seeking to create trusts or who get ready to write wills should seek sound legal advice from lawyers who are experts in that area.

“Secondly, people need to accept that just as you face challenges in building an estate, there is a limit to which you can control what you made. At some point, you need to leave beneficiaries to their own devices. Instead of the estate being wasted by outsiders, it would be better to leave the property to the beneficiaries and their devices,” he says.

Ms Agimba cites the Kenyatta and Chandaria families as some of the success stories in passing on wealth to the next generation.

“The ones who survive well seem to have good structure; a good family governance system and a good corporate governance structure. They do have a family vision, values and mission which are ingrained in children as they grow up,” she says.

And she explains that families need to start planning early.

“You know it’s unfair to accumulate wealth and then dump the vision that created it on a 45-year-old when you are 80 years old. Children and potential beneficiaries need to grow with the vision,” says Ms Agimba.

The lawyer advises that if one creates a trust or if one intends to leave children in charge, then one needs to communicate properly and share with them the vision early enough.

“Sixty-five per cent of wills or trusts break down because of communication. The holding factor is in creating the right relationships,” she says. 

Presbyterian minister the Rev Phyllis Byrd Ochillo says the Bible reputedly encourages mortal man in a manner that can be summed up; “Thou shall make a last will and testament.”

“As we look towards the future when God promotes us to our eternal home we do this as stewards of gifts from God. It is essential we plan early for how our materials gifts will be shared. We should as people of God not be afraid to have a well reflected will and testament which is done with love and fairness to all we care for,” says Rev Ochilo.

EXPERT’S TAKE

Best practice in passing on generational wealth to your children

1. Develop a Family Wealth Strategy. This is done by agreeing and acting on the values the family will uphold in the long term. For example thriftiness, self-reliance, charity, hard work.

Family members should meet to define and document a family constitution or a family mission. This document should allow future and unborn generations the opportunity to update the statements.

2. The family and heirs should be engaged in open communication and shared decision making. Hold multi-generational family meetings; engage heirs in discussions on family finance, business decisions, and investment analysis, and explain the family governance roles to your heirs and let them practice these roles.

3. Teach the child family’s culture, history and values. Share estate plans with each heir.

4. Build trust. Most estate transfer plans fail due to breakdown in family trust and communication leading to heirs destroying the long term family wealth plan.

5. Provide education, training, mentoring and practice. Thayer Willis in Navigating the Dark Side of Wealth notes the importance which formal education has in exposing heirs to the wider world ideas, and the importance of teaching your heir about finances.

- Ensure heirs have opportunities for higher education.

- Encourage heirs to select and utilise mentors for various subject areas.

- Engage heirs with your circle of advisors.

- Assist heirs in finding relevant internship or employment to facilitate learning.

- Allow your heirs to have both positive and negative experiences. Financial advisors all stress the need for heirs to experience the full range of life’s challenges.

Let your heirs take on a job, start their own company, live on their own without your support.

Unearned money can be a great hindrance at certain critical ages, such as early teens to thirties as it interferes with the ability of your heir to find their own path in life.

Teach your heirs how to get what they want and show them they can do it.

                - Anne Agimba

To avoid problems over estate, start nurturing your heirs early enough

Anne Mugwere-Agimba

Japan’s Hoshi Hotel has been running as a family business since 718AD. The Hoshi family is in its 49th generation with no end in sight. But can Kenyan families successfully pass on generational wealth?

Many wealthy families have gone back to the drawing board on their estate planning following media reports on the Njenga Karume litigation. It had appeared that setting up a trust to handle the multi-billion-shillings estate was the height of organisation — in fact, the best laid plan. Since the matter is in court we cannot carry on this particular conversation further, but the questions remain:  why would an estate plan fail and what is best practice in passing on generational wealth be it in a will, in a family trust or through gifting when you are alive?

Estate planning is the process of anticipating and arranging for the disposal of money and property during a person’s life. It typically attempts to eliminate uncertainties over the administration of a probate and maximise the value of an estate.

Thus, the head of the family must have an estate plan. Even a half-baked estate plan is better than none as the children or wives left behind will at least know what your wishes were for them and your assets.

How then will you ensure that your family follows your estate plan?  When beneficiaries to a trust or heirs to a will contest the document, they most often do not agree with the founder’s wishes. 

However, unless the founder lacked capacity of mind as he drew up the estate, did not follow the Constitution (for example not leaving his wife her share of the marital home) or the executors left behind have abused their fiduciary duty, then it is not common practice for the courts to dismiss the estate plan because a beneficiary is not satisfied with it.

The court’s duty would as much as possible be to see that the trust or will wishes are carried out as closely as possible. The court would respect that since it was the father’s wealth, he was best placed to give directions on how the family and its wealth should be led and protected.

According to Forbes, only a maximum of 15 per cent of heads of families leave a plan for their family. Eighty-five per cent do not! This leaves the families without any leadership on how to carry on without them. These heads of the family are essentially leaving the courts to decide who is best to benefit from the estate. According to the laws in Kenya and world over, a deceased person’s property must be administered. If you choose not to write a will or a trust, the law does not allow a vacuum — and your hard earned wealth will be administered for you.

Families sometimes do not even know basic things like which bank accounts, shares or properties their parents had. This has given rise to the Unclaimed Assets Fund, which is really an accumulation of money left behind in accounts held in financial institutions — mostly by people who died and their families did not know the accounts existed.

The government has now decided that instead of the money continuing to be held by the financial institution they can make better use of it.

If you choose to leave your money with the banks in your “secret” account that your wife or husband does not know exists, then alas! the government has a plan for it for the country and not your family. At the very least let someone know all your assets so that your family may benefit.

According to research by the Financial Times:

• 7.5pc of families lack a wealth mission.  A wealth mission describes to the beneficiaries how the money was obtained, what the wealth means to the founder and what it should mean to the beneficiaries and how to continue accumulating and administering it.

• 7.5 per cent of estate plans fail due to technical reasons. For instance, the will or trust was not properly signed, or the testator was of unsound mind.

• 25 per cent of heirs are unprepared to receive or handle their wealth.

• An astounding 60 per cent of estate plans fail due to trust and communication breakdown amongst family members.

Estate planning should be a long term affair. It is about building good relationships within the family including open communication and trust. Most times parents are afraid to tell their children how wealthy they are for fear that their children will grow up with a sense of entitlement, laziness and worst of all without purpose. Let’s put this idea to test on some well-known personalities.

Prince William of England has been brought up knowing he will be King of England one day. His training began when he was a baby. When we listen to his accomplishments and observe his sense of duty, we have no doubt that he will make a great king of England when his time comes.

In Kenya, we have seen pictures of President Uhuru Kenyatta, when he was a boy, “hanging out” with his father Mzee Jomo Kenyatta and other leaders. It appears the grooming to be president started right from when he was a young boy.

The above mentioned steps on estate planning are life long and at best should start when the children are young. If, however, you have not yet started, the best time is now. The family get-together over the holidays can play a much greater role in passing on your wisdom.

Let your young daughter or son join you in the office over the weekends or holidays. Change your perspective, make a plan and take control for your family’s future as you build your empire. After all, your children should stand on your shoulders to see further and do more.

The author, an advocate of the High Court of Kenya, specialises in Commercial Law and also practises in the area of Commercial Trusts