TRUSTS
A trust is, a legal relationship that is legally created and exists between a Settlor, who is the creator of the trust, a Trustee who is the protector of the trust, and a Beneficiary who shall be identifiable or ascertainable about a class or relationship with another person, whether living or dead.
The parties can either be an individual or a legal entity. Under the Trust, the Settlor will transfer legal ownership of their assets to the Trustee to hold for the benefit of the Beneficiaries.
Types of trusts
Charitable trusts- a trust formed for the exclusive purpose of the relief of poverty, advancement of education, religion or human rights, fundamental freedoms or protection of the environment, or any other purpose beneficial to the general public.
Non-charitable purpose trusts– they may be created for a specific purpose despite the absence of any beneficiary and it becomes valid if the purpose whether partly charitable or not, for which the trust is created is specific, capable, or fulfilled and is not legal and the terms of the trust provide for the disposition of surplus assets of the trust upon its termination.
Discretionary trusts- a trust where the beneficiaries or the benefits of the trust become ascertainable once the trust deed sets out the criteria or at the discretion of the trustees.
Irrevocable trusts– are trusts that do not contain an express power of revocation. A trust shall be deemed to be irrevocable if an express power of revocation has not been exercised by the settlor during the lifetime of the settlor.
Family trusts– The primary objective of a family trust is to create or preserve wealth for future generations, rather than operating as a trading entity.
Trusts, whether living or testamentary (will trust), partly charitable or non-charitable that are incorporated by any person(s) for planning or managing personal estate. Family trusts are made in contemplation of other beneficiaries (whether directly related to the settlor or not), made for the preservation or creation of wealth for generations, and are non-trading entities.
The Trust shall be valid if the settlors of the trust are also beneficiaries of the trust.
Family trusts are a versatile and effective financial planning tool. Their purpose is to preserve and manage family wealth, protect assets, and achieve specific financial objectives.
Family trusts are designed to provide flexibility, control, and privacy when it comes to managing assets, avoiding probate, and ensuring a smooth transition of wealth between generations.
Trustees are responsible for managing the assets held within the trust in accordance with the provisions outlined in the trust deed and any accompanying letter of wishes.
The letter of wishes is a written memorandum that provides detailed instructions on how the settlor would have managed the assets if they had retained ownership. Although not legally binding, trustees typically adhere to the letter of wishes unless circumstances make it disadvantageous for the beneficiaries.
Family trusts also protect the trust assets from creditors, as the trust assets are not considered the personal property of the settlor or beneficiaries. This safeguard allows the settlor to engage in high-risk ventures without jeopardizing the trust assets. Additionally, family trusts can protect generational wealth by preventing the splintering of assets in cases of separation or divorce, shielding them from relationship property claims.
Moreover, family trusts offer protection for family members with special needs or medical conditions. Provisions can be made within the trust to ensure that the assets are utilized for the benefit of beneficiaries requiring medical care or facing challenges due to age or infirmity. Trusts can also safeguard against spendthrift beneficiaries by imposing conditions on access to the trust, ensuring responsible financial management.
There are also tax and other efficiencies that are experienced as a result of having a family trust structure.
While family trusts offer numerous advantages, there are also a few considerations to bear in mind. One downside is the loss of ownership of assets, as they are transferred to the trust. Although the settlor retains some control and information rights, excessive involvement may undermine the benefits of the trust structure. Additionally, the settlor must account for the administrative requirements and associated costs of managing the trust on an annual basis.
Furthermore, potential future changes in the law regarding family trusts could impact the original objectives of establishing the trust. It is important to remain updated on any legal developments to ensure continued compliance and effectiveness of the trust structure.
In conclusion, family trusts in Kenya offer a range of benefits, including effective estate planning, asset protection, and provisions for beneficiaries with specific needs.
Irrevocable Living Trusts
An irrevocable Living Trust does not contain a revocation clause. Once formed, the settlor cannot make changes to the terms of the Trust. Property transferred by the Settlor is deemed to be solely owned by the Trust and does not form part of the Settlor’s personal property. This provides creditor protection in the event of the settlor’s bankruptcy or proceedings by the creditors.
Family Trust Defined
A family trust is a non-trading entity created for purposes of preserving or creating wealth for future generations. Apart from preserving, a family trust is a useful succession planning tool in that once the settlor transfers their assets to the trustees, they cease to be the owners of such assets and the trustees in turn are deemed to be the legal owners, while the beneficiaries become the beneficial owners.
Registered family trusts can be categorized into two: testamentary and living trusts.
a) Testamentary Trusts
A Testamentary Trust is created in accordance with the instructions in a person’s Will. It outlines how assets and how they will be distributed to certain named beneficiaries upon the testator’s death. It is governed by the Law of Succession Act and becomes effective upon the testator’s death, upon the conclusion of probate proceedings.
Other than the benefit of a testamentary trusts serving to consolidate one’s and preserve wealth for generations, the disadvantage is that one still has to go through probate proceedings to kick-start their operation.
b) Living Trusts
Living trusts are a creation of the Trustees (Perpetual Succession) (Amendment) Act. They are formed for the and become operational during the lifetime of the settlor. Living trusts’ beneficiaries need not be directly related to the settlor and can either can be either revocable or irrevocable.
A revocable living trust is one whose terms the settlor can change, amend or revoke during his/her lifetime as the assets of the trust are deemed to be still their property, while an irrevocable living trust is one whose terms are not subject to amendment, change or revocation by the settlor during their lifetime as the settlor is deemed to no longer be the owner of such property.
Beneficiaries of Family Trusts
The Amendment Act provides that: –
Companies or charities can be included as beneficiaries of the trust, including the settlor himself.
The settlor can impose obligations or conditions on the beneficiaries e.g. through the trust deed, the settlor may provide that upon reaching a certain age, the beneficiaries can start receiving income from the trust.
Similarly, the settlor can provide for the addition or exclusion of persons eligible to be beneficiaries of the trust.
Trust Property
Any property from the settlor or any person or entity may be added to trust e.g. land, cash, shares, vehicles etc.
During and after registration, the settlor can add property to the trust to which they are beneficially entitled, notwithstanding that the property is not legally in their name.
Trust Enforcer
It is not mandatory for a trust to have an enforcer, however the introduction of this concept in the Amendment Act helps to guarantee transparency and accountability with regard to the management of the trust.
An enforcer has a duty to report to the settlor or trustees any financial breaches and in such an event can either require trustees to take remedial action or pursue legal action against the trustees.
Benefits of Family Trusts
1. Family Trusts as a tool for tax planning
Following the enactment of the Finance Act, 2021, several amendments were made to the Income Tax Act and the Stamp Duty Act with respect to registered family trusts. These amendments provide for tax exemptions for some transactions affecting family trusts. These include; a. Exemptions under the Income Tax Act i. Income Tax Exemptions • Certain income derived by the beneficiaries from registered family trusts are exempted from tax. This include amounts paid out of the trust, on behalf of beneficiaries exclusively for education, medical treatment and early adulthood housing purposes. This applies to all Income of less than 10M per year. • The Act also provides for exemption on the income of a family trust. ii. Capital Gains Tax Exemptions • Property which is sold for purposes of transferring proceeds into a registered family trust are exempted from capital gains tax (CGT). • Individuals who transfer their property into registered family trusts are exempted from CGT payment for those transactions. b. Exemptions under the Stamp Duty Act With the introduction of S.52(2)(b), conveyancing transactions of registered Family Trusts are now exempt from paying stamp duty during the transfer of land, investment shares etc.
Trustees' Legal Duties and Liabilities
The trustee manages the trust’s assets, a significant responsibility. The trustee is either appointed by the settlor or the court if the settlor failed to appoint someone, or if the appointed trustees fail. The trustee must voluntarily accept his or her position. Once accepted, the trustee cannot resign without the consent of all of the beneficiaries or the court. A trust will not fail for want of a trustee.
Since the trustee holds legal title to the trust property, he or she owes fiduciary duties to the beneficiaries who hold equitable title. The trustee must distribute the property in accordance with the settlor’s instructions and desires.
His or her three primary jobs include investment, administration, and distribution.
A trustee is personally liable for a breach of his or her fiduciary duties. The trustee’s fiduciary duties include a duty of loyalty, a duty of prudence, and subsidiary duties. The duty of loyalty requires that the trustee administer the trust solely in the interest of the beneficiaries. The duty of prudence requires that the trustee is held to an objective standard of care in managing the trust property. Subsidiary rules include the duty of impartiality (no favoritism between classes of beneficiaries), the duty not to comingle trust property and the trustee’s personal property, and the duty to inform and account to beneficiaries. The trustee will always have duties, or the trust will become passive and legal title will pass to the beneficiaries.
The trustee has an affirmative duty not to delegate acts he or she could reasonably be required to personally perform. A trustee could, however, employ agents and attorneys where reasonable under the circumstances. A “trustee may delegate duties and powers that a prudence trustee of comparable skills could properly delegate under the circumstances.” the trustee is held accountable to a standard of reasonable care, skill, and caution when selecting an agent.
If there are multiple trustees, they carry a dual accountability for their own actions, inactions, and decisions as well as those of their co-trustees. At common
Beneficiaries can recover improperly distributed trust assets if they are traceable back to the trust. Beneficiaries’ claims against the trustee are of no higher priority than claims of other trustee creditors. Beneficiaries, however, and not creditors, are the only parties who can reach the trust property. If a trustee wrongfully disposes of the trust property, the beneficiaries can recover the property unless it has come into the hands of a bona fide purchaser for value. If the trustee disposes of trust property and acquires other property with the proceeds of the sale, the beneficiaries can enforce the trust on the newly acquired property.
The trustee is entitled to receive reasonable compensation and can be subject to loss of such compensation as well as a surcharge if they breach their fiduciary duties and thereby cause losses to trust.
Who are Family Trusts For?
Family trusts are suitable for a wide range of individuals and families, including:
High-net-worth individuals: Those with substantial assets who want to preserve and protect their wealth for their present family and future generations.
Business owners: Business owners often use family trusts to safeguard their business interests and provide for the financial security of their family members.
Parents and grandparents: Individuals who want to ensure provision for their children’s or grandchildren's financial well-being and education, can establish family trusts.
Individuals with complex financial situations: People with complex financial portfolios may use family trusts to manage and distribute their assets efficiently.
The End Goal of a Family Trust
The primary end goal of establishing a family trust is to provide for the financial well-being and security of family members and other beneficiaries well into the future. Family trusts can achieve several specific objectives, including:
Asset Protection: Protecting family wealth from potential creditors, lawsuits, or claims against the estate.
Estate Planning: Efficiently transferring assets to heirs and beneficiaries, often without going through the probate process.
Privacy: Keeping asset distribution and financial details within the family and out of the public record.
Continuity: Ensuring that wealth is managed and preserved across generations, even in the event of the settlor's incapacity or death.
Tax Efficiency: Utilising trust structures to minimise tax liabilities and enhance the financial benefits to beneficiaries.
Specific Beneficiary Support: Providing for beneficiaries' education, medical expenses, or other specific needs in a controlled and structured manner.
The trust deed should include the following information:
The names of the grantor/settlor (the person creating the trust), trustee, and beneficiaries
The assets and properties being placed in the trust.
The powers and duties of the trustee.
The terms and conditions for the distribution of assets or gains to beneficiaries.
The provisions for amending or revoking the trust, if necessary.
Drafting a trust deed is best done with the aid of a legal professional. In this way, you can cover all necessary legal eventualities and ensure your trust is drafted and registered in strict adherence to the law.
The trust deed should be signed and executed by both the settlor(s) and the trustee(s). The execution by both parties provides clear evidence of the intentions of both parties and of the agreed obligations assumed by the trustee.
Registration under the Registration of Documents Act (Cap 285, Laws of Kenya).
Upon preparation and execution of a trust deed, the next step entails making an application for registration of the Trust Deed under Registration of Documents Act (Cap 285, Laws of Kenya) at the Lands Registry.
The process of registration under the Registration of Documents Act takes one (1) to three (3) weeks from the date of application for registration. Once registered under this Act, the trust does not have a legal personality of its own. In order for the Trust to have a legal personality of its own, it has to be incorporated pursuant to the Trustees (Perpetual Succession) Act (Cap 164).
Registration under the Trustees (Perpetual Succession) Act (Cap 164, Laws of Kenya).
The process of incorporation of a trust under this Act is as detailed hereunder;
Pursuant to section 3 of The Trustee (Perpetual Succession) (Amendment) Act, 2021 an application for the incorporation of a registered trust shall be in writing and shall be accompanied by the following documents;
Duly registered Trust Deed and Constitution;
Petition (should be commissioned);
Diagrammatic representation of the common seal;
Abstract of minutes appointing the trustees;
Organization’s current financial status such as bank statements;
Statement of donor funding/commitment;
Curriculum vitae of trustees (for individual trustees);
Brief summary of the Trust;
Certified copies of Identity Card and KRA Pin (for individual trustees);
Certified copies of Registration Certificate and KRA Pin (for corporate trustees); and
Any other relevant document.
The Principal Registrar shall within sixty (60) days of receipt of the application for incorporation of a registered trust, approve or reject the application.
Upon incorporation, the trustees shall become a body corporate and shall have perpetual succession and a common seal, power to sue and be sued in their corporate name and may hold any movable or immovable property that may be vested in them by way of purchase, acquisition, donation, gift or other assurance.
In Kenya, trusts can be either unincorporated or incorporated.
Unincorporated Trusts:
Setting up an unincorporated trust doesn’t require formal registration. Trustees create a trust deed outlining their roles, responsibilities, and the trust’s objectives. Trustees must act honestly and in good faith, following the trust deed, common law, and the Kenyan Trustees Act. Failure to do so may lead to criminal or civil liabilities.
Incorporated Trusts:
For trusts intending to acquire and hold land, incorporation is necessary under the Trustees (Perpetual Succession) Act. Once registered, the trust gains the status of a corporate body with perpetual succession. This means its existence is not affected by the death or incapacity of any trustees, allowing it to enter into contracts, sue, or be sued.
Incorporation Process.
The process of incorporation of Trusts is listed under section 3 of the TPSA. Here’s a simplified breakdown of the incorporation process:
Preparation of Trust Deed: Trustees draft a trust deed outlining the trust’s purpose and structure.
Execution: Trustees, whether individuals or a corporate body, sign the trust deed.
Stamping: The stamped trust deed is submitted to the land’s office, and a nominal stamp duty is paid.
Registration: The stamped trust deed is registered under the Registration of Documents Act for issuance of a Certificate of Incorporation. This is mandatory for trusts intending to acquire land.
POWERS OF TRUSTEE;
Some of the notable general powers of Trustees, provided for under Part III of the Trustees Act, include the following;
Where a trust for sale, a power of sale of property is vested in a trustee, a trustee has the power to sell and or concur with any other person in selling all or any part of the Property.
Trustees have the power to sell subject to depreciatory conditions and such shall not be grounds for impeachment by the beneficiaries unless it also appears that the consideration for the sale was thereby rendered inadequate.
Trustees shall have and shall be deemed always to have had power to raise money required by the trust by sale, conversion, calling in or mortgage of all or any part of the trust property for the time being in the possession of the trust.
Trustees shall have the power to insure against all damage by fire and any building and insurable property and to pay premiums for that insurance out of the income of any other property subject to the trust without obtaining the consent of any person entitled to the income.
Trustees shall have the power to deposit documents held by them relating to the trust with a bank, banking company or other company whose business includes the undertaking of safe custody of documents and the sum payable shall be paid out of the income of the trust property.
Trustees may instead of acting personally employ and pay agents whether advocates, bankers’ stockbrokers, or other persons to transact any business or do any act required to be transacted or to be done in the execution of the trust.
Trustees intending to remain out of Kenya for a period exceeding one (1) month may notwithstanding any rule of law or equity to the contrary, by the power of Attorney (duly registered at the relevant registries) delegate to any person (including a trust corporation), for the execution or exercise all or any trust powers and discretion vested in them, during their absence from Kenya.
BENEFITS OF CREATING A TRUST.
Some benefits of creating a trust include the following;
Trusts ensure a smooth transfer of assets to the Beneficiaries by avoiding costs that would be associated with the long tedious probate process in court to determine the validity of a will.
Trusts give a level of control and protection to assets since the legal ownership is held by the Trustees who are bound by the provision of the Trust Deed.
Trusts allow flexibility since they allow Trustees to further invest the trust assets in their possession.
Trusts offer continuity, their life are not limited to the life of the settlor, and as such they offer a smooth transition in the event of the demise of the Settlor.
Trust can be used in moments when a settlor is incapacitated. Revocable trust enhances a level of certainty for settlors in moments of incapacity, during an illness, and/or a disability.
Family trusts are a valuable estate planning tool since it allows the separation of assets from personal ownership. This protects the assets from creditors, as the trust assets are not considered the personal property of the settlor or beneficiaries.
Trusts may offer protection for beneficiaries with special needs or medical conditions. Provisions may be made within the trust to ensure that the trust assets are utilized for the benefit of beneficiaries requiring medical care or facing challenges due to age or infirmity.
TAXATION ON TRUSTS IN KENYA.
Income from any settlement paid to or for the benefit of a child (under 18 years) of a settlor during the life of settlor is deemed to be the income of the settlor for purposes of tax, this is according to section 25 of the Income Tax Act, Cap 470, Laws of Kenya. Section 25 (7) of the Income Act, introduces ‘registered family trust’ in the definition of settlement. This effectively makes the income derived from the transfer of assets through a registered family trust the income of the settlor under the section and therefore subject to income tax.
Further under section 26, of the Income Tax Act, income from a settlement paid to persons other than the child of a settlor shall be deemed as the income of the settlor for income tax purposes. By excluding, “a registered family trust” from the definition of a settlement, Section 26 (5) of the Income Tax Act, effects that the income from a registered family trust is excluded from being deemed an income of the settlor and is therefore not subject to income tax when paid to persons other than the child of a settlor.
Any income chargeable to tax under the Income Tax Act and received by any person in their capacity as a trustee, executor or administrator shall be deemed to be the income of that trustee, executor or administrator, and where the income amount consists of qualifying dividends or qualifying interest that amount shall be deemed to be an amount chargeable to tax.
Any amount, received as income by any person beneficially entitled, from any trustee in their capacity, or paid out of income by the trustee on behalf of such person, shall be deemed to be income.
In the case of a registered trust, income tax is exempted from income received by a beneficiary or paid out on behalf of a beneficiary relating to;
Any amount paid out of the trust income on behalf of any beneficiary that is used exclusively for education, medical treatment, or early adulthood housing;
Income paid to any beneficiary which is collectively below ten million shillings in the year of income;
Any other amount that the Commissioner may prescribe from time to time.
Exemptions under the Income Tax on Trusts include the following;
Such parts of income of an individual chargeable to capital gains derived from the transfer of property including; investment shares which are transferred or sold to transfer the title or the proceeds into a registered family trust;
Income or principal sum of a registered family trust;
Any Capital gains relating to the transfer of title of immovable property to a family trust;
Exemptions under the Stamp Duty Act, include the following;
Any transfer made to a registered family trust as a gift under section 52(2) will be exempt from payment of stamp duty.
Section 117 (1) (h) introduces “a registered family trust” as an exemption to stamp duty, in addition to a will, codicil, or other testamentary disposition.
OTHER NOTABLE ASPECTS.
Enforcer
The TPSA Amendment Act, 2021 introduces the concept of an enforcer who can be an individual or corporate entity appointed by the settlor or the beneficiaries. The role of the enforcer is to monitor the administration of the trust for the benefit of the beneficiaries. An enforcer cannot however also be a trustee.
An enforcer has to report to the settlor or trustees any financial breaches and in such an event can either require trustees to take remedial action or pursue legal action against the trustees.
Though it is not mandatory for a trust to have an enforcer, the introduction of this concept helps to guarantee transparency and accountability concerning the management of a trust
Invalidity of Trusts.
A trust is valid and enforceable only per the terms of the trust. However, it becomes invalid if;
It was created to do anything illegal in Kenya;
its beneficiaries are not identifiable or ascertainable;
it was established by duress, fraud, misrepresentation, or in breach of a fiduciary duty;
if the terms are so uncertain as to render performance impossible; or
if the settlor had no legal capacity to create the trust.
Although a trust is created voluntarily and is effected without consideration, a trust shall not become void by virtue of the settlors bankruptcy, liquidation of the settlors property or proceedings, or a suit against the settlor by his or her creditors. The court may, however, declare a trust to be void where it’s proven that the trust was made for fraudulent purposes, including to evade creditors of the settlors.
A corporate institution such as a trust company or bank (again in most cases) is a better choice for a trustee. There’s a middle ground that can work very well, too: A family member can be co-trustee with an institutional trustee that can provide needed expertise and checks and balances.
Registration Process
Registrar- prior to the Amendment Act, trusts were registered through the Cabinet Secretary. Now trusts are to be registered with the Principal Registrar of Documents, a move aimed at reducing the bureaucracy in the process of registering trusts.
Timelines for registration- for registration and issuance of a certificate of incorporation by the Principal Registrar, is expected to be within 60-90 days. Typically, currently it takes 2-5 years for registration to be concluded.
Process- to incorporate a trust one needs to: –
Prepare a trust deed and other relevant documentation- the trust deed will specify who the trustees and the beneficiaries of the trust will be. For the purposes of this research, the trustees will most likely be the parents to the children, with the children as beneficiaries. The Deed will also set out the objectives of the trust, and its duration. Most trusts for children have a duration that lasts until the children attain the age of majority (18).
Pay stamp duty.
Register the Trust which can involve two stages under Registration under the Registry of Documents Act and Incorporation under the Perpetual Successions Act.
Registration under the Registry of Documents Act – registration under the Registration of Documents Act does not make a trust into a body corporate trust yet. However, the trust can commence implementing the objects of the trust as a simple trust. The process may take 1-3weeks.
Incorporation under the Trustees (Perpetual Succession) Act – after registration under the Registration of Documents Act, a certified copy of the Trust Deed and a Petition for Incorporation is lodged with the Ministry of Lands for incorporation of the trust. The process may take months.
Post-incorporation- Once a Trust is incorporated under the Trustees (Perpetual Succession) Act, the trustees shall thereupon become a body corporate by the name described in the certificate, and the Trust shall be able to:
have perpetual succession and a common seal;
power to sue and be sued in their corporate name; and,
subject to the conditions and directions contained in the certificate, to hold and acquire, and by instruments under the common seal to convey, transfer, assign, charge and demise any movable or immovable property or any interest therein now or hereafter belonging to, or held for the benefit of, the trust concerned in the same manner and subject to such restrictions and provisions as trustees might so do without incorporation”.
Taxation
The Amendment Act ties in with the changes made in the Finance Act of 2021. The Finance Act brought in material changes to the taxation of registered family trusts, principally, introducing various tax exemptions relating to transactions involving registered family trusts. In particular: –
exemption from Stamp Duty on the transfer of properties into a registered family trust.
exemption from Capital Gains Tax on the transfer of properties into a registered family trust
exemptions from income or capital gains taxes on incomes earned by the registered family trust.
to the extent that income paid out of a registered family trust to any beneficiary does not exceed KES10-million in a year, or where it is used exclusively for the purpose of education, medical treatment or early adulthood housing, such income is not subjected to tax on the beneficiary.
