This opinion is an overview of trusts as an estate planning tool and specifically family trusts that seek to provide an alternative consideration to the traditional estate planning methods of wills and probate. Despite their flexibility and tax planning benefits, trusts, probably because of being misunderstood, are rarely used as estate planning tools in Kenya.

 

1.       Definition of a Family Trust in Estate Planning Context

(i)      A family trust is a trust whether living or testamentary, partly charitable, or non-charitable, that is registered or incorporated by any person or persons, whether jointly or as an individual, for the purposes of planning or managing their personal estate[i]. It is basically an artificial entity that derives its life from a document or instrument. It is created by means of a document known as a Trust Deed.  

(ii)    A family trust is an effective tool for estate planning since it aids in the preservation or creation of wealth for multiple generations. In Kenya, Family Trusts and Trusts in general are created and regulated under the Registration of Documents Act Chapter 285 Laws of Kenya and the Trustees (Perpetual Succession) Act Chapter 164 of the Laws of Kenya.

(iii)  A Trust should not be mistaken with a will. A will takes effect upon death whereas trusts may be used both during the life and after death of its creators. Both will and trusts can be used separately or together as a tool for effective estate planning.

 

2.       What are the elements of a Trust?

A family trust and trusts in general are comprised of the following elements:

(i)      A Settlor being the person who sets up the trust; 

(ii)    Trustees being the person(s) appointed by the Settlor to manage the trust for the benefit of beneficiaries;

(iii)  An enforcer who monitors the administration of the trust for the benefit of the beneficiaries; 

(iv)  Trust Property/Investments; 

(v)    The Trust Deed being the document which sets out the roles and powers of the trustees with respect to the trust property and the beneficiaries; and  

(vi)  The Beneficiaries of the Trust.

 

3.       What are the components of a Trust Deed?

The Trust Deed is usually comprised of, inter alia, the following details ;

(i)       Name and objectives of the Trust;

 

(ii)       Full details of the Settlor;

 

(iii)     Full details of the Proposed Trustees;

 

(iv)     Full details of the Enforcer;

 

(v)       Proposed physical address Domicile and residence of the trust;

 

(vi)     Description of beneficiaries and their necessary allotments if any;

 

(vii)   Description of the Trust Fund- A list of assets held by the trust, a letter/statement from the donor stating his commitment, the transfer of properties/ funds may be progressive but indicate the initial amount/properties to be transferred;

 

(viii) Administration details of the Trust including powers of trustees, accounts and record keeping, meetings etc; and

 

(ix)     A dispute resolution clause.

 

4.       Funding of the Trust

A Trust is usually funded by the person creating it. Usually once a Trust is created, the person creating it (Settlor) usually transfers the legal interest in assets to the Trustees and/or Trust to hold on behalf of the beneficiaries. The Settlor can also transfer cash at the bank or cash at hand to the Trust.

Further and subject to the terms of the Trust, a Trust may also accept property from any person to be added to the trust property.

 

5.       Management of the Trust

 

5.1.  A Trust is managed by the Trustees who derive their power and responsibilities from the trust deed. The Trustees have a fiduciary duty to the settlor to manage the capital and income of the trust for the benefit of the beneficiaries.

 

5.2.  The Trustees are also usually monitored by an enforcer[ii] whose primary role is to enforce the terms of the Trust and ensure that the Trust is run for the benefit of the beneficiaries. An enforcer is very key in a Trust since they ensure that the assets of the Trust are not wasted and/or misused by the Trustees to the detriment of the beneficiaries.

 

6.       What are the benefits of a Trust in estate planning?

 

6.1.  Trusts are often considered as tools for the very wealthy, however a trust has many benefits in the context of estate planning regardless of the size of your estate. The purpose of a Family trust is majorly to hold family assets for the benefit of the intended beneficiaries who are usually family members.

 

6.2.  The chief advantage of family trust is avoiding probate. Placing your assets in a trust can offer you the peace of mind of knowing that assets will be passed unto the beneficiary you designate, under the conditions you chose without first undergoing a drawn-out legal process.

 

6.3.  A trust can also provide some level of privacy with respect to your estate, the assets, and their distribution.

 

6.4.  Placing your assets in a trust may help protect them from creditors should you go bankrupt or should you become incapacitated before your death.

 

6.5.  A trust also removes assets from of undue influence over older frail members, broken relationships, greedy individuals etc.

 

6.6.  Tax advantages including exemptions from stamp duty and capital gains tax on transfer of properties into a registered trust or on income generated. Further income paid out towards education, medical income and early adulthood housing is not subjected to tax on the beneficiary.

 

7.       Are Trusts Tax Efficient under Kenyan Law?

 

7.1.  In Kenya, the Income Tax Act Chapter 470 Laws of Kenya (Revised in 2021) extends some tax exemptions to Registered Family Trusts. These exemptions extend to;

 

(i)      Certain income that is derived by the beneficiaries of the registered family trust. This entails any amount that is paid out of the trust income on behalf of any beneficiary and is to be used exclusively for the purpose of education, medical treatment, or early adulthood housing[iii];

 

(ii)    Any income that is paid to any beneficiary which is collectively below ten (10) million shillings in the year of income[iv];

 

(iii)  any property, including investment shares that is transferred or disposed of for the purpose of transferring the title or the proceeds into a registered family trust[v];

 

(iv)  the income or principal sum of a registered family trust[vi];

 

(v)    Any capital gains relating to the transfer of title of immovable property to a registered family trust[vii]; and

 

(vi)   The Commissioner of Taxes may also from time to time extend tax exemptions to registered family trust.

 

7.2.  The stamp duty act has exempted the transfer of property in favour of a registered trusts from payment of stamp duty[viii].

 

7.3.  In the foregoing, trusts that are established in Kenya are to some extent exempted from paying tax as described above. We therefore advise individuals to consider registering family trusts in Kenya so that they may enjoy the tax exemption benefits.

 

8.       Registration of Trust in Kenya

 

Registration of a Trust under Kenyan Law involves two stages: -

 

8.1.  Registration under the Registry of Documents Act: Under this Act a trust deed is prepared and executed by the Settlor and the Trustees and then stamped and registered with the lands office. This type of registration is considered limited for the reasons that it does not make a trust a body corporate, and any action can only be undertaken by trustees in their names. However, the trust can commence implementing the objects of the trust as a simple trust.

 

8.2.  Incorporation under the Trustees (Perpetual Succession) Act: Under this Act a trust registered under the Registration of Documents Act may take the additional step of registration under this Act. A certified copy of the trust deed and a petition for incorporation is lodged with the Principal Registrar of Documents for incorporation of the trust. The Principal Registrar has sixty (60) days after receipt of an application for incorporation of a trust to either grant or reject the application. Upon completion of the registration process The Trust becomes a body corporate with its own separate legal status from the trustees.

Conclusion

Effective estate planning is important as it gives you control of how you would want your assets to be held and distributed upon your demise. Making an estate plan a priority now can save money and time later and help your loved ones avoid potential financial hardship and conflicts. It is therefore important to establish an effective estate plan earlier rather than later. A careful use of wills and/or trusts can ensure that your assets end up where you want them to. Please note that a trust can settle your estate more quickly than a will and has the added benefit of providing confidentiality for trust assets. It is, however, prudent to choose the right trustees to ensure that the trust is managed professionally and without bias or fraud.

RESERVATIONS AND DISCLAIMER

This legal opinion is privileged, confidential and is protected by law and is intended solely for the recipient for whom it has been prepared. It is neither conclusive nor exhaustive of the law and all issues contained herein. Reliance on this Legal opinion should be accompanied by notification and any clarifications sought should be directed to the undersigned personally.

 

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