Family Trusts As A Tool of Wealth Planning in Kenya

Photo by Sasun Bughdaryan

Introduction

One of the most effective and powerful ways of planning and transferring wealth across generations is through the incorporation of a family trust. A family trust is a trust created by a person for purposes of planning or managing their personal estate.

Parties to a Family Trust

The parties to a family trust are:

a. the settlor who is the person who donates or transfers assets to the trust;

b. the trustees who are the people who receive the assets from the settlor and manages them for the benefit of the beneficiaries;

c. the beneficiaries who are the people entitled to the benefit of the assets in the trust;

d. an enforcer may also be appointed by the settlor to monitor and enforce the terms of the trust for the benefit of the beneficiaries.

Benefits of a Family Trust

i. Trust assets are not subject to Settlor’s succession proceedings. Once a settlor transfers their assets to the trust, the trustees are recognised as the legal owners and the beneficiaries as the beneficial owners. Therefore, when a settlor passes on assets in the trust are not considered as assets of the settlor’s estate. Consequently, the trustees continue administering the trust without the need of going to court to obtain letters of administration and certificate of confirmation of grant. The court process is:

a) expensive especially where the dependants cannot agree on the distribution of the estate;

b) time consuming as it takes at least one (1) year to complete; and

c) lacks confidentiality as documents filed in court are accessible to the public.

ii. A settlor may also be a beneficiary of a family trust they have created thereby benefitting from trust assets.

iii. Separate legal entity – Trustees of a family trust can be incorporated under the Trustees (Perpetual Succession) Act, Cap. 486 Laws of Kenya and once they are incorporated, they become a separate legal entity from the settlor’s and trustee’s estate. This protects the trust property from any liabilities of the settlors or the trustees.

iv. Preservation of wealth across generations – Subject to the provisions of the trust deed, a family trust provides a structure whereby the assets can preserved in the trust and still be enjoyed by many generations.

v. Protection from spousal rights - subject to the provisions of the trust deed, the trust assets do not form part of the assets of the beneficiaries and are therefore not subject to matrimonial disputes.

vi. Transfer of assets to a family trust is subject to tax exemptions- conveyance of property into a registered family trust is exempt from stamp duties and capital gains tax.

Ways of transferring Assets to a Family Trust

A person can transfer assets to a family trust in various ways including the following:

a) Create a family trust during the person’s lifetime and transfer assets to the trust during the person’s lifetime. This option allows the settlor to personally transfer the assets to the trust and to have full control of the people who can benefit from the trust assets through the provisions of the trust deed. This is as compared to the succession process where the court has power to make decisions of who the beneficiaries are and the entitlement of such beneficiaries. The disadvantage of this option however is that the settlor loses the absolute control he or she had over the assets during her lifetime.

b) Create a family trust and a will through which the deceased bequeaths his or her assets to the family trust. In this option, the settlor creates the family trust and makes it a beneficiary under the will. This option gives a structure where the settlor can provide for the preservation, management and use of assets across generations without division and possible wastage upon the settlor’s death. It also allows the settlor to retain the settlor’s assets in his or her name during the settlor’s lifetime. However, courts still have the option to vary the distribution of the assets provided in the will.

c) A will can provide for the creation of a family trust and transfer of the assets to the trust. In certain circumstances, a person may die before a trust is incorporated and may leave a will providing that the executors of his or her will can create a family trust and transfer assets to the family trust. We advise on and implement the best structure for estate planning based on an individual’s circumstances. Please contact us at info@mckayadvocates.com; eva@mckayadvocates.com or njeri@mckayadvocates.com for further information.