FAMILY TRUST

1. What is a family trust?

Section 3D of the Trustees (Perpetual Succession) Act defines a family as

a trust, whether living (takes effect during the lifetime of the settlor) or
testamentary (takes effect after the death of the settlor), 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.

Parties:

i. Settlor – creates the trust by transferring ownership of their assets into the
trust, and appointing a trustee to administer and manage those assets on
behalf of the beneficiaries.
ii. Trustee – 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.
iii. Beneficiaries – individuals who receive benefits from the family trust.
iv. Enforcer – an independent party separate from the trustee, who monitors
and ensures compliance with the settlor's wishes.

Fundamentals of a trust:

a) Capacity of settlor.
b) Capacity of beneficiaries -minors cannot have legal interest in land.
c) Certainty of words - words must establish an intention to set up a trust.
d) Certainty of subject-
 Trust property must be clearly identifiable
 Certainty of beneficial interests
e) Certainty of objects - ascertained/ascertainable beneficiaries. The terms of
the trust deed may expressly provide for the addition or exclusion of a
person in a class of persons eligible to be beneficiaries of the trust.

Unlike other kinds of trusts, the rule in perpetuity outlined in section 5 of the
Perpetuities and Accumulations Act does not apply to family trust. 1
Subject to the terms of the trust, property may be added to the trust property
after creation of the trust.

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Section 2(9) of the Perpetuities and Accumulations Act

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 2. Project proposal for the establishment of a family trust

Step 1: Highlighting the purpose (objectives) and apprehensions of setting up the

trust.

The founder of the trust (the settlor) has to identify the purpose and objectives of
setting up a trust, which can include: succession planning etc.

It is also critical that the settlor communicates their apprehensions or

foreseeable challenges usually brought about by unique family dynamics for
example, children born out of wedlock, polygamy, minors or vulnerable
dependants or any other unique dynamic that has a bearing on the succession
plan.

The trust deed should also contain;

a) Statement and short description of the property or interest therein which

at the date of application is held or intended to be held by the trustees.
b) The names and addresses of the Trustees. The proposed title of the
corporate body, of which title the words "trustee" and "registered" shall
form part. The proposed device of the common seal. The regulations for
the custody and use of the common seal.

Step 2: Identifying how the trust will be funded

The founder of the trust has to identify the assets (both movable and
immovable) that will form the trust fund. For example, any government bonds,
company shares, employment benefits, pension benefits, Sacco benefits or
savings, land, apartments or commercial properties that they own. The trust can
also be funded by 3rd parties other than the founder of the trust. This can be
done through transfers from 3rd Parties to the trust, donations, debt settlement
by the founder’s debtors into the trust account or contributions from other family
members.

Step 3: Deciding who will manage the trust

The first trustees of the trust are usually appointed by the founder of the trust
while any subsequent or replacement trustees are appointed by the Board of
Trustees in accordance with the terms of the trust deed. The founder may
appoint his or her peers, relatives or adult children to be a trustee. He or she
may also engage the services of a professional, independent corporate trustee to
undertake the administrative tasks and assist other family member trustee to
smoothly run the trust and protect their legacy.

Step 4: Preparing the Trust Deed and related documents.

This should be done by an experienced professional, preferably, a Wealth and

Private Client lawyer. They are responsible for ensuring that the trust deed is

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self-executing and meets the objectives of the founder of the trust. Contrary to
popular belief, setting up a trust is not just drawing a trust deed. It is a complex
process that involves devising a tax efficient and legally enforceable document
that operationalises the objectives of the settlor or founder. It is not a one-fit-all
scenario and standard trust deed or templates should be avoided as they not
only deny the settlor the benefit of customization but also lead into
unforeseeable legal problems later on.

Step 5: Registration of the Trust.

Step 6: Settlement of the trust assets into the trust.

Settlement is the transfer of property by its registered owner into the trust.

Clauses to be contained in the trust deed:

1. Settlement
2. Powers of Trustees:
These are provided for in the Trustees Act. They include:

i. Power of advancement (S.34)

Allows the trustee to give part of the trust fund to a beneficiary before the time
specified in the deed. (the money should be used to improve a material situation
of the beneficiary).

ii. Power of Maintenance (S.33)

Empowers trustee to alleviate a situation of need of a minor beneficiary where

they are lacking in necessities of life.

iii. Power of investment (Part II)

A trustee may invest any trust funds in his hands in a manner prescribed in
section 4 of the Trustees Act either in securities or real property. The investment
must be solely in the financial interests of the beneficiaries.
3. Accountability for profits by trustees.
4. Revocation - All trusts are now deemed to be irrevocable upon the death
of the settlor unless the trust deed contains an express power of
revocation or the settler exercises an express power of revocation during
his/her lifetime.
5. Perpetuity period
6. Termination
a) Resignation/retirement of a trustee (S. 40 of the Trustees Act)
b) Death of trustee: if 2 or more and one dies, both the office and estate to
pass onto the surviving trustees.

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 c) if sole trustees dies without having made any new appointment, their
personal representatives may exercise power.

7. Education and Training

a) Family Education: Conduct workshops or sessions to educate family

members on the importance of the trust, their roles, and the benefits of
wealth preservation.
b) Trustee Training: Provide training for appointed trustees on their fiduciary
responsibilities and the effective management of the trust.

8. Budget
The estimated budget for the project. This includes legal fees, financial
consultation charges, and any other associated costs.

3. The Pros
1. Ensures assets are managed according to the wishes of the settlor on behalf
of the beneficiaries.
2. It is an effective and convenient tool in succession planning as it avoids
probate and estate administration processes which are costly and time
consuming.
3. Insulate assets from creditors - 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.
4. Both movable and immovable trust assets can be held within the trust for as
long as the trust continues to exist. As a result, a family trust emerges as one
of the rare estate planning instruments that enables the preservation and
expansion of family wealth, ensuring its enjoyment by numerous
generations.
5. Protect generational wealth by preventing the splintering of assets in cases
of separation or divorce, shielding them from matrimonial property claims.
6. Imposing conditions on access to the trust, ensures responsible financial
management for spendthrift beneficiaries.
7. Tax and other efficiencies.

4. The Cons
1. Loss of ownership of assets, as they are transferred to the trust.
2. Limited control - once assets are placed in a trust, control over those assets
is transferred to the trustee. This lack of direct control can be a drawback for
individuals who want to maintain hands-on management of their assets.
3. Unlike wills, which are private documents, trusts are often subject to public
disclosure. Depending on jurisdiction, the terms and details of the trust may

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 become a matter of public record, potentially exposing family financial
information.
4. Tax Implications - while family trusts can provide certain tax benefits, they
can also have tax implications that need to be carefully considered. Changes
in tax laws or mismanagement of the trust structure could result in
unintended tax consequences.
5. The settlor must account for the administrative requirements and associated
costs of managing the trust on an annual basis.

5. Tax benefits and when can they can be gotten

The Finance Act 2021 enacted changes and various exemptions with regards to
the transfer of property to registered family trusts in the Income Tax Act (Cap
470) & The Stamp Duty Act (Cap 480). The statutes have created exemptions in
Capital Gains Tax, income tax and Stamp Duty for assets being transferred to the
registered family trust,

a. Income Tax Act Exemptions

Section 11(3) of the Income Tax Act provides that any income (taxable on the
trustee) received by a beneficiary from a trustee is subject to taxation on the
beneficiary under the Act.

The Finance Act 2021 introduced section 11(3A) to the Income Tax Act to provide
an exemption of taxable income with respect to "registered trusts" in the
following circumstances;

i. any amount that is paid out of the trust income on behalf of any
beneficiary and is used exclusively for the purpose of education,
medical treatment or early adulthood housing;
ii. income paid to any beneficiary which is collectively below ten million
shillings in the year of income; and
iii. such other amounts as the Commissioner may prescribe from time to
time.

b. Stamp Duty Act Exemptions

Section 52(2)(b) of the Stamp Duty Act now exempts the conveyance or transfer
of property to registered family trusts from payment of stamp duty. The
amendment brings registered family trusts into the ambit of corporate bodies

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exempt from paying stamp duty upon transfers of property from an individual to
the registered family trust.

The implication is that the family trust is exempted from paying the applicable
stamp duty,

c. Capital Gains Tax Exemptions

Paragraph 36 of the first schedule of the Income Tax Act was amended to
introduce a new provision granting exemption from capital gains tax on income
derived by an individual upon transfer of property, including investment shares,
which is transferred or sold for the purpose of transferring the title or the
proceeds into a registered family trust.

Paragraph 58 of the Income Tax Act was amended to provide an exemption to

capital gains tax on an individual who transfers immovable property to a family
trust.

The effect of the amendments is that the following are exempted from income
tax

i. Property, including investment shares, which is transferred or sold for the

purpose of transferring title or the proceeds into a registered family trust;
ii. Any capital gains relating to the transfer of title of immovable property to
a family trust.

6. What can't a trust do

i. Evade Creditors- A trust cannot be used to defraud or evade creditors.

Transferring assets to a trust with the intent to hinder, delay, or defraud
creditors is typically not permitted.
ii. Engage in Illegal Activities - Assets in a trust cannot be used for illegal
activities. Trusts must operate within the bounds of the law.
iii. Benefit the Trustee Unfairly - The trustee must act in the best interests of
the beneficiaries. The trust cannot be used for the personal gain of the
trustee at the expense of the beneficiaries.

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 iv. Violate Public Policy - Trust provisions that violate public policy, such as
those promoting discrimination or engaging in activities harmful to the
public, may be deemed unenforceable.
v. Act Contrary to Trust Purpose - A trust is established for a specific
purpose, and the assets should be used in accordance with that purpose.
Trustees have a fiduciary duty to carry out the trust's objectives.
vi. Serve as a Tax Evasion Tool - A trust cannot be used as a tool for tax
evasion. While trusts may have tax advantages, engaging in fraudulent or
illegal tax activities is not permissible.
vii. Violate Antitrust Laws - Trusts must comply with antitrust laws to prevent
anti-competitive behaviour. Certain activities that may violate antitrust
laws, such as price fixing or market allocation, are not allowed.
viii. Transfer Assets Illegitimately - Assets transferred to a trust must be done
legitimately, following all legal requirements. Fraudulent or improper
transfers may be subject to legal challenges.
ix. Act Beyond the Trust's Scope - The trust document defines the scope and
purpose of the trust. Any actions taken by the trustee should align with
these provisions.

7. The process of registering and incorporating a family trust

The initial registration of a simple Trust Deed is done in the Registry of

Documents. Thereafter and pursuant to the Trustee (Perpetual Succession)
(Amendment) Act of 2021, an application for the incorporation of a registered
family trust is done under the office of Principal Registrar of Documents and
must be approved or rejected within sixty (60) days.

i. Application for incorporation

Section 5 of the Trustees (Perpetual Succession) Act provides that an application

in writing shall be made to the Principal Registrar for a certificate. The same shall
be signed by the person or persons making it, and contain particulars including
names and addresses of trustees, objects of the trusts, list of beneficiaries etc.

ii. Appointment of trustees

Before a certificate of incorporation is granted the trustees have to be effectually

appointed or constituted to the satisfaction of the Principal Registrar.

8. Costs

For every document presented for registration – 500

For every personal search -1,000

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For every copy of a registered document or abstract folio—

(i) Where the number of pages or folios does not exceed five -100 per of copy
such pages or folios

(ii) Where the number of pages or folios exceed five - 100 per copy of the first
five pages or folios plus KSh. 10 per page or folio in excess of the said five pages
or folios

9. How to transfer assets to a trust

Once the trust has been registered or incorporated, the founder of the trust can
proceed with settlement of assets into the trust. Settlement is the transfer of
property by its registered owner into the trust. Upon settlement, the assets
cease to belong to the founder and ownership is transferred to the Trust. The
assets settled into the trust can be either the founder’s assets or even assets
owned by third parties.

10. Timeline

By combining the registration of a trust deed and the incorporation of the trust
into a single office, the process is streamlined and time-efficient. The new
regulations establish specific timelines for completing the registration,
significantly reducing the previous duration of 1 to 3 years to just 60 days.
Additionally, all the necessary compliance obligations for an incorporated trust
are handled by the Principal Registrar's office, eliminating the need to engage
with the office of the Cabinet Secretary responsible for lands.

Reference:

https://bowmanslaw.com/insights/regulatory-services/kenya-a-snapshot-of-family-trusts /

https://cmadvocates.com/blog/the-process-of-setting-up-a-family-trust

https://kmkadvocates.co.ke/n/family-trust