Estate Planning in Kenya has been dominated by two approaches to succession. Intestate succession, where an individual dies without a will and Testate succession where an individual leaves a will, often dubbed, the Last Will and Testament. Family trusts have until recently not featured in the estate planning debates in Kenya.
However, recent amendments to Kenya’s trust laws, particularly those ushered in by the Finance Act, 2021 and changes to the Trustees (Perpetual Succession) Act, have catalysed the establishment of a family trust as an alternative, if not a superior vehicle for wealth preservation and succession.
What is a family trust
The concept of a trust is ancient, rooted in the doctrines of equity developed by the English Courts partly to mitigate the harshness of common law. Philosophically, it is rooted in the equitable principle of separating legal ownership from beneficial enjoyment. The settlor (the person creating the trust) usually the family patriarch or matriarch transfers their property to Trustees, who hold the legal title not for themselves, but for the benefit of the beneficiaries, both born and unborn.
This relationship is now firmly anchored in a progressive Kenyan legal framework comprising:
- the Trustees (Perpetual Succession) Act (Cap 164) which provides the legislative underpinning for the incorporation of the Trust clothing it with a legal personality separate and independent from its trustees. As a distinct legal entity with corporate attributes, a trust can own property, open and maintain bank accounts as well as maintain and defend legal proceedings in its own name. Significantly, a trust enjoys perpetual succession, an endearing tribute which allows the Trust to survive its settlor and trustees.
- Amendments to the Perpetuities and Accumulations Act (Cap 160) which exempted registered family trusts from the rule against perpetuities meaning a trust can exist in perpetuity thus allowing wealth to be preserved and accumulated for multiple generations without the threat of vesting and the attendant tax consequences.
- The Finance Act, 2021 which introduced specific tax exemptions for registered family trusts placing them on a favourable footing as more particularly explored hereunder.
Why a family trust
In mature jurisdictions such as the United Kingdom, Singapore and Hong Kong, the conversation has moved beyond simple family trusts to the establishment of full-fledged family offices consisting of private wealth management advisory firms created for ultra-high-net-worth families. These offices represent the pinnacle of bespoke, multi-generational wealth management which consolidates under one roof, legal, tax and investment advisory.
In Kenya, family trusts are emerging from the decades of scepticism often avoided in part due to misunderstanding of the concept and a lack of enabling legislative framework. With the recent developments, they may eventually pave the way for the establishment of full-fledged family offices. The underlying principles that drive the creation of family offices are the same ones that make a family trust essential in this country. These are control, privacy and longevity.
To enumerate, and in no exhaustive manner, the benefits that flow from establishment of a family trust as tool for estate planning are immense, consider the following:
One, though dubbed “Last Testament and Will” wills are open to challenge by dissatisfied would-be beneficiaries subjecting the process to long protracted court proceedings. The outcome from such a processes bear little in common with the testator’s wishes. A properly constituted trust owns the assets and upon the settlor’s death, the trust continues to operate seamlessly. There is no “estate” to be administered by the court, meaning the family avoids the delays and costs of probate and intestate succession entirely.
Two, succession proceedings do not enjoy privacy. A will becomes a public document once filed in court, exposing a family’s wealth and relationships to public scrutiny. A trust deed is a private contract between the settlor and the trustees. The details of the assets and beneficiaries remain confidential.
Three, vesting the property in a family trust insulates those assets from creditors of the settlor. Once assets are irrevocably transferred to a trust, they are no longer the personal property of the settlor.
Additionally, a well-drafted trust deed, with clear terms and carefully selected trustees can avoid family disputes as trust far more resilient to challenge than a will. The court’s role is to uphold the trust, not to redraw the settlor’s vision.
Finally, there are significant tax benefits, brought about by the recent legislative changes that make a family trust attractive. Transfer of an immovable property by a settlor to a registered family trust is exempt from Capital Gains Tax (CGT). Similarly, transfers of assets to family trust as a gift inter vivos, that is during the lifetime of a settlor are exempt from stamp duty.
Nonetheless, there are considerations to be borne in mind in deciding whether or not to establish and vest property in a family trust. Costs of establishing and administering the trust is an important factor. A family trust might be suitable where the estate is sufficiently large to justify the set-up and administrative costs. Further, a trust divests the settlor of control over the trust assets. Lastly, the operation of a family trust is as good as the trustees appointed to oversee it and there is no guarantee that the trustees will not mismanage the assets. Notwithstanding this, the law mitigates the risk of mismanagement by allowing the trustees to appoint an enforcer, whose powers include, monitoring the administration of the trust, enforcing its terms, reporting breaches and where necessary, pursuing legal action against trustees. By appointing an independent enforcer who cannot simultaneously serve as a trustee, the functioning of the trust is upheld through impartial oversight.
Conclusion
Whether to opt for a Will or a Trust as an estate planning tool, requires professional advice informed by amongst others, objectives and wishes of the settlor, the nature of assets, size of the estate and the costs involved.
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If you have any queries or need clarifications regarding Wills and Family Trusts, please feel free to contact
- Chege Njoroge, Managing Partner, njoroge@lesinkonjoroge.com
- Yvonne Ouma, Associate, yvonne@lesinkonjoroge.com or your usual contact at our offices.
DISCLAIMER: The information contained in this briefing note is provided for general informational purposes only and does not constitute, and should not be construed, as a legal advice. It is not intended to create, and receipt of it does not constitute, an advocate-client relationship.