Gabael Trust v2

Category: Legal Alert

  • A Family Trust as a Tool for Protection of Family Wealth

    [vc_row][vc_column][vc_column_text]You have worked hard to acquire valuable assets or you have established your family business which has grown to be a successful enterprise. You are wondering how can you protect your wealth and eventually pass it down to future generations. This is where estate planning comes in.

    Estate planning is the process by which an individual or family arranges the transfer of their estate in anticipation of death. Your estate is comprised of everything that you own; this includes movable, and immovable assets, as well as tangible and intangible assets. Regardless to its size or quantum, everyone has an estate that would require to be administered upon death.

    An estate plan is important because it: –

    • Enables you elect your heirs or beneficiaries (that is, those who will inherit what from your estate
    • Gives you the ability to name your children’s guardian in the event of your premature death
    • Enable you protect your estate from creditors
    • Enable you reduce taxes on your estate; and
    • Minimizes the chances of family strife and ugly legal battles

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    Wills, Trusts and Power of Attorney

    Wills, trusts and Power of Attorney are common tools used by individuals for estate planning.

    A will takes effect when you die and its contents may include: how your estate will be shared or distributed; who will look after your children if they are still young; what trust you intend to establish thereunder; donations to charities; and even instructions about your funeral.

    It is paramount that your will is valid and is up to date as your legal rights and status changes- especially if you marry or remarry, divorce or separate; have children or grandchildren; if your spouse or beneficiaries dies; if you have significant changes in your estate or sell any of the assets previously covered in your will.

    If you die without a will (that is, intestate) or your Will is declared invalid by a court of law, your estate will be managed and administrated by a court appointed administrator(s) in accordance with the provisions of the Law of Succession Act, Chapter 160 of the Laws of Kenya. This process may be lengthy, uncertain and costly.

    Testamentary Trust is a trust created under your Will and only takes effect upon your death. Such trusts are normally set up to protect assets and will be administered by a trustee or trustees who is/are usually appointed in the Will. A testamentary trust would generally be created or established if:

    • The beneficiaries are minors (under 18years old)
    • The beneficiaries have diminished mental capacity
    • You do not trust the beneficiaries to use their inheritance wisely
    • You do not want family assets split for instance as part of a divorce settlement; or
    • You do not want family assets to become part of bankruptcy proceedings.

    Another tool that can be employed in estate planning is power of attorney. This can be used where you want someone (your appointed power of attorney) to have legal authority to look after your affairs on your behalf, for instance in case of incapacitation due to hospitalization.

    We shall look briefly at the establishment of family trusts in Kenya.[/vc_column_text][vc_empty_space height=”20px”][vc_column_text]

    What is a Family Trust?

    A trust, by definition, is a three- party relationship where you or the person creating the trust (usually called the settlor or grantor) transfer some assets like money or property (normally called the trust funds) to a third party (usually called the trustee) to be manager and administered on behalf of some third parties (called the beneficiaries).[/vc_column_text][vc_column_text]A family trust is a legally binding estate planning tool that is established to financially secure and protect you and your family. Family trust, unlike wills, have the benefit of avoiding probate, a lengthy and costly legal process that oversees the transfer of assets. Sometimes, though, it might be advisable for the grantor to make some inter-vivos gifts (gifts made while the grantor or donor is alive) in order to provide for some beneficiaries or minimize or avoid taxes.[/vc_column_text][vc_empty_space height=”20px”][vc_column_text]

    What is the purpose of a Family Trust?

    The purpose for a family trust is to establish a legal mechanism where your family assets are ring fenced and to enable family members (the beneficiaries) to reap financial benefits from your estate while you are still alive or after death.

    There are many reasons to establish a family trust. For instance, if you have an estate that you would want to pass to your children, your trust deed can outline how this will be done. Your direction to your trustees can be broad or specific, and can include provisions or conditions as to when and how the beneficiaries will get a share of the trust fund or income in future (e.g., at certain age, after tertiary education; upon marriage etc.).

    Whereas other types of trust can list third parties as beneficiaries, family trusts usually only cater for your own family members.[/vc_column_text][vc_empty_space height=”20px”][vc_column_text]

    Types of Family Trusts

    There are several types of family trusts, and the main ones include:

    1. Revocable Family Trust: – This type of trust can be easily modified or dissolved anytime you decide to do so. These are flexible trusts.
    2. Irrevocable Family Trust: – This type of trust cannot be cancelled or easily changed after its establishment. The settlor or grantor loses access to and control over the trust assets once the trust has been funded because the assets become trust-owned. Irrevocable trusts are often used for assets protection.
    3. Living Trusts: – Living Trusts are designed to hold and protect your assets for you during your lifetime. With a revocable living trust you can designate yourself as the trustee (either alone or together with others) and take control of assets within the trust. This means the assets in the trust remain part of your estate while you are alive and have mental capacity and you will usually be named as a the ‘principal beneficiary of the trust. For instance, as the principal beneficiary of the trust, you can be guaranteed right of occupation of your property for the remainder of your life meaning that your trustees, usually your children, cannot evict you under any circumstances. You are also at liberty to move home, or release equity from the trust at any time. You can also direct your trustees to sell the property and to buy a new property of your choice. As the grantor or settlor, you retain the power to change and amend the trust deed at any time including changing the beneficiaries. Equally, you can even dissolve the trust altogether. This type of trust is equally applicable to married couples as well as to single people.

    With an irrevocable living trust, you as the settlor or grantor relinquish certain rights to control the trust fund and appoint an independent trustee or trustees who effectively become the legal owners. Once the trust has been established, the named beneficiaries are set and as a settlor you can do little to amend the trust deed.

    4. Marital Trust: – This trust will usually provide that the assets will automatically pass to a surviving spouse upon the death of the first spouse. Once both have passed, the trust assets will go or be administered for the benefit of designated beneficiaries.[/vc_column_text][vc_empty_space height=”20px”][vc_column_text]

    Advantages and Disadvantages of Family Trusts

    The advantages of setting up a family trust include:

    1. Creditor protection – assets held in trust are usually accessible to the creditors of the grantor or beneficiaries, or the trustees
    2. Protection against partners in divorce – If your assets are owned by a trust, or are given to your trust upon death, your children can continue to receive the benefit of those assets but the assets do not form part of their personal property, and therefore cannot be subject to claims by your children’s partners in the event of Moreover, if those assets are transferred into a family trust prior to entering into a marriage, the assets in the trust are less likely to be subject to claim at the end of the relationship.
    3. Protecting property from or for beneficiaries – For purposes of protection of your children from bad company or frauds or bad marriage, it may not be advisable to simply give your assets to your children during your life or on death. If you employ a family trust, then the trust can provide a vulnerable child or dependent with income and/or capital to meet their cash requirements as they arise. This can help protect the long- term value of your family’s assets. With an airtight trust deed, assets can be protected from the threat of lawsuit, bankruptcy or divorce.
    4. Reducing or preventing claims against your estate – Under the Succession Act, the court can effectively rewrite your Will if it considers that members of your family have been disadvantaged by its provisions and have not been adequately provided for. However, the court cannot rewrite your trust.
    5. Confidentiality – Family trust are not publicly registered and therefore can be kept confidential and private.

    [/vc_column_text][vc_empty_space height=”20px”][vc_column_text]The following are a number of the disadvantages of having a family trust:

    1. Loss of ownership of assets – Once you have funded the trust, especially an irrevocable trust, then the trustees of that trust will have the ownership and the control the assets. Therefore, even if you can retain some control by holding the power to appoint and/or remove trustees, or even by being a trustee yourself, the assets you transfer to the trust are no longer your If you continue to treat the assets as your own, any trust could be open to challenge as a sham.
    2. Legal costs of formation of the trust and the transfer of assets – There are costs involved with establishing and funding a trust. These will depend on the complexity of your trust and the nature of the assets to be Nevertheless, there are certain stamp duty and capital gain tax exemptions under Kenyan laws for transfer of assets to a family trusts.
    3. Continuous Administration Costs – If you establish a trust, you need to allow for the time and cost involved with meeting the trust’s annual accounting and administrative Additional costs may also apply   if you appoint professionals trustee or corporate trustees.

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    Is a Family Trust Appropriate for you?

    If you want your assets and your loved ones protected when you can no longer do so, then you will need an effective estate plan which may inevitably involve establishment of a family trust. As indicated above, there are a lot of advantages of establishing a family trust. Without one, your assets could be exposed to claims by third parties and your family left without protection. Moreover, your estate could be exposed to unwarranted legal contestations amongst your dependents and family members. In such case, the court could designate how your assets are divided — including who gets to raise your children in the event of death. Therefore, there are tangible benefits of establishing a family trust. Indeed, most family trusts are formed to reduce the impact of changes which may, or may not, occur such as;

    1. Protection of children or other venerable dependents
    2. Protection of estate from claims from business creditors; and
    3. Protection of estate from relationship breakdowns like divorce or separation;

    [/vc_column_text][vc_empty_space height=”20px”][vc_column_text]If you have any further questions, or would like to talk to someone about establishing a family trust, make an appointment with us or contact us through legal@gabaeltrust.com.

     

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  • New Legal Regime on Registration of Family Trusts in Kenya

    [vc_row][vc_column][vc_column_text]The Trustee (Perpetual Succession) (Amendment) Act, 2021 (the “Amendment Act), which was signed into law on 23rd December, 2021 has made some amendments to the Trustees (Perpetual Succession) Act (Chapter 164 of the Laws of Kenya) (the Act”) in relation to registration of non-charitable trust and family trust in Kenya. Before this change, there was no comprehensive law that provided for registration of family trusts – through these were still being registered as simple trusts or as family companies. The Amendment Act was preceded by certain changes in tax laws through the Finance Act, 2021 which, inter alia, exempted transfers of property to a registered family trust from stamp duty and capital gain taxes.

    As stated in the preamble to the Amendment Act, the new legal regime for registration of family trusts in aimed at promoting the usage of family trusts for purposes of preservation of inter-generational wealth.[/vc_column_text][vc_column_text]In the new regime, like charitable and non-charitable trusts, family trusts will now be incorporated under the Act. Upon such incorporation, the family trust will:

    1. Become a body corporate by the name described in the certificate
    2. Have perpetual succession and a common seal
    3. Have power to hold and acquire property in its own name and by instruments under the common seal to convey, transfer, assign, charge and demise any movable or immovable property or any interest therein
    4. Have power to sue and be sued in its corporate name.

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    What is a Family Trust?

    Under the Amendment Act, 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 purpose of planning or managing their personal estate’

    Generally speaking, a family trust is defined as a trust created for purposes of planning or managing one’s personal estate. In a nutshell, it is an estate planning tool. Under the new law, the family trusts should be made in contemplation of beneficiaries other than the settlor, and for the purpose of preserving or creating wealth for multiple generations. Moreover, a family trust should not be a trading entity. Therefore, where a trust intends to engage in trading or any businesses, this would only be possible through incorporation of separate trading companies which would be fully owned by the trust.[/vc_column_text][vc_empty_space height=”20px”][vc_column_text]

    Deed of Settlement

    The Amendment Act, also made provision for the settlement of property into family trusts by any person other than the settlor. This will encourage and ease the consolidation of wealth among families thereby promoting wealth preservation through generations. Settlement is a kind of transfer of property, predominantly immovable, by its owner. Nevertheless, invariably, in settlements, consideration would not be there directly as in the case of sales. For instance, a settlement can be made in favour of family members or even non relatives due to the love and affection that the executant/ owner of property had over the claimant. Thus ‘love and affection’ is considered as a consideration in settlement. Equally, a property can be settled in favour a trust also for religious or charitable purpose and the mental satisfaction is considered as the consideration.[/vc_column_text][vc_empty_space height=”20px”][vc_column_text]

    Features of a Family Trust.

    As indicated before, a family trust is a legal entity into which one can transfer assets to be managed or administered by trustees on behalf one or multiple family members. When you talk of trust, these main terms that should be understood are:

    Trust deed/document: The legal agreement which establishes and set the terms and conditions under which the trustees will manage or administer the trust assets on behalf of the beneficiary or beneficiaries.

    Grantor/settlor: The person who establishes or creates a trust.

    Trustee(s): The person(s) who manage(s) the trust assets or the custodian of the The trustee can also be a body corporate usually known as corporate trustee.

    Trust beneficiary or beneficiaries: The individuals or other persons that received benefits or receive income or assets from the trust.

    Funding the trust: It is a process in which the grantor transfers the assets from his or her own personal names to that of the This will often involve changing the titles of assets from a person’s individual name to the name of the corporate trust. Examples are the transfer of a logbook of a car to the trust or a title deed to a property to the trust.[/vc_column_text][vc_empty_space height=”20px”][vc_column_text]

    Who is an Enforcer?

    The Amendment Act also introduced the concept of Enforcer, as a separate office that is distinct from that of trustees. The enforcer should be appointed by the settlor or, in his absence, the beneficiaries.

    The office of the Enforcer is established to monitor the administration of the trust for the benefit of the beneficiaries. Whilst not a mandatory role, it would be prudent to provide for an enforcer in a trust deed. Under the Amendment Act, the enforcer is given an overarching / supervisory role over the trustees with mandate to:

    • Enforce the terms of the trust;
    • Inquire into the status of implementation of the trust;
    • Require the trustee to remedy any breach of the terms of the trust
    • Report any financial or other breaches by the trustee to the settlor or the beneficiaries and or to pursue legal action against the trustees for such breaches or other malfeasance
    • Act in the place of trustees in any suit relating to the enforcement of the trust or breach of trust by the trustees

    It should be underscored that under the Amendment Act, the Enforcer must be separate and distinct from the trustee(s). Therefore, the two offices cannot be occupied by the same person.[/vc_column_text][vc_empty_space height=”20px”][vc_column_text]

    Registration of Family Trusts

    Before the Amendment Act, the registration of trusts under the Act was vested in the office of the Cabinet Secretary and therefore riddled with uncertainty and administrative bureaucracy with incorporation of trusts being delayed for years.

    The Most revolutionary part of this Amendment Act is the ease of the registration process. Under the amendment Act, the applications for incorporation of family trusts (as well as other forms of trusts) will be under the office of Principal Registrar of Documents and must be approved or rejected within sixty(60) days.[/vc_column_text][vc_empty_space height=”20px”][vc_column_text]

    Tax Incentives for Family Trusts

    As indicated before, the Amendment Act was preceded by amendments to the Finance Act, 2021 which introduced several tax incentives for family trusts. Under these changes, the tax exemptions shall apply in respect of:

    1. The income or principal sum of a registered family trust
    2. Capital gains relating to the transfer of title of immovable property to a family trust; and
    3. Capital gains accruing to an individual on the transfer of property, including investment shares, for the purpose of transferring the title or the proceeds into a registered family trust.

    Further, with effect from 1st July, 2021, following the changes introduced by the said Finance Act to Section 11 of the Income Tax Act the following payout from a registered family trust will, inter alia, be exempt from family trust:

    1. 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;
    2. Income paid to any beneficiary which is collectively below Kenya Shillings ten million (KShs. 10,000,000/=) in the year of income.

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    Advantages of Family Trust

    The advantages of a family trust, inter alia, include:

    1. Tax Planning – Please refer to the aforesaid tax exemptions which will significantly reduce the total amount of tax paid on the trust income by the beneficiaries.
    2. Asset Protection – A family trust structure can protect your family’s wealth from creditors or in the event of divorce. Unless where trust is being used as creditors avoidance scheme, creditors of the beneficiaries cannot access trust This includes where a beneficiary becomes bankrupt.
    3. Avoidance of Probate – a trust structure can be used to avoid expensive and often continuous probate Unlike in cases of wills or settlements, third parties’ dependents cannot contest the provisions of a trust.
    4. Discretionary trusts – the family trust can be restructured as a discretionary trust in which case the trustees will decide when payouts are paid out, how frequently, and any other rules to prevent reckless spending by beneficiaries and generally for the preservation of the family
    5. Enforcer – The introduction of the independent office of enforcer (as aforesaid) will ensure that trustees of family act do not abuse their office or act ultra vires the terms of the trust deed. This will also reduce unwarranted litigation as the enforcer can also be given power to remove any offending trustees and to replace them with other trustees in consultation with the settlor or the beneficiaries.

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    How Gabael Trust Corporation Can Assist

    Our Family Business and Estate Planning Unit should be happy to help you structure and register a family trust. Our tax lawyers will be involved in advising on the tax issues so that your trust is able to guarantee maximum tax benefits.

    If you are interested to register or set up a family trust, or require any further information or clarification of the foregoing, please get in touch with us.

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    Contact

    legal@gabaeltrust.com

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