A family trust is a useful strategy for managing one's assets for estate planning purposes and multiplication of generational wealth.
1.
CONCEPT
OF FAMILY TRUST
A
family trust is a useful strategy for managing one's assets for estate planning
purposes and multiplication of generational wealth. It is created by the person
initiating the trust, known as the settlor,
who transfers his assets into a private trust. The assets are then managed by a
trustee who oversees them for the
benefit of the individuals designated as beneficiaries.
The settlor has the option to retain their role as the initiator, beneficiary,
or trustee of the trust. This makes it possible to have beneficiaries provided
for without the risk of wastage as the settlor through the trust deed and the
trustees provide for a framework for use and utilization of assets.
Prior
to the enactment of the Trustees
(Perpetual Succession) Act (2021) (the Act”) there was no comprehensive legal
framework governing the registration of family trusts. Section
3D of The Trustee (Perpetual Succession)
(Amendment) Act, 2021 defines family trust as;
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.
In
the past, wills have been the favored method for estate planning. However,
recent changes to Kenyan legislation have elevated family trusts as a prominent
choice for estate planning. These amendments have enhanced family trusts,
transforming them into a highly effective means of safeguarding assets for
families. A written will is a formal
document that specifies the desires of the person making the will (testator) concerning the division of their
assets and management of their affairs following their passing. It is a legally
binding document that should be signed by the testator in the presence of two
or more independent witnesses. The
will must be subjected to the probate provisions of testate succession before
distribution which can still be contested over the appellate court hierarchy
and may open the succession process to interference by 3rd parties.
In contrast family trust offer greater privacy and there is no public
invitation for proof of the same or objections to the trust as well as no need
to lodge probate proceedings in court.
In
the event that a person passes away without leaving a will, they are considered
to have died intestate, and the distribution of their assets typically follows
the laws of intestacy as outlined in the Law of Succession Act Cap 160.
Consequently, the individual loses control over the handling and allocation of
their assets after death, leaving their estate vulnerable to mismanagement,
depletion, and prolonged legal disputes arising from disagreements among family
members.
Registered
family trusts are therefore categorized into two; testamentary and living trusts. A living trust is a trust established
by a settlor while they are alive. Similar to a will, a living trust outlines
the desires of the settlor regarding their assets, dependents, and heirs.
However, unlike a will that becomes operative only after the testator’s death,
a living trust becomes effective while the settlor is still alive and remains
in effect even after their passing. Testamentary trust is a trust that is
specified in the will and becomes effective only after the settlor's demise.
The Trustee (Perpetual Succession)
(Amendment) Act, 2021 provides that a family trust shall be made in contemplation of other
beneficiaries, whether such intended beneficiaries are directly related to the
settlor or not, or are living or not. The section further provides that notwithstanding
creation of a trust in contemplation of the beneficiaries, a family trust shall
not be invalid for the reason that the settlor(s) are also beneficiaries to the
trust.
In
the new regime, family trusts are to be registered or incorporated under the
Act as a corporate body and shall be a non-trading entity. Essentially this
means that the trust is exempted from corporation tax rate that is ordinarily
imposed on other corporate bodies
The
main object of Section 2(9) of The
Perpetuities and Accumulations (Amendment) Act 2022 which stipulates that
the perpetuity period shall not apply to family trusts is to establish a
supportive framework for safeguarding generational wealth by removing the limitations
on perpetuity and accumulation. This enhancement strengthens the efficacy of
family trusts as a valuable estate planning tool. Under the previous provisions
of the Act, the existence of a Trust, including a Family trust, was limited to
a maximum duration of 80 years as specified in the Trust Deed. If the 80-year
period was not indicated in the trust deed, the trust could only endure for the
lifetime of the individual alive at the time of its creation plus an additional
18 years.
With
the recent amendment, family trusts now have the ability to continue
indefinitely without a specified perpetuity period. This significant change
will greatly benefit trusts intended to span across multiple generations.
Building
upon Section 2(9) of the Act, which exempts family trusts from the perpetuity
period, it is important to highlight that 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
2.
PURPOSE
OF FAMILY TRUST
·
Made for the purpose of preservation or
creation of wealth for generations
·
Planning or managing personal estate.
·
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. AMENDMENTS BY THE
FINANCE ACT 2021
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;
- 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;
- income
paid to any beneficiary which is collectively below ten million shillings
in the year of income; and
- such other
amount 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
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, which currently stands at either 4% for land/property within a
municipality or 2% for property outside municipality.
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 is 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 aforementioned amendments is that the following are exempted from
income tax
- Property, including investment
shares, which is transferred or sold for the purpose of transferring title
or the proceeds into a registered family trust;
- Any capital gains relating to the
transfer of title of immovable property to a family trust.
4.
REGISTRATION
OF FAMILY TRUST
The
registration procedure for trusts has been made more straightforward and
efficient, positioning family trusts as a leading choice among estate planning
tools in Kenya. Pursuant to Section 3
of The Trustee (Perpetual Succession)
(Amendment) Act, 2021 an application for the incorporation of a registered
family trust is done under the office of the Principal Registrar of Documents
where one applies for a certificate of incorporation. The application shall be
in writing. The application must be approved or rejected within sixty (60) days
of receipt of the application.
Once
a trust is officially registered or incorporated, the individual who initiated
the trust (founder) may proceed with the process of settlement of assets into the trust. Settlement refers to the act
of transferring property by its registered owner to the trust. Through settlement,
the assets no longer remain the property of the founder but are instead transferred
to the family trust.
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.
CONCLUSION
Choosing
a family trust as your preferred method of estate planning offers tangible
advantages and benefits. Families can take advantage of and reap
the benefits of certain recent legal modifications, which encompass;
a.
Once family trusts are incorporated; they
acquire the status of a legal entity which grants the family trust capacity to
possess property in its own name rather than having it registered under the
individual names of trustees.
b.
Relatives and external parties who are
not directly related to the family can transfer assets to the family trust
without being subject to the prevailing 15% capital gains tax. Additionally,
the family trust will be exempt from paying the applicable stamp duty, which
currently stands at either 4% or 2% depending on the property's location.
c.
It is a tool for preventing trustees of
the family trust from misusing their authority or violating the terms outlined
in the trust deed, since a separate position known as the enforcer has been established. The introduction of this independent
office aims to minimize unnecessary legal disputes. The enforcer is granted the
authority to remove any trustees who engage in wrongful conduct and replace
them with alternative trustees, in consultation with the founder/settlor or
beneficiaries of the trust.
d.
It reduces chances of squandering of
wealth by beneficiaries/ heirs who are irresponsible.
e.
Benefits from the power of compounding if
managed prudently over time and can create a legacy.
f.
It is an opportunity to affect how your
property/wealth is applied/ devolves even through generations.
