TRUSTS IN ESTATE PLANNING
A trust is an equitable obligation binding a person (Trustee) to deal with property over which he has control (Trust Property) either for the benefit of persons (beneficiaries) of whom he may himself be one and any one of whom may enforce the obligation.
As such, a Trust can be described as an entity created for purposes of ensuring that a property interest is held by one person; a Trustee, at the request of another; a settlor, for the benefit of a beneficiary.
A Trustee therefore holds the property subject to personal obligations to manage and apply it in accordance with the terms of the Trust deed for the benefit of the beneficiaries or in the manner prescribed.
In a Trust, it is not easy for a Trustee to use the settlor’s property for personal gains. A Trustee who deals with the Trust property inconsistently with the terms of the Trust is personally liable to the beneficiaries for breach of trust and in the absence of any defences, the Trustee will be required to compensate the beneficiaries for the loss.
Trusts can be designed in a way that the benefits of the Trust belong to the settlor in their lifetime ensuring early set off of the management of the Trust.
Characteristics of a Trust
- It is a relationship;
- It is a relationship with respect to property;
- It is a relationship of a fiduciary character;
- It involves the existence of equitable duties imposed upon the holder of the title to the property to deal with it for the benefit of another; and
- It arises as a result of a manifestation of an intention to create the relationship.
In Kenya, we have seen that upon the death of prominent personalities squabbles arise in the family which tarnish the image of such families.
To avoid such scenarios, individuals should consider the use of living trusts instead of wills. The constitution and benefits of the living trusts will be looked at in depth in this article.
Essentials of a Trust
For a trust to be considered valid, there are three main essentials that need to be considered in the creation of a trust:
- Certainty of Intention: the construction of words used in creating the trust must express the intention to set up the trust.
- Certainty of Subject Matter: where the trust property or trust fund cannot be identified, such a trust is considered non-existent. Therefore in essence, the trust property should be defined into specifics and be able to be identified by the parties involved. It cannot be generally defined.
- Certainty of Object: there needs to be certainty of the class of beneficiaries for whom the trust is created for.
Examples of Trusts
- Pension Trusts e.g provident funds and pension funds
- Investment Trusts e.g. Unit Trusts, Real Estate Investment Trusts, Oil and Gas Royalty Trusts
- Regulatory Compliance Trusts e.g Nuclear Decommissioning Trusts, Environmental Remedial Trusts, Liquidating Trusts and Law Office Trust Accounts
- Private/Individual Trusts e.g Testamentary Trusts and Intervivos/ Living Trusts
TRUST AS A TOOL OF ESTATE AND TAX PLANNING
A trust is another method of estate transfer—a fiduciary relationship in which you give another party authority to handle your assets for the benefit of a third party, your beneficiaries. A trust can be created for a variety of functions, and there are many types of trusts.
- A living trust
- A testamentary trust
A will can be used to create a testamentary trust. You can also create a trust for the primary purpose of avoiding probate court, called a revocable living trust.A revocable living trust is mainly used for the purpose of estate transfer.
Like a will, a trust will require you to transfer property after death to loved ones. It is called a living trust because it is created while the property owner, or trustor, is alive. It is revocable, as it may be changed during the life of the trustor.
The trustor maintains ownership of the property held by the trust while the trustor is alive.
The trust becomes operational at the trustor’s death. Unlike a will, a living trust passes property outside of probate court. There are no court or attorney fees after the trust is established. Your property can be passed immediately and directly to your named beneficiaries.
Trusts tend to be more expensive than wills to create and maintain. A person called a trustee will be named in the document to control the distribution of assets following the wishes of the trustor, in accordance with the trust document and its mandates.
This is also an effective way to control the passing of your estate beyond the grave.
Trust in tax planning
Trusts are not only instrumental towards estate planning but can also be used as a tool for tax planning. This is particularly so where the beneficiaries of the estate are resident in different jurisdictions and also where the properties of the estate are situated in different jurisdictions, which may trigger high tax obligations on the estate.
In this regard, offshore Trusts have gained popularity as an avenue not only for estate and tax planning but also for purposes of protecting assets from creditors, to postpone the time of vesting of property, to pass on to Trustees the decision of who receives the Trust income or the Trust capital and to enable the settler to choose professional persons to administer and pass on assets according to his wishes, among others.
As such, it is advisable for an estate to consider establishing a Trust in a favourable jurisdiction to mitigate against high tax implications.
In Kenya for instance, Trusts are considered to be corporate bodies and therefore they will be taxed at a considerably high rate. As already stated above, an estate may have properties in different jurisdictions;and the beneficiaries of the Trust may be resident in different countries.
This may have high tax implications and may also result in double taxation especially considering Kenya’s current double tax treaty network. Therefore, it may be prudent for estates to consider establishing Trusts in other countries, which will not only benefit them from a tax perspective but will also help facilitate estate planning.
While deciding on a suitable location, it is important to consider the regulatory framework and the taxation regime in the respective jurisdiction. In this regard, Mauritius is considered a favourable location for offshore Trusts on the basis of its tax regime, regulatory framework and its proximity to Kenya.
New Zealand has also of late become a strong contender in the race towards being the most favorable offshore Trust jurisdiction.
A Family Trust is a relationship between the settlor, who creates the Trust and decides what goes into the trust deed (the trustees, who hold title to the Trust assets in their own names and deal with them as instructed in the trust deed) and the beneficiaries, who receive the benefits from the Trust.
The income and assets owned by a Family Trust are not owned outright by either the trustees or the beneficiaries. Trust assets only become the property of the beneficiaries when trustees transfer the assets from the Trust to the beneficiaries personally.
Unlike a will, a Family Trust provides continuity of the estate of a deceased person by ensuring that the estate devolves to future generations and more importantly through capable and reliable people.
The concept of a Trust is one that involves an owner of a specific property being able to govern how the same property should be used or administered over.
Parties to a Living Trust
- Settlor: this is the person who establishes the trust by transferring his assets to the trustees. The settlor must completely constitute a trust by transferring the assets to the trustees.
- Trustees: this can be a natural person or an artificial person who receives the assets from the settlor and has the responsibility of administering the assets for the benefit of the beneficiaries. The trustee becomes the legal owner of the assets but cannot use the assets for the trustee’s benefit.
- Beneficiaries: these may be individuals (including the settlor) or classes of persons who will and may become entitled to the income and capital of the trust.
- Protector: in other jurisdictions he is also called the appointor. Though a relative new concept in our jurisdiction, this position is best described as a party who is given power under the trust deed instrument to protect the assets in the trust, has veto power over the trustees and appoints trustees and many other responsibilities. The position acts as a check and balance on the powers of the trustees for the benefit of the beneficiaries.
Constitution of a Living Trust
- Letters of Wishes: this is an instrument that is drafted by the settlor indicating his or her intentions to the trustee as to the administration of the trust fund. Although not legally binding, it provides guidance to the trustees in all aspects of administration and management of the trust during the lifetime and after the demise of the settlor. This can be applied in both testamentary trust and living trust. It can give direction with regards to:
- Management of capital
- Tax mitigation
- Funeral arrangements etc
- Trust Deed: this is an instrument that contains the terms and conditions that governs the relationship between the settlor, trustees and beneficiaries in the management and control of the assets. It gives the trustee the power to carry out the wishes of the settlor. It is normally created by execution of both the settlor and the trustee. The execution by both parties provides clear evidence of the intentions of both parties and of the agreed obligations assumed by the trustee. This is called a settlement.
- Transfer of assets to the Trust: for a trust to exist and be operationalized, the trust property or trust fund will have to be vested in the trustees. This transfer will vary with the various forms of properties being transferred, for example, with land it is registration of transfer, bills of exchange is by endorsement..
ESTABLISHMENT OF A TRUST
A Trust is established by way of a Trust deed. The Trust deed, amongst other things, contains the objects of the Trust, the name of the Trust, the properties held under the trust, the power of the trustees, meetings of the Trustees and the Trust’s administration.
The Trust deed has to be signed by all the trustees, should be stamped and then registered at the Lands Office under the Registration of Documents Act (Chapter 285 of the Laws of Kenya).
Once registered as indicated above, the Trust is duly established as an unincorporated Trust which does not have a legal personality of its own. Thus, the Trust can only own property, enter into contracts or do any other thing in the names of its trustees but not in its own name.
As noted above, an unincorporated Trust does not have a separate legal existence of its own separate from its trustees. Therefore, in order for the Trust to be able to have a separate legal status and be able to own property, enter into contracts and do any other thing in its own name, it has to be incorporated.
The law providing for the incorporation of certain Trusts and related matters is set out in the Trustees (Perpetual Succession) Act, (Chapter 164 of the Laws of Kenya).
Section 3 (1) of the Act provides that the trustees who have been appointed by any body or association established for any religious, educational, literary, scientific, social, athletic or charitable purpose or who have constituted themselves for any such purpose may apply in the manner provided for in the Act, for a certificate of incorporation of the trustees as a corporate body.
Section 5 of the Act provides that for the Trust to attain its own legal personality, an application has to be made to the Cabinet Secretary in charge of matters relating to lands.
This application shall be in writing, signed by the person or persons making it, and shall contain the prescribed particulars. This application must be accompanied by the registered Trust deed and the evidence of a parcel of land that is owned or to be owned by the Trust.
PURPOSE OF A TRUST
There are many types of trusts, but irrevocable and revocable trusts are the most common. An irrevocable trust involves giving up control of your assets during your lifetime. You name a trustee who manages the trust and the assets you place in it.
You can manage a revocable trust yourself. One might be more suitable for you than the other, depending on what you’re trying to achieve.
- Trusts Avoid Probate – Many people include trusts in their estate plans for the purpose of avoiding probate. Both irrevocable and revocable trusts bypass the probate process. This can be an attractive option if you have a large estate, because probate can cost up to 7 percent of your estate’s value. There’s a catch, however. You must transfer ownership of your assets to your trust before your death. The assets you own are subject to probate when you die, because probate is the legal process that transfers ownership of your assets to your beneficiaries. The trust, on the other hand, transfers trust assets to your beneficiaries, so probate is unnecessary.
- Trusts Are Private – If privacy is a concern to you, trusts are a good estate planning option. Some people choose them because they don’t want their financial holdings to be common knowledge when they die. Because assets placed in your trust don’t go through the probate process, they’re not a matter of public record.
- Trusts Control Inheritances – Trusts can also serve the purpose of keeping control of your assets even after your death. If you pass your assets to your beneficiaries through a will, they receive the assets when you die. If you use a trust instead, you can set it up so that younger, less mature beneficiaries might not receive their inheritance until they reach a certain age. The trust would manage their inheritance until that time.
- Some Trusts Shield Your Assets From Creditors – A purpose unique to irrevocable trusts is that they can also shield your assets from creditors during your lifetime, so you’re sure you have something to leave your loved ones when you die. If your career is one that leaves you open to lawsuits, and if someone gets a judgment against you, they can’t use that judgment to seize your assets if you’ve transferred them to an irrevocable trust. If you maintain control over them, either through a revocable trust or by not forming a trust at all, you could lose the assets to creditors or lawsuits.
- The tax advantages.
In a revocable Living Trust, you retain control over your personal assets during your life. Such trusts are commonly used as a substitute for a will in estate planning. You can change the terms, by adding or removing beneficiaries, or cancel the trust entirely.
The assets are not protected from creditors and lack the tax advantages of irrevocable trusts. Your assets transfer automatically and quickly to your beneficiaries at the time of your death.
- Family Trusts in Estate Planning in Kenya
If you want to avoid the probate process entirely, and/or accomplish special goals (like controlling distribution of the assets over time, or helping a charity or a disabled relative) you can create a trust.
This can be an attractive option if you have a larger estate, because probate can cost up to seven percent of the value of your estate.
In an irrevocable trust, you give up control of your assets during your lifetime. They are managed instead by a trustee. In an irrevocable trust, your assets are protected from creditors.
One type of trust that is commonly used by estate planning lawyers is the revocable Living Trust, which allows you to retain control over your personal assets. However, revocable Living Trusts aren’t for everyone. In some cases, the disadvantages can outweigh the benefits.
- A Revocable Living Trust Gives You Control – As the name implies, a revocable Living Trust takes legal effect during your life rather than at your death. Since it’s revocable, you always have the options of changing the terms of the trust, such as adding and removing beneficiaries, or cancelling the trust entirely. This flexibility is seen as an advantage by many people, because you can’t always predict your future financial needs or whether relationships with beneficiaries will become strained.
- You Can Use a Revocable Living Trust in Place of a Will – Many estate plans use revocable Living Trusts as a substitute for a will either entirely or for specific assets. Wills may be subject to probate proceedings in a state court after your death. During probate, there’s always the possibility that a family member who is excluded from your will may challenge the terms of your will. Moreover, probate usually delays the distribution of your estate. With a revocable Living Trust, however, your assets can be distributed immediately. They aren’t subject to probate or to challenges by those who aren’t named as beneficiaries.
- Make Sure That an Irrevocable Living Trust Isn’t a Better Option – One of the main disadvantages to creating a revocable Living Trust is that the trust property is still considered yours and isn’t protected from your creditors or lawsuits. Making the Living Trust irrevocable provides more creditor protection since you’re no longer considered the owner of property in the trust. The downside to irrevocable trusts, of course, is that you can’t change your mind if you ever need your assets back at some point.
- Consider the Estate Tax Implications – Since you’re considered to be the owner of all assets in your revocable Living Trust at the time of death, the value of your trust property may be subject to federal and state estate taxes. Check carefully, because state tax laws change frequently.
TRUSTS IN KENYA
Trust Law in Kenya as with most common-law countries, is to a large extent dependent on common law on ordinary Trusts which establish a basic relationship between a settlor, trustee and beneficiary.
Compared with other economies around the world, the Trusts regime in Kenya is not flexible enough to accommodate more advanced relationships between settlors and beneficiaries, facilitating the setting up of Trusts for effective and adequate succession and tax planning of family affairs and assets. Under Kenyan Law, the trustees have far more discretion than a settlor would prefer.
As a result, the Trust structures in Kenya are predominantly used by charitable organizations and religious institutions.
- The Trustees (Perpetual Succession) Act (Act)
- The Public Trustees Act
- Income Tax Act
- The Tax Procedures Act.
- The Registration of Documents Act (Chapter 285 of the Laws of Kenya)
The implication of an unincorporated trust is that the Trust can only own property, enter into contracts or do any other thing in the name of its trustees but not in its own name, that is in the name of the Trust.
An unincorporated Trust does not have a separate legal existence of its own separate from its trustees. This posses a challenge when there are a change of trustees either by application of Law or under the provisions of the Trust deed, as changes are required to be individually noted on every ownership document.
The most common mistake in formation of Trusts in Kenya is not following up registration. The Act governs the incorporation of Trusts and provides for a defined structure on operations of Trusts and Trustees duties.
The registration under the Act accords a Trust as a separate legal status and is able to own property in its own name, enter into contracts and do any other thing in its own name. The Trust would upon registration under the Act have a separate and distinct legal identity.
- Section 3 (1) of the Act provides, inter-alia, that the trustees who have been appointed by any body or association established for any religious, educational, literary, scientific, social, athletic or charitable purpose or who have constituted themselves for any such purpose may apply in under the Act, for incorporation a corporate body.
- Section 4 of the Act provides that upon issuance of the certificate of incorporation (under the Act) ,it shall confer and vest in the body corporate(now incorporated as a result of issuance of certificate) all movable and immovable property and any interest therein belonging to or held by any person or persons for the benefit of the trust concerned.
INCORPORATION OF A TRUST IN KENYA
- Preparation of trust deed
A trust deed must be prepared. It contains the name of the trust, the objectives of the trust, the names in full and addresses of the trustees including powers of the trustees to change and appoint other trustees.
- Payment of Stamp duty
The trust document duly signed by trustees is submitted for stamp duty.
Registration may involve two stages
- Registration under the Registry of Documents Act.
- Incorporation under the Perpetual Successions Act.
Registration under the Registration of Documents Act
The process may take 1-3weeks. Registration under the RDA does not make a trust into a body corporate trust yet. However, the trust can commence implementing the objects of the trust as a simple trust.
Incorporation under the Trustees (Perpetual Succession) Act
After registration under the registry of documents, a certified copy of trust deed and a petition for incorporation is lodged with the ministry of lands for incorporation of trust. The Trust may be incorporated under the TPSA, making it a body corporate.
In the petition, it must be stated that the trustees require incorporation of a trust and provide a representation of the common seal of the trust, which is round in shape with the name of the trust inscribed.
The process takes an average of 3 to 6 months to the issuance of a certificate of Incorporation.
- Name of the Trust
- Main Objective of the Trust- Education, Medical, Beneficial etc
- Name of the Settlor/ Donor- Full name, copy of ID card/passport; If it’s a company, a copy of the certificate of registration
- Proposed physical address of the trust or foundation
- Domicile and residence of the trust or foundation
- A Trust Deed
- Description of beneficiaries and their necessary allotments if any
- Description of the Trust Fund- A list of assets held by the trust, A letter/statement from the donor stating his commitment, The transfer of properties/ funds may be progressive but indicate the initial amount/properties to be transferred
- The Description and details of the Trustees. Names and addresses in full, Passport photos, Copies of Pin certificates, Copies of national ID or Passport
- Administration details of the Trust. Consider whether standard procedures are appropriate or are there any special administrative procedures required. This includes the following;
- Appointment of trustees
- Operation of Trust accounts
- Powers of the trustees
- Procedure of conducting meetings
- Amendment of the Trust deed