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
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:
Examples of 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 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
Constitution of a Living Trust
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.
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.
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.
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 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.
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.
The trust document duly signed by trustees is submitted for stamp duty.
Registration may involve two stages
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.