Trust 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 or any one of whom may enforce the obligation.

As such, a Trust can be described as an entity created to ensure 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 by 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 defenses, 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

1. It is a relationship;
2. It is a relationship concerning property;
3. It is a relationship of a fiduciary character;
4. 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
5. 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 tarnishes 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, three main essentials need to be considered in the creation of a trust:

1. Certainty of Intention: the construction of words used in creating the trust must express the intention to set up the trust.
2. 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.
3. Certainty of Object: there needs to be certainty of the class of beneficiaries for whom the trust is created.

Examples of Trusts

1. Pension Trusts e.g provident funds and pension funds
2. Investment Trusts e.g. Unit Trusts, Real Estate Investment Trusts, Oil and Gas Royalty Trusts
3. Regulatory Compliance Trusts e.g Nuclear Decommissioning Trusts, Environmental Remedial Trusts, Liquidating Trusts, and Law Office Trust Accounts
4. 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.

1. A living trust
2. 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 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, per the trust document and its mandates.

This is also an effective way to control the passing of your estate beyond the grave.

A declaration of trust will also provide the basic terms of the trust. Your estate stays private and passes directly to your heirs, you do not pay a probate attorney or court costs, and your loved ones may be able to avoid being tied up in probate court for what could be a year or more. From this planner’s perspective, a trust can be a fantastic choice for estate transfer.

Trust in tax planning

Trusts are not only instrumental in estate planning but can also be used as a tool for tax planning. This is particularly so where the beneficiaries of the estate are residents 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, an estate should consider establishing a Trust in a favorable 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 residents 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 favorable location for offshore Trusts based on its tax regime, regulatory framework, and its proximity to Kenya.

New Zealand has also of late become a strong contender in the race toward being the most favorable offshore Trust jurisdiction.