MANAGEMENT OF AN ESTATE THROUGH THE CREATION OF A FAMILY TRUST UNDER THE TRUSTEES (PERPETUAL SUCCESSION) ACT
Introduction
The prudent use and management of property includes planning for the posterity of the estate in the event of your demise. Aside from the use of a written Will under the Law of Succession Act, the law provides alternative ways through which a person can proactively plan for the continuity or succession of their estate in the event of demise and which includes; incorporation of a private limited company (to be wholly owned by the family) under the Companies Act, 2015, or creation of a family trust under the Trustees (Perpetual Succession) Act, 2021.
In this write up we shall discuss the management of an estate through the registration of a family trust under the Trustees (Perpetual Succession) Act as follows: –
Definition of a family trust
A family trust is defined under the Trustees (Perpetual Succession) (Amendment) Act, 2021, as a trust that is registered or incorporated by a person to plan or manage their estate. A trust can be incorporated during the lifetime of a person to operate during the lifetime or to operate after the demise of the person and it can be partly charitable or non-charitable.
Some of the salient features of a family trust are that it can be created for the benefit of persons related to the person creating the trust or not, and whether living or not. It is also made for the preservation or creation of wealth and is a non-trading entity.
The parties in a family trust
The parties in a family trust are legally identified as follows: –
i.) Settlor (also referred to as a founder) – this is the person who initiates the creation of the trust, sets out the objectives, identifies the beneficiaries, and appoints the trustees who shall manage the trust.
ii) Trustee- a person given control or powers of administration of property in the trust with a legal obligation to administer it solely for the purposes specified in the document constituting the trust (the Trust Deed).
iii) Beneficiary- a person or group of persons who benefit from the trust and for whom the trust is created.
The creation of a family trust
The family trust is created using the following steps: –
(i) Preparation of a Trust Deed.
The Trust Deed will set out the objectives of the trust e.g. family business, succession planning or creating generational wealth, appoint the persons to manage the trust (the trustees), and identify the property that will form the trust fund. The Trust Deed will also outline the powers and duties of the trustees and must be signed by all the appointed trustees;
(ii) Registration of the Trust Deed at the Registrar of Documents.
This will entail of assessment of the Trust Deed for payment of stamp duty, stamping upon payment of the assessed amount, and lodgement for registration of the trust under the Registration of Documents Act as a simple trust; and
(iii) Incorporation of the registered Trust
After registration, the trust may be incorporated into a body corporate under section 3 of the Trustees (Perpetual Succession) Act. The process of incorporation involves the lodging of an application for incorporation to the Principal Registrar who shall within sixty (60) days either approve the application and grant a certificate or reject the application and on rejecting give a reason for the rejection.
The application is accompanied by, among others, the original registered Trust Deed, a petition for incorporation signed by all the trustees, the curriculum vitae (cv’s) of all the trustees, and copies of KRA PIN Certificates and National Identity cards of the trustees.
Upon successful incorporation by the Principal Registrar, the trust will become a body corporate by the name described in the certificate having:
i. perpetual succession and a common seal;
ii. the power to sue and be sued in the corporate name of the trust; and,
iii. subject to the conditions and directions contained in the certificate, to hold and acquire, to sell, transfer, assign, charge and lease any movable or immovable property of the trust.
Advantages of a creating a family trust for estate planning
- A registered family trust is a non-trading entity therefore exempted from paying corporation tax payable by companies.
- The registration of a family trust is an effective tool of estate planning as it avoids the probate and administration process which may be lengthy and costly.
- A registered family trust is exempted from payment of the following taxes:
a. Capital Gains Tax
i. A registered family trust is exempted from paying capital gains tax in respect of property, including investment shares, which is transferred or sold to transfer the title or the proceeds into a registered family trust; and
ii. Any capital gains relating to the transfer of title of immovable property to a family trust.
b. Income Tax
The income or principal sum of a registered family trust is exempted under section 13 of the Income Tax Act. However, 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 with the following exceptions provided in section 11 (3A) of the Act: –
i. 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;
ii. income paid to any beneficiary which is collectively below ten million shillings in the year of income; and
iii. such other amount as the Commissioner may prescribe from time to time.
Disadvantages of a family trust
- Loss of ownership of assets
Once assets are transferred to the registered trust, they belong to the trust and the owner cannot transfer them back unlike in a family-owned company where property may be transferred back to the owner.
- The duration for incorporating the trust may be long
The Act stipulates that the period for incorporation of the trust shall be sixty (60) days. However, should the Principal Registrar reject the application to incorporate, the procedure to appeal against the decision is not clearly set out. Therefore, the period to incorporate the trust may prolong.
The private limited company as an alternative means to secure the estate
As an alternative to the registration of a trust, a family-owned company may also be registered to safeguard family property. The salient features of a family-owned company compared to a registered family trust are provided hereunder as follows: –
Comparison between a family-owned private company and a registered family trust
| Registered family trust | Family owned company |
Registration | Registration of a family trust may take a longer period compared to a company if the trust will be incorporated. Registration of the trust as a simple trust may take 4 to 6 weeks, while the incorporation is stipulated by the Trustees (Perpetual Succession) Act to take an additional sixty (60) days. | Registration of a company takes a relatively short period (2 -3 weeks). |
Management | The family registered family trust is managed by the trustees for the benefit of the beneficiaries. The trustees have complete control of the businesses of the trust and their powers and duties are set out in the Trust Deed. | Ownership is divided into shares and decision making is therefore based on voting as per the shareholding. A company is also managed by directors and any other appointed agents. |
Tax liability and tax exemptions | A registered family trust may be incorporated as a body corporate but it remains to be a non- trading entity for tax purposes. This means that the trust itself is not taxed, but the income proceeds of the trust are distributed to the beneficiaries and trustees who are then taxed with specific exceptions provided in law. In addition, a registered family trust has the benefit of exemption from capital gains tax on transfer of immovable property to the trust or any assets whose proceeds will be transferred into the trust. | A company is a trading entity subject to corporate tax of 30% annually. Transfer of property belonging to the shareholders to the company is exempted from stamp duty, however in other instances of transfer, the company is subject to capital gains tax. |
Enforcement | An enforcer may be appointed under the Trust Deed of the trust to enforce the terms of the trust, review status of implementation of the trust, require trustees to take remedial actions, report to the settlor and beneficiaries and to institute legal action against trustees for abuse of their powers. | A company is required to fulfil obligations entrenched in the Companies Act, 2015 . The Registrar of Companies maintains all records and registers of the company and ensures compliance with the statutory obligations. In addition, a member of the company may institute proceedings seeking relief on behalf of the company against directors or any member for any actions committed against the company. |
Statutory requirements | A registered family trust is managed in accordance with the Trust Deed. Any amendments on the Trust Deed are to be filed with the Principal Registrar under the Act for record purposes. | In addition to the Memorandum and Articles of Association, a company has additional statutory obligations under the Companies Act such as: – i. mandatory appointment of an auditor, ii. annual general meetings, iii. maintaining register of members and beneficial owners, iv. maintaining a record of meetings, v. filing annual returns, vi. notifying the Registrar of major changes and decisions of the company. |
CONCLUSION
In the foregoing discussion, it is evident that Kenyan law has provided sufficient means by which a person may ensure the proper planning and management of their estate during and even long after their demise.
We trust that the salient features of a family trust as set out herein and also as contradistinguished with the use of a private limited company will help guide you on the most suitable means to plan and manage your estate.
NB: –
*This write up is meant for general information only and should not be relied upon without seeking specific legal advice.