Family Trusts as an Alternative to Traditional Succession
In our previous article, we discussed how to register a family trust. Now, we will explore why setting up a family trust can be a better choice than writing a traditional will for estate planning. Family trusts offer several advantages, including better asset protection, privacy, and ease of managing your estate after you pass away. By understanding these benefits, you can make a more informed decision about the best way to plan your estate.
Both wills and family trusts will determine how assets will be distributed among one’s beneficiaries, and therefore, if either is your chosen estate planning vehicle, there are concrete advantages of having either a will or a trust depending on your particular intent and needs. There however lies certain advantages of choosing to go to the family trusts route over a will.
A family trust allows the settlor to outline how their assets will be handled during their lifetime, giving the settlor more testamentary power, which is impossible to do in a will as a will outlines one’s wishes or intentions regarding the disposition of their property after their death.
Once a family trust has been created, the settlor could also continue to benefit from the assets as a beneficiary to the said trust during his lifetime. With the tremendous testamentary power that a family trust empowers to the settlor, the settlor could assign how the assets will be used in the instance he becomes incapacitated due to old age or mental illness during and before his death. This cannot be done in testate succession as the lack of mental capacity invalidates the estate planning mechanisms and the wishes of the testator by rendering the will invalid.
Using family trusts as a way of estate planning ensures that there is a preservation or creation of wealth for generations, thus creating a family legacy. This is an obvious alternative to the use of a will that could potentially bring about contention and rifts among beneficiaries, in addition to increasing the chances of squandering of assets by irresponsible beneficiaries.
After the trust is incorporated in line with the Trustees (Perpetual Succession) Act 2021, it acquires an independent legal personality, thus shielded from any creditor litigation against the settlor in their individual capacity. Additionally, once incorporated, the family trust can neither be subjected to succession nor probate proceedings, unlike wills which run the risk of having the estate sued by creditors or being voided by courts due to illegality.
Creation of a family trust is a private process unlike in probate procedures which carry risks of contention such as objections or protests, that require the objector to publish gazette notices notifying the public of the same. In probate, on the contrary, the procedure is open to interference by 3rd parties in litigation.
In the creation of a family trust, the process is simpler, without particular requirements on form or substance, unlike a will which has the specific and formal requirements that would invalidate a will if not complied with, as per the provisions of the Law of Succession Act.
Formalizing and writing a will is less costly than setting up a family trust, which is costlier and more complex. Subject to the Trustees (Perpetual Succession) Act, the registration process of a trust is too lengthy, costly and bureaucratic, and upon its registration it also attracts administrative and maintenance costs. However, creation of family trusts could in the long-term be cheaper than succession which has the risk of litigation that could last for years in courts.
The Finance Bill, 2024 introduced to the National Assembly on 9th May 2024, proposes significant changes to the Income Tax Act, among them being a repeal tax exemption on the income or principal sum from a registered family trust. The implication of this proposal is that it will eventually discourage the use of registered family trusts as an estate planning vehicle and we’re hoping the same will be taken through a proper public participation exercise before it is signed into law.
In the event of any inquiries or concerns regarding family trust, our team at MMS Advocates stands ready to provide expert legal guidance and support. You can reach us at our office located at Lower Duplex Apartments, LOWER HILL ROAD, or conveniently contact us via email at info@mmsadvocates.co.ke.