Setting Up a Family Trust in Kenya: A Comprehensive Guide with Key Amendments and Efficient Registration Process.

Family Trusts

Family Trusts are legally recognized in Kenya effective 2021, when the Trustees (Perpetual Succession) (Amendment) Act (“the Amendment Act”) was signed into law on 7^th December in the same year, and can be registered/incorporated by any person(s) whether jointly or individually, for the purpose of planning or managing personal estates.

The Amendment Act introduced key changes to the Trustee (Perpetual Succession) Act which mainly dealt with the registration of other forms of trusteeships for example charitable, social, scientific and educational trusts. The Amendment Act in particular deals with family and non-charitable trusts, for the accumulation and preservation of wealth for the benefit of future generations.

Family Trust Defined

A family trust is a non-trading entity created for purposes of preserving or creating wealth for future generations. Apart from preserving, a family trust is a useful succession planning tool in that once the settlor transfers their assets to the trustees, they cease to be the owners of such assets and the trustees in turn are deemed to be the legal owners, while the beneficiaries become the beneficial owners.

Registered family trusts can be categorized into two: testamentary and living trusts. 

1. a) Testamentary Trusts 

A Testamentary Trust is created in accordance with the instructions in a person’s Will. It outlines how assets and how they will be distributed to certain named beneficiaries upon the testator’s death. It is governed by the Law of Succession Act and becomes effective upon the testator’s death, upon the conclusion of probate proceedings.

Other than the benefit of a testamentary trusts serving to consolidate one’s and preserve wealth for generations, the disadvantage is that one still has to go through probate proceedings to kick-start their operation. 

• b) Living Trusts 

Living trusts are a creation of the Trustees (Perpetual Succession) (Amendment) Act. They are formed for the and become operational during the lifetime of the settlor. Living trusts’ beneficiaries need not be directly related to the settlor and can either can be either revocable or irrevocable. 

A revocable living trust is one whose terms the settlor can change, amend or revoke during his/her lifetime as the assets of the trust are deemed to be still their property, while an irrevocable living trust is one whose terms are not subject to amendment, change or revocation by the settlor during their lifetime as the settlor is deemed to no longer be the owner of such property.

Beneficiaries of Family Trusts

The Amendment Act provides that: –

1. Companies or charities can be included as beneficiaries of the trust, including the settlor himself.
2. The settlor can impose obligations or conditions on the beneficiaries e.g. through the trust deed, the settlor may provide that upon reaching a certain age, the beneficiaries can start receiving income from the trust.
3. Similarly, the settlor can provide for the addition or exclusion of persons eligible to be beneficiaries of the trust.

Trust Property

1. Any property from the settlor or any person or entity may be added to trust e.g. land, cash, shares, vehicles etc.
2. During and after registration, the settlor can add property to the trust to which they are beneficially entitled, notwithstanding that the property is not legally in their name.

Trust Enforcer

It is not mandatory for a trust to have an enforcer, however the introduction of this concept in the Amendment Act helps to guarantee transparency and accountability with regard to the management of the trust.

An enforcer has a duty to report to the settlor or trustees any financial breaches and in such an event can either require trustees to take remedial action or pursue legal action against the trustees.

Registration Process

1. Registrar- prior to the Amendment Act, trusts were registered through the Cabinet Secretary. Now trusts are to be registered with the Principal Registrar of Documents, a move aimed at reducing the bureaucracy in the process of registering trusts.

• Timelines for registration- for registration and issuance of a certificate of incorporation by the Principal Registrar, is expected to be within 60-90 days. Typically, currently it takes 2-5 years for registration to be concluded.

• Process- to incorporate a trust one needs to: –
• Prepare a trust deed and other relevant documentation- the trust deed will specify who the trustees and the beneficiaries of the trust will be. For the purposes of this research, the trustees will most likely be the parents to the children, with the children as beneficiaries. The Deed will also set out the objectives of the trust, and its duration. Most trusts for children have a duration that lasts until the children attain the age of majority (18).
• Pay stamp duty.
• Register the Trust which can involve two stages under Registration under the Registry of Documents Act and Incorporation under the Perpetual Successions Act.

• Registration under the Registry of Documents Act – registration under the Registration of Documents Act 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. The process may take 1-3weeks.

• Incorporation under the Trustees (Perpetual Succession) Act – after registration under the Registration of Documents Act, a certified copy of the Trust Deed and a Petition for Incorporation is lodged with the Ministry of Lands for incorporation of the trust. The process may take months.

• Post-incorporation- Once a Trust is incorporated under the Trustees (Perpetual Succession) Act, the trustees shall thereupon become a body corporate by the name described in the certificate, and the Trust shall be able to:
• have perpetual succession and a common seal;
• power to sue and be sued in their corporate name; and,
• subject to the conditions and directions contained in the certificate, to hold and acquire, and by instruments under the common seal to convey, transfer, assign, charge and demise any movable or immovable property or any interest therein now or hereafter belonging to, or held for the benefit of, the trust concerned in the same manner and subject to such restrictions and provisions as trustees might so do without incorporation”.

Taxation

The Amendment Act ties in with the changes made in the Finance Act of 2021. The Finance Act brought in material changes to the taxation of registered family trusts, principally, introducing various tax exemptions relating to transactions involving registered family trusts. In particular: –

• exemption from Stamp Duty on the transfer of properties into a registered family trust.
• exemption from Capital Gains Tax on the transfer of properties into a registered family trust
• exemptions from income or capital gains taxes on incomes earned by the registered family trust.
• to the extent that income paid out of a registered family trust to any beneficiary does not exceed KES10-million in a year, or where it is used exclusively for the purpose of education, medical treatment or early adulthood housing, such income is not subjected to tax on the beneficiary.

For more insights pertaining to this matter, you can reach the writer at Mwenda@mmsadvocates.co.ke . You can also contact us at MMS Advocates, Lower Duplex Apartments, LOWER HILL ROAD, or email us at info@mmsadvocates.co.ke