A family trust is a non-trading entity that is registered or incorporated by any person or persons, whether jointly or as an individual, for the purposes of planning or managing their personal estate.  Family trusts are governed by the Trustees (Perpetual Succession) Act (Cap 164).

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

• Testamentary Trusts

A testamentary trust is established in accordance with the instructions contained in a person’s Will. It describes who the beneficiaries and trustees will be and how the trust’s assets will be distributed and managed upon the testator’s death. It is governed by the Law of Succession Act and becomes effective upon the testator’s death after conclusion of probate proceedings.

• Living Trusts

Living trusts are  established and become operational during the lifetime of the person setting up the trust called a settlor. Living trusts can either be revocable or irrevocable. The terms of a revocable living trust are subject to change, amendment, or revocation by the settlor while they are still alive. In contrast, the terms of an irrevocable living trust cannot be changed, amended, or revoked by the settlor while they are still alive as the settlor loses control over the assets placed in the trust.

Benefits of setting up a family trust

1. Wealth preservation: A family trust helps preserve family wealth across generations by shielding it from mismanagement or external claims.
2. Estate planning: Trusts allow for structured succession planning, avoiding the delays and costs associated with succession proceedings.
3. Tax advantages: Registered family trusts are granted a number of tax exemptions when transferring property to the trust, such as stamp duty and capital gains tax for individuals transferring property to a trust.
4. Privacy: Unlike wills, which become public upon probate, trust arrangements remain private.
5. Protection of vulnerable beneficiaries: A family trust allows a trustee to manage assets on behalf of vulnerable beneficiaries such as minors and people with disabilities, thus preventing mismanagement or exploitation.
6. Family trust ensures that the settlor’s wishes are safeguarded.

Registration and incorporation process of a family trust

1. Preparation of a trust deed. The trust deed specifies the trustees and the beneficiaries of the trust. The trust deed also sets out the objectives of the trust, and its duration.
2. Payment of stamp duty. Once signed by the trustees, the trust deed must be submitted for stamp duty assessment and payment.
3. Registration of the trust deed at the office of the Registrar of Documents in accordance with the Registration of Documents Act (RDA). Registration under the RDA does not make a trust into a body corporate. The trust can however, commence implementing the objects of the trust as a simple trust.
4. Incorporation of the trust through the Business Registration Service portal in accordance with the Trustees (Perpetual Succession) Act. After RDA registration, the duly registered trust deed, a petition for incorporation and supporting documentation are lodged with the Business Registration Service (BRS).
5. Once a Trust is incorporated, the trustees become a body corporate by the name described in the certificate of incorporation, and the Trust shall be able to:
6. Have perpetual succession and a common seal; and
7. Sue and be sued in its corporate name.

Tax incentives of a family trust

The following are the tax exemptions enjoyed by family trusts:

• Capital Gains Tax– Paragraph 58 of the first schedule of the Income Tax Act provides an exemption to capital gains tax on the transfer of a title of immovable property to a family trust.
• Income Tax– Paragraph 36 (g) of the first schedule of the Income Tax Act exempts income of an individual chargeable to tax where the gain is a result from the transfer of a property, including investment shares, which is transferred or sold for the purpose of transferring the title or the proceeds into a registered family trust.
• Stamp Duty– Section 52 (2) (b) of the Stamp Duty Act exempts payment of stamp duty for a conveyance or transfer in favour of a registered family trust for charitable purposes only or the trustees of a trust so established. Section 117(h) of the Stamp Duty Act exempts a registered family trust from payment of stamp duty.

Conclusion

Family trusts offer a powerful tool for asset protection, succession planning, and wealth management in Kenya. With proper structuring and legal advice, family trusts can offer unparalleled peace of mind ensuring that family wealth is preserved, protected, and efficiently passed on to future generations. Should you require any further information, do contact us at info@cfllegal.com