DEMYSTIFYING TRUSTS IN KENYA: A DEEP DIVE.

1. INTRODUCTION:

 Establishing a Trust is a significant endeavor that involves careful consideration and adherence to legal processes. Trust Law in Kenya as with most commonwealth countries, is to a large extent dependent on common law on ordinary Trusts which establish a basic relationship between a settlor, trustee, and beneficiary

A trust is therefore, a legal relationship that is legally created and exists between a Settlor, who is the creator of the trust, a Trustee who is the protector of the trust, and a Beneficiary who shall be identifiable or ascertainable about a class or relationship with another person, whether living or dead. The parties can either be an individual or a legal entity. Under the Trust, the Settlor will transfer legal ownership of their assets to the Trustee to hold for the benefit of the Beneficiaries.

In Kenya, Trusts are governed by the Trustees Act, Cap 167 (The “Act”), and the Trustees (Perpetual Succession) Act Cap 164 (The “TPSA”), Laws of Kenya, and their respective regulations. There are, however, other statutes that affect the operation of Trusts in Kenya such as the Income Tax Act Cap 470, Stamp Duty Act, Cap 480, and the Tax Procedures Act No. 29 of 2015, Laws of Kenya.

2. CREATION OF TRUSTS.

• Types of Trusts;

The various types of Trusts applicable in Kenya are listed under the TPSA and with ITS amendment, vide the Trustee (Perpetual Succession) (Amendment) Act, 2021 which received the presidential assent on 7 December 2021, some changes were introduced, and some of the changes to the TPSA Act, involved the introduction of new types of trust. Therefore, the following are the types of trusts applicable under the TPSA;

• Charitable trusts- a trust formed for the exclusive purpose of the relief of poverty, advancement of education, religion or human rights, fundamental freedoms or protection of the environment, or any other purpose beneficial to the general public.
• Non-charitable purpose trusts– they may be created for a specific purpose despite the absence of any beneficiary and it becomes valid if the purpose whether partly charitable or not, for which the trust is created is specific, capable, or fulfilled and is not legal and the terms of the trust provide for the disposition of surplus assets of the trust upon its termination.
• Discretionary trusts- a trust where the beneficiaries or the benefits of the trust become ascertainable once the trust deed sets out the criteria or at the discretion of the trustees.
• Irrevocable trusts– are trusts that do not contain an express power of revocation. A trust shall be deemed to be irrevocable if an express power of revocation has not been exercised by the settlor during the lifetime of the settlor.
• Family trusts– are trusts, whether living or testamentary (will trust), partly charitable or non-charitable that are incorporated by any person(s) for planning or managing personal estate. Family trusts are made in contemplation of other beneficiaries (whether directly related to the settlor or not), made for the preservation or creation of wealth for generations, and are non-trading entities.  The Trust shall be valid if the settlors of the trust are also beneficiaries of the trust.

In Kenya, trusts can be either unincorporated or incorporated.

1. Unincorporated Trusts:

Setting up an unincorporated trust doesn’t require formal registration. Trustees create a trust deed outlining their roles, responsibilities, and the trust’s objectives. Trustees must act honestly and in good faith, following the trust deed, common law, and the Kenyan Trustees Act. Failure to do so may lead to criminal or civil liabilities.

1. Incorporated Trusts:

For trusts intending to acquire and hold land, incorporation is necessary under the Trustees (Perpetual Succession) Act. Once registered, the trust gains the status of a corporate body with perpetual succession. This means its existence is not affected by the death or incapacity of any trustees, allowing it to enter into contracts, sue, or be sued.

• Incorporation Process.

The process of incorporation of Trusts is listed under section 3 of the TPSA. Here’s a simplified breakdown of the incorporation process:

• Preparation of Trust Deed: Trustees draft a trust deed outlining the trust’s purpose and structure.
• Execution: Trustees, whether individuals or a corporate body, sign the trust deed.
• Stamping: The stamped trust deed is submitted to the land’s office, and a nominal stamp duty is paid.
• Registration: The stamped trust deed is registered under the Registration of Documents Act for issuance of a Certificate of Incorporation. This is mandatory for trusts intending to acquire land.

3. POWERS OF TRUSTEE;

Some of the notable general powers of Trustees, provided for under Part III of the Trustees Act, include the following;

• Where a trust for sale, a power of sale of property is vested in a trustee, a trustee has the power to sell and or concur with any other person in selling all or any part of the Property.
• Trustees have the power to sell subject to depreciatory conditions and such shall not be grounds for impeachment by the beneficiaries unless it also appears that the consideration for the sale was thereby rendered inadequate.
• Trustees shall have and shall be deemed always to have had power to raise money required by the trust by sale, conversion, calling in or mortgage of all or any part of the trust property for the time being in the possession of the trust.
• Trustees shall have the power to insure against all damage by fire and any building and insurable property and to pay premiums for that insurance out of the income of any other property subject to the trust without obtaining the consent of any person entitled to the income.
• Trustees shall have the power to deposit documents held by them relating to the trust with a bank, banking company or other company whose business includes the undertaking of safe custody of documents and the sum payable shall be paid out of the income of the trust property.
• Trustees may instead of acting personally employ and pay agents whether advocates, bankers’ stockbrokers, or other persons to transact any business or do any act required to be transacted or to be done in the execution of the trust.
• Trustees intending to remain out of Kenya for a period exceeding one (1) month may notwithstanding any rule of law or equity to the contrary, by the power of Attorney (duly registered at the relevant registries) delegate to any person (including a trust corporation), for the execution or exercise all or any trust powers and discretion vested in them, during their absence from Kenya.

4. BENEFITS OF CREATING A TRUST.

Some benefits of creating a trust include the following;

• Trusts ensure a smooth transfer of assets to the Beneficiaries by avoiding costs that would be associated with the long tedious probate process in court to determine the validity of a will.
• Trusts give a level of control and protection to assets since the legal ownership is held by the Trustees who are bound by the provision of the Trust Deed.
• Trusts allow flexibility since they allow Trustees to further invest the trust assets in their possession.
• Trusts offer continuity, their life are not limited to the life of the settlor, and as such they offer a smooth transition in the event of the demise of the Settlor.
• Trust can be used in moments when a settlor is incapacitated. Revocable trust enhances a level of certainty for settlors in moments of incapacity, during an illness, and/or a disability.
• Family trusts are a valuable estate planning tool since it allows the separation of assets from personal ownership. This protects creditors, as the trust assets are not considered the personal property of the settlor or beneficiaries.
• Trusts may offer protection for beneficiaries with special needs or medical conditions. Provisions may be made within the trust to ensure that the trust assets are utilized for the benefit of beneficiaries requiring medical care or facing challenges due to age or infirmity.

5. TAXATION ON TRUSTS IN KENYA.

Income from any settlement paid to or for the benefit of a child (under 18 years) of a settlor during the life of settlor is deemed to be the income of the settlor for purposes of tax, this is according to section 25 of the Income Tax Act, Cap 470, Laws of Kenya. Section 25 (7) of the Income Act, introduces ‘registered family trust’ in the definition of settlement. This effectively makes the income derived from the transfer of assets through a registered family trust the income of the settlor under the section and therefore subject to income tax.

Further under section 26, of the Income Tax Act, income from a settlement paid to persons other than the child of a settlor shall be deemed as the income of the settlor for income tax purposes. By excluding, “a registered family trust” from the definition of a settlement, Section 26 (5) of the Income Tax Act, effects that the income from a registered family trust is excluded from being deemed an income of the settlor and is therefore not subject to income tax when paid to persons other than the child of a settlor.

Any income chargeable to tax under the Income Tax Act and received by any person in their capacity as a trustee, executor or administrator shall be deemed to be the income of that trustee, executor or administrator, and where the income amount consists of qualifying dividends or qualifying interest that amount shall be deemed to be an amount chargeable to tax.

Any amount, received as income by any person beneficially entitled, from any trustee in their capacity, or paid out of income by the trustee on behalf of such person, shall be deemed to be income.

In the case of a registered trust, income tax is exempted from income received by a beneficiary or paid out on behalf of a beneficiary relating to;

• Any amount paid out of the trust income on behalf of any beneficiary that is used exclusively for education, medical treatment, or early adulthood housing;
• Income paid to any beneficiary which is collectively below ten million shillings in the year of income;
• Any other amount that the Commissioner may prescribe from time to time.

Exemptions under the Income Tax on Trusts include the following;

• Such parts of income of an individual chargeable to capital gains derived from the transfer of property including; investment shares which are transferred or sold to transfer the title or the proceeds into a registered family trust;
• Income or principal sum of a registered family trust;
• Any Capital gains relating to the transfer of title of immovable property to a family trust;

Exemptions under the Stamp Duty Act, include the following;

• Any transfer made to a registered family trust as a gift under section 52(2) will be exempt from payment of stamp duty.
• Section 117 (1) (h) introduces “a registered family trust” as an exemption to stamp duty, in addition to a will, codicil, or other testamentary disposition.

6. OTHER NOTABLE ASPECTS.
   • Enforcer

The TPSA Amendment Act, 2021 introduces the concept of an enforcer who can be an individual or corporate entity appointed by the settlor or the beneficiaries. The role of the enforcer is to monitor the administration of the trust for the benefit of the beneficiaries. An enforcer cannot however also be a trustee.

An enforcer has 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.

Though it is not mandatory for a trust to have an enforcer, the introduction of this concept helps to guarantee transparency and accountability concerning the management of a trust

• Invalidity of Trusts.

A trust is valid and enforceable only per the terms of the trust. However, it becomes invalid if;

• It was created to do anything illegal in Kenya;
• its beneficiaries are not identifiable or ascertainable;
• it was established by duress, fraud, misrepresentation, or in breach of a fiduciary duty;
• if the terms are so uncertain as to render performance impossible; or
• if the settlor had no legal capacity to create the trust.

Although a trust is created voluntarily and is effected without consideration, a trust shall not become void by virtue of the settlors bankruptcy, liquidation of the settlors property or proceedings, or a suit against the settlor by his or her creditors. The court may, however, declare a trust to be void where it’s proven that the trust was made for fraudulent purposes, including to evade creditors of the settlors.

In conclusion, the establishment of a trust demands meticulous planning, strict compliance with legal requirements, and the submission of specific documents. The introduction of tax reliefs through the Finance Bill, 2021, has incentivized the creation of family trusts for effective estate planning. The recent amendments to the TPSA have somewhat streamlined the process, albeit the trust regime in Kenya still lacks the flexibility observed in other global economies, particularly in accommodating more intricate relationships among settlors, trustees, and beneficiaries.

While capitalizing on the current tax reliefs, there remains optimism for additional regulatory measures and amendments to the law. These anticipated changes are crucial not only for (family trusts) but for all trust types, aiming to provide clarity in registration processes and offer expanded tax incentives. The ongoing evolution of trust regulations is essential for fostering a dynamic and adaptable legal framework that can cater to diverse trust structures and relationships.