Unlocking the Power of Family Trusts in Kenya: A Comprehensive Guide

In our ongoing commitment to keep our readers well-informed, we at Kubwa & Company Advocates continue our discussion on trusts in Kenya, following up on our previous article, What You Need to Know About Trusts in Kenya.

Today, we delve into a specific facet of trust law – the Family Trust in Kenya. This article explains how family trusts can help with wealth management, tax planning, and succession planning, leveraging updates from the Kenyan legal framework and expert insights in five subheadings.  

Understanding Family Trusts

A family Trust is an arrangement where an individual (the settlor) transfers assets into a Trust to benefit their family members (beneficiaries). Governed by the Trustee (Perpetual Succession) Act (Cap 164), family trusts have emerged as a pivotal mechanism for estate planning.

Recent legislative changes have significantly clarified and expanded the scope of Trusts in Kenya. These changes have made Trusts more accessible and beneficial for Kenyan families, paving the way for a more secure and efficient wealth management system.

Key Benefits of Establishing a Family Trust in Kenya

1. Tax Efficiency: Family trusts offer significant tax advantages, including tax exemptions, as shown below:
   • Income Tax Exemptions:
     • Any money paid from the trust for a beneficiary’s education, medical treatment, or housing is tax-exempt. This applies to the income generated by the trust itself.
   • Beneficiary Exemptions:
     • Any amount paid out of the trust for the benefit of any beneficiary and used exclusively for education, medical treatment, or housing is exempt from tax.
     • Also, income paid to any beneficiary collectively below KES 10 million in a year of income is exempt from tax. This significantly benefits wealth distribution within families without immediate tax implications.
   • Capital Gains Tax (CGT) Exemptions:
     • Property or investment shares transferred or sold to transfer the title or proceeds into a registered family trust are exempt from Capital Gains Tax.
     • In addition, any capital gains relating to the transfer of title of immovable property to a family trust are exempt from CGT.
   • Stamp Duty Exemptions:
     • The Stamp Duty Act exempts conveyancing transactions related to registered family trusts from stamp duty in transferring property. This applies when land or investment shares are transferred into the trust.
     • However, the trust must be registered appropriately to benefit from these tax exemptions, and transactions must align with all legal provisions.

2. Avoiding Probate and Succession Delays:
   • One of the most compelling reasons for setting up a family trust is to bypass Kenyan courts’ often lengthy and complex probate process. Trust assets are not part of probate, allowing the beneficiaries to have quicker access to the Trust assets.
   • In a Trust, your beneficiaries will avoid the agony of two prominent succession court battles involving Mbiu Koinange and JM Kariuki estates. The estate of Mbiu Koinange, a prominent landowner’s case, has been in Kenyan courts for over 40 years, while the succession battle over the estate of JM Kariuki, a famous Kenyan politician, has lasted approximately 38 years. Parties in both cases faced numerous delays due to legal challenges, disputes among family members, court case backlogs, multiple claimants and political scrutiny.  

3. Structured Wealth Management:
   • Trusts provide a structured approach to managing and distributing wealth across generations. They can be tailored to reflect the settlor’s wishes, ensuring assets are used in ways that align with family values or specific goals, like education or business growth. The following family trusts should suffice:
     • the Delamere family, known for their extensive land holdings in Kenya, notably at Soysambu and Ol Joro Orok, has managed its estate through trusts for over a century.
     • the Kenyatta family, one of Kenya’s most prominent, has managed their vast assets through various trusts. These trusts have included land, commercial properties, and businesses, with some elements enduring for decades, passing from Jomo Kenyatta to subsequent generations.
     • The late Nicholas Biwott, a prominent Kenyan politician and business figure, set up trusts to manage his extensive properties and investments. While details remain private, it’s known that these trusts have been structured to benefit family members across generations, focusing on education, health, and real estate.

4. Protection from Creditors:
   • Assets within a trust can be shielded from creditors, divorce settlements, or legal judgments against beneficiaries, offering an additional layer of security.
5. Confidentiality:
   • Unlike wills, which become public documents upon probate, trusts maintain privacy over the distribution of your assets.

Setting Up Your Family Trust

The responsibility of registering trusts in Kenya lies with the Registrar of Companies, and this process can be completed entirely online, making it convenient for all parties involved.  

Recent law amendments have brought about significant changes in the trust landscape. Trusts are now presumed irrevocable unless specified otherwise, providing more stability and less chance for manipulation post-creation. These amendments also introduced a new role of the enforcer to ensure the trust operates within its legal framework, adding another layer of checks and balances to the system.

The Family Trust setup revolves around three key considerations: legal requirements, choosing trustees and defining the beneficiaries. The registration process involves drafting a trust deed. This legal document outlines the trust’s terms, including who the trustees are, the beneficiaries, and how the trust operates.

Trustees are chosen to manage the Trust’s assets, while beneficiaries must be identified. 

After considering the above, the following details must be included:

1. Proposed name, which must have the word ‘Registered Trustees’ at the end;
2. Objects or purpose of the trust;
3. A duly completed application for incorporation in the prescribed form (Form TR1);

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4. A Petition to have the trust incorporated (the document must be commissioned by a Commissioner for Oaths);
5. Duly Registered trust deed (registered under the Registration of Documents Act with the Ministry of lands) or Constitution;
6. Statement of donor funding/commitment;
7. Title deed belonging to the trust or one of the trustees or other asset or property ownership documents.
8. Current search indicating ownership position of assets listed;
9. Financial statement of the organization or of one trustee such as a current bank statement;
10. Minutes appointing the Trustees;
11. Brief Summary of the Trust (should not exceed 1 Page);
12. Curriculum vitae of the trustees or employees;
13. Diagrammatic representation of the common seal;
14. Certified copies of the National Identity card (ID), Kenya Revenue Authority Pin Certificate (KRA Pin) and passport photos of the Settlor, Trustees, beneficiaries and enforcers, if any.

Challenges and Considerations in Family Trusts

While family trusts offer numerous advantages, as highlighted earlier, they are not without challenges:

1. Complexity: Trusts are complex legal instruments to the untrained eye. Incorrect setup can lead to unintended consequences like tax liabilities or beneficiary disputes.
2. Cost: There are initial and ongoing costs associated with setting up and maintaining a trust, including legal fees, trustee fees, and administrative expenses.
3. Flexibility vs. Control: While trusts offer control over asset distribution, they also require relinquishing control over those assets once they enter the trust.

Conclusion

Family trusts represent a sophisticated tool for estate and succession planning in Kenya, offering protection and strategic advantages in wealth management. With the recent legal enhancements, Family Trusts are more attractive than ever. Whether you’re considering setting up a trust in Kenya or seeking to optimise an existing one, we at Kubwa and Company Advocates are here to guide you through every step.

Contact us for personalised advice on how a Family Trust can fit into your estate planning or any queries related to trust law in Kenya. Let’s secure your legacy and ensure your assets serve your family’s best interests for future generations. Keep an eye on our insights for more on wealth management in Kenya tax planning strategies, and practical advice.

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Should you require more information, please do not hesitate to contact [email protected].