Family Trusts and Generational Wealth in Kenya

The law of trusts constitutes a fundamental pillar of legal frameworks in the common law world, governing the relationships and obligations surrounding assets and property. At its core lies the principle of trust – a relationship where one party (the trustee) holds and manages assets on behalf of another (the beneficiary), guided by the settlor's intentions. The law of trusts serves as a beacon of equitable governance, ensuring the seamless transfer and stewardship of wealth across generations and purposes. Trusts serve as instruments of asset management and protection within the legal system. A succinct yet comprehensive definition of trusts was espoused by an Australian Judge, Mayo J in the following terms:

Strictly it refers, I think, to the duty or aggregate accumulation of obligations that rest upon a person described as a trustee. The responsibilities are in relation to property held by him, or under his control. That property he will be compelled by a court in its equitable jurisdiction to administer in the manner lawfully prescribed by the trust instrument, or where there be no specific provision written or oral, or to the extent that such provision is invalid or lacking, in accordance with equitable principles.

Essentially, trustees bear the duty of conscientiously overseeing the entrusted assets for the beneficiaries’ utmost benefit adhering to the terms laid out in the trust instrument or, in its absence or insufficiency, guided by equitable principles as directed by the Courts. Kenya’s trust regime finds its roots in English Common law, and equity principles, bolstered statutorily by the Trustee Act CAP 167 and the Trustees (Perpetual Succession) (Amendment) Act CAP 164 (hereinafter ‘the Amendment Act’). The Amendment Act provided updates on the legal framework governing the law of trust in the country.   The statute was assented to on 7th December 2021 and effected on 23rd December 2021. One of the essential additions by the Amendment Act was the recognition of Family Trusts.

Family Trust

A Family Trust is defined under Section 3D of the Amendment Act in the following terms:

(1) A family trust is a trust, whether living or testamentary, partly charitable or non-charitable, 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.

(2) A family trust shall be –

(a)  made in contemplation of other beneficiaries, whether such intended beneficiaries are directly related to the settlor or not, or are living or not;

(b)  made for the purpose of preservation or creation of wealth for generations; and

(c)  a non-trading entity.

(3) Notwithstanding sub-section (2), a family trust shall not be invalid for reason that the settlor or joint settlors are also beneficiaries to the trust.

Trusts have have emerged as indispensable components in estate planning and wealth preservation tactics employed by individuals perceived as successful in society. They play a pivotal role in fortifying the wealth of affluent individuals and ensuring its continuity across generations. Contemporary elites and business moguls favour trusts due to their ability to safeguard assets from creditors and spouses of the settlor, while maintaining confidentiality and enabling professional management. However, it is crucial to note that establishment of a trust is not a license to circumvent tax obligations.

In Kenya, a trust may be invalidated if it is established with an intention or purports to engage in any activity that is considered unlawful. Additionally, the validity of a trust hinges on its compliance with legal prerequisites including: presence of identifiable beneficiaries, absence of coercion or fraud, clarity of terms, and the legal capacity of the settlor. It is also noteworthy that once a trust has been duly registered, its validity remains unaffected by the settlor's bankruptcy, liquidation of their assets, or legal actions taken against them by creditors. Essentially, any property transferred to the trust is no longer considered to form part of the settlor’s estate.

Conclusion

A trust in undoubtedly a highly effective tool of estate planning, developed to ensure wealth preservation, especially for future generations of the affluent in society. With the ability to split asset management and enjoyment, trusts inherently offer versatility, enabling tailored solutions to fit the precise needs of individual cases. Kenyan legislators amended the Trustees (Perpetual Succession) Act CAP 164 which introduced family trusts. The Amendment Act aptly sets the scope of a family trusts and places safeguards to ensure that the same is set up within the confines of the law. While trusts are valuable instruments, their true efficacy lies in their proper understanding and lawful utilization.

Disclaimer: The information provided in this article is for informational purposes only and should not be construed as legal advice or a legal opinion. Readers are advised to seek professional legal counsel regarding their specific circumstances and legal questions through info@mmorlaw.com.