Trusts in Kenya

A Trust can broadly and traditionally be defined as a legal obligation/relationship that
exists between a Settlor, a Trustee and a Beneficiary. These parties can either be
individuals or legal entities.

Parties to a Trust

1. Settlor: This refers to the party who creates the trust by transferring his assets to the trustees. There is no legal obstacle stopping a settlor from appointing himself/herself as a trustee.
2. Trustee(s): This is a legal person who receives the assets transferred by the settlor and is required to administer the assets for the benefit of the beneficiaries.

• Beneficiaries: These refer to persons entitled to use or enjoy the assets or income of the trust. A settlor cannot benefit from the trust property unless he or she is a beneficiary. However, nothing prevents a settlor from being a beneficiary.

Under a Trust arrangement, the Settlor transfers legal
ownership of assets to the Trustee, to hold for the benefit of the Beneficiaries.
Trusts are created through a written document which sets out the duties and powers
of a Trustee. This can either be a settlement document or a declaration of
Trust. Thereafter, a Trust Deed is drafted which contains inter alia; the name of the
Trust, the objectives of the Trust, addresses of the Trustees and powers of the
Trustees.

As with most common-law countries, Kenya is to a large extent dependant on laws
that are founded on the Laws of England. Trusts in Kenya are created under the
Trustees Act or the Trustees (Perpetual Succession) Act. There are however, other
statutes that affect the operation of Trusts in Kenya such as the Income Tax Act and
the Tax Procedures Act.

A Trust having been established by way of a Trust deed ought to be stamped and then registered at the Lands Registry under the Registration of Documents Act (Chapter 285 of the Laws of Kenya). The process of registration of the Trust deed pursuant to CAP 285 establishes it as an unincorporated Trust which does not have any distinct legal personality of its own.

The implication of an unincorporated trust is that the Trust can only own property, enter into contracts or do any other thing in the name of its trustees but not in its own name, that is in the name of the Trust. An unincorporated Trust does not have a separate legal existence of its own separate from its trustees. This posses a challenge when there are a change of trustees either by application of Law or under the provisions of the Trust deed, as changes are required to be individually noted on every ownership document.

The most common mistake in formation of Trusts in Kenya is not following up registration under the Trustees (Perpetual Succession) Act (Act). The Act governs the incorporation of Trusts and provides for a defined structure on operations of Trusts and Trustees duties.

The registration under the Act accords a Trust as a separate legal status and is able to own property in its own name, enter into contracts and do any other thing in its own name. The Trust would upon registration under the Act have a separate and distinct legal identity.

Once a Trust is incorporated under the Trustees (Perpetual Succession) Act Chapter 164 of the Laws of Kenya, the trustees shall thereupon become a body corporate by the name described in the certificate, and the Trust shall be able to:

1. have perpetual succession and a common seal;
2. power to sue and be sued in their corporate name; and,
3. 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”.

Another advantage is that the Income Tax Act provides that the income of a registered trust is exempted from taxation.  The Finance Act 2006 further provides that any contributions made from a tax exempt entity shall be exempt from tax – this mainly applies for charitable trusts and one has to apply to the Minister to be exempt from paying taxes.

Further, charitable trusts are exempted from paying land rates payable on its immovable properties and also are exempted on stamp duty when buying land and property;

In addition, since charities are widely recognized as existing for social good this shall attract and aid in fundraising. To note, organizations with charitable status cannot use assets for any purpose other than the pursuit of charitable objectives. The assets of a charity can never be used for private benefit.

Cons to Note in the Process of the Incorporation of a Trust:

1. The process is quite lengthy especially the second stage which is the incorporation of the Trust as this may take more than 6 months;
2. The paperwork is tedious;
3. The process is costly compared to say; incorporating a company;
4. Individuals on the board of a charity, often referred to as trustees, must not be paid unless the constitution of a charity, authorizes it;
5. Charities cannot raise equity investment.

The Trusts regime in Kenya is not flexible enough to accommodate more advanced relationships between settlors and beneficiaries, facilitating the setting up of Trusts for effective and adequate succession and tax planning of family affairs and assets. Under Kenyan Law, the trustees have far more discretion than a settlor would prefer. As a result, the Trust structures in Kenya are predominantly used by charitable organisations and religious institutions.

You might also consider setting up a trust as a way to provide for a beneficiary who is underage. Once the beneficiary is deemed capable of managing their assets, they will receive possession of the trust.

Even if you have what’s known as a revocable living trust into which you can put the bulk of your assets, you still need what’s known as a pour-over will. In addition to letting you name a guardian for your children, a pour-over will ensures that all the assets you intended to put into the trust are put there, even if you fail to retitle some of them before your death.

Any assets that are not retitled in the name of the trust are considered subject to probate. As a result, if you haven’t specified in a will who should get those assets, a court may decide to distribute them to heirs whom you may not have chosen.

 

Authored by Henry Njuguna Adv, MCIArb

We at NKN will gladly help through this process. Reach out on 0722382783.