By Vruti Shah,Arnold Mutisya Monday, August 28, 2023

Family trusts in Kenya have gained recognition and importance with the implementation of the Trustees (Perpetual Succession) (Amendment) Act, 2021. This amendment, effective from 23 December 2021, introduced new categories of trusts, including family trusts.

Family trusts are established by individuals, either alone or jointly with others, to plan and manage their estate. These trusts can be either living trusts or testamentary trusts and may have charitable or non-charitable aspects. The primary objective of a family trust is to create or preserve wealth for future generations, rather than operating as a trading entity.

Once assets are transferred into a family trust, they cease to be the personal property of the settlor and become the property of the trust itself. Several key parties are involved in the functioning of a family trust. The settlor is the person who establishes the trust, determines the contents of the trust deed, and transfers assets into the trust as a trust fund.

Trustees are responsible for managing the assets held within the trust in accordance with the provisions outlined in the trust deed and any accompanying letter of wishes. Beneficiaries are individuals who receive benefits from the family trust, while a trust protector or enforcer, an independent party separate from the trustees, monitors and ensures compliance with the settlor's wishes.

The letter of wishes is a written memorandum that provides detailed instructions on how the settlor would have managed the assets if they had retained ownership. Although not legally binding, trustees typically adhere to the letter of wishes unless circumstances make it disadvantageous for the beneficiaries.

There are several reasons why individuals choose to set up family trusts. Firstly, they serve as a valuable estate planning tool by separating assets from personal ownership and protecting them within the trust. This distinction ensures streamlined asset distribution and reduces the likelihood of challenges to the settlor's intentions.

Family trusts also protect creditors, as the trust assets are not considered the personal property of the settlor or beneficiaries. This safeguard allows the settlor to engage in high-risk ventures without jeopardizing the trust assets. Additionally, family trusts can protect generational wealth by preventing the splintering of assets in cases of separation or divorce, shielding them from relationship property claims.

Moreover, family trusts offer protection for family members with special needs or medical conditions. Provisions can be made within the trust to ensure that the assets are utilized for the benefit of beneficiaries requiring medical care or facing challenges due to age or infirmity. Trusts can also safeguard against spendthrift beneficiaries by imposing conditions on access to the trust, ensuring responsible financial management.

There are also tax and other efficiencies that are experienced as a result of having a family trust structure.

While family trusts offer numerous advantages, there are also a few considerations to bear in mind. One downside is the loss of ownership of assets, as they are transferred to the trust. Although the settlor retains some control and information rights, excessive involvement may undermine the benefits of the trust structure. Additionally, the settlor must account for the administrative requirements and associated costs of managing the trust on an annual basis.

Furthermore, potential future changes in the law regarding family trusts could impact the original objectives of establishing the trust. It is important to remain updated on any legal developments to ensure continued compliance and effectiveness of the trust structure.

In conclusion, family trusts in Kenya offer a range of benefits, including effective estate planning, asset protection, and provisions for beneficiaries with specific needs.