What is a Family Trust?
A family trust is an estate planning tool that is created by a Settlor (the Founder of the Trust) by transferring his or her assets to the trust and placing them under the control of a Trustee for the benefit of their named Beneficiaries.
What is the Purpose of Establishing a Family Trust?
A family trust enables you to create a legal mechanism whereby your personal assets or your family assets can be accumulated, multiplied and passed onto the named beneficiaries throughout generations.
It also allows you to outline how you want your affairs to be handled in the event you are incapacitated due to old age or mental illness.
It is important to note that whereas other types of trust can list third parties as beneficiaries, family trusts only cater for your own family members.
What is the Nature of a Family Trust?
Once a family trust is registered, it becomes a body corporate with a common seal, having perpetual succession, the power to sue and be sued as well as the capacity to own property in its own corporate name.
Of note is that a family trust is a non-trading entity meaning that if the maker of the trust wants to transfer commercial property to the trust then he or she would have to seek professional advice on how to devise the family trust structure to allow for the same.
Be it as it may, family trusts can be used to hold non trading assets like land or your family home or can be a shareholder in one of your trading companies, in which case it will offer you more protection by disguising the true owners of the business.
What are the advantages of establishing a Family Trust?
Family trust are an exceptional estate planning tool as they enable the maker of the trust and their family to enjoy the following advantages: –
1. Asset Protection
Establishing a family trust provides an excellent asset protection mechanism for your family’s wealth. Once you transfer your assets to your duly incorporated family trust, then the trust becomes the registered owner of the property. Such asset protection is very useful particularly in the following circumstances:
- In the event of divorce settlement (because trust assets will not be available for distribution as part of the matrimonial assets);
- Where you have given or are likely to give personal indemnities or guarantees in the course of business (since your personal assets (like family home) will be owed by the trust and there- fore unavailable to such creditors)
- Where you are involved in risky business that exposes you to personal claim from creditors or employee; and
- Where there are minors/children or disabled or vulnerable family members who cannot cater for themselves or whose future you wish to secure.
2. Avoidance of Probate.
A trust structure can be used to avoid expensive and often contentions probate process. This is because unlike wills that are invariably contested in court by dependents and family members, recent court decisions show that courts will generally not agree to the revocation or nullification of a family trust deed.
3. Tax Planning
The Finance Act, 2021 introduced some tax incentives in respect of family trusts which include the following tax exemptions:
- Tax on the income or principal sum of a registered Family Trust
- Capital gains tax relating to the transfer of title of immovable property to a Family Trust; and
- Capital gains tax and stamp duty accruing to an individual on the transfer of property, including investment shares, for the purpose of transferring the Title or the proceeds into a registered Family Trust
In addition, it also introduced section 11(3A) to the Income Tax Act to provide an exemption of taxable income with respect to registered trusts in the following circumstances:
- Any amount that is paid out of the trust income on behalf of any Beneficiary and is used exclusively for the purpose of education, medical treatment or early adulthood housing;
- Income paid to any beneficiary which is collectively below Ten million shillings (Kes. 10M) in the year of income; and
- Such other amounts as the Commissioner may prescribe from time to time.
4. Discretionary Trusts
Creating a family trust does not mean that you will completely lose control of your assets or properties. This is especially the case if you elect to be a Trustee of your family trust either alone or together with others.
The family trust can be structured as a discretionary trust in which case the Trustees will decide when and how frequently payouts are done as well as any other rules to prevent reckless spending by the beneficiaries and generally for the preservation of the family wealth.
5. Enforcer
Kenyan statutes on trusts have recently been amended to introduce the office of an Enforcer who can be appointed by the founder of the trust or in his absence, by the Beneficiaries of the trust. The Enforcer is usually appointed for purposes of safeguarding the interest of the Beneficiaries as well as supervising the Trustees and prevent cases of breach of trust.
Is a Family Trust appropriate for you?
Noting the above, there are tangible benefits to be gained by establishing a family trust. Indeed, most family trusts are formed to reduce the impact of changes which may or may not occur such as:
- Protection of children or other vulnerable dependents
- Protection of the estate from the claims from business creditors; and
- Protection of estate from relationship breakdowns like divorces or separations
That notwithstanding, it would be a good idea to consider registering a family trust if you are keen on accumulating, protecting and multiplying your family assets during your lifetime and even after your demise
How we can Help
Gabael Trust Corporation Limited has established itself as a ‘go-to-firm’ that provides premier corporate trustee, corporate administrator and corporate executor services in Kenya. We also provide value-added services such as advice on investment, tax and retirement that may be critical for your Family Trust.
We have an excellent team of experts and strategic partners across the East African Region who are ready to meet your unique trust administration needs and we welcome you to take advantage of our excellent, professional and cost-effective services.
