You have worked hard to acquire valuable assets or you have established your family business which has grown to be a successful enterprise. You are wondering how can you protect your wealth and eventually pass it down to future generations. This is where estate planning comes in.
Estate planning is the process by which an individual or family arranges the transfer of their estate in anticipation of death. Your estate is comprised of everything that you own; this includes movable, and immovable assets, as well as tangible and intangible assets. Regardless to its size or quantum, everyone has an estate that would require to be administered upon death.
An estate plan is important because it: –
- Enables you elect your heirs or beneﬁciaries (that is, those who will inherit what from your estate
- Gives you the ability to name your children’s guardian in the event of your premature death
- Enable you protect your estate from creditors
- Enable you reduce taxes on your estate; and
- Minimizes the chances of family strife and ugly legal battles
Wills, Trusts and Power of Attorney
Wills, trusts and Power of Attorney are common tools used by individuals for estate planning.
A will takes effect when you die and its contents may include: how your estate will be shared or distributed; who will look after your children if they are still young; what trust you intend to establish thereunder; donations to charities; and even instructions about your funeral.
It is paramount that your will is valid and is up to date as your legal rights and status changes- especially if you marry or remarry, divorce or separate; have children or grandchildren; if your spouse or beneﬁciaries dies; if you have signiﬁcant changes in your estate or sell any of the assets previously covered in your will.
If you die without a will (that is, intestate) or your Will is declared invalid by a court of law, your estate will be managed and administrated by a court appointed administrator(s) in accordance with the provisions of the Law of Succession Act, Chapter 160 of the Laws of Kenya. This process may be lengthy, uncertain and costly.
Testamentary Trust is a trust created under your Will and only takes effect upon your death. Such trusts are normally set up to protect assets and will be administered by a trustee or trustees who is/are usually appointed in the Will. A testamentary trust would generally be created or established if:
- The beneﬁciaries are minors (under 18years old)
- The beneﬁciaries have diminished mental capacity
- You do not trust the beneﬁciaries to use their inheritance wisely
- You do not want family assets split for instance as part of a divorce settlement; or
- You do not want family assets to become part of bankruptcy proceedings.
Another tool that can be employed in estate planning is power of attorney. This can be used where you want someone (your appointed power of attorney) to have legal authority to look after your affairs on your behalf, for instance in case of incapacitation due to hospitalization.
We shall look briefly at the establishment of family trusts in Kenya.
What is a Family Trust?
A trust, by deﬁnition, is a three- party relationship where you or the person creating the trust (usually called the settlor or grantor) transfer some assets like money or property (normally called the trust funds) to a third party (usually called the trustee) to be manager and administered on behalf of some third parties (called the beneﬁciaries).
A family trust is a legally binding estate planning tool that is established to ﬁnancially secure and protect you and your family. Family trust, unlike wills, have the beneﬁt of avoiding probate, a lengthy and costly legal process that oversees the transfer of assets. Sometimes, though, it might be advisable for the grantor to make some inter-vivos gifts (gifts made while the grantor or donor is alive) in order to provide for some beneﬁciaries or minimize or avoid taxes.
What is the purpose of a Family Trust?
The purpose for a family trust is to establish a legal mechanism where your family assets are ring fenced and to enable family members (the beneﬁciaries) to reap ﬁnancial beneﬁts from your estate while you are still alive or after death.
There are many reasons to establish a family trust. For instance, if you have an estate that you would want to pass to your children, your trust deed can outline how this will be done. Your direction to your trustees can be broad or speciﬁc, and can include provisions or conditions as to when and how the beneﬁciaries will get a share of the trust fund or income in future (e.g., at certain age, after tertiary education; upon marriage etc.).
Whereas other types of trust can list third parties as beneﬁciaries, family trusts usually only cater for your own family members.
Types of Family Trusts
There are several types of family trusts, and the main ones include:
- Revocable Family Trust: – This type of trust can be easily modiﬁed or dissolved anytime you decide to do so. These are flexible trusts.
- Irrevocable Family Trust: – This type of trust cannot be cancelled or easily changed after its establishment. The settlor or grantor loses access to and control over the trust assets once the trust has been funded because the assets become trust-owned. Irrevocable trusts are often used for assets protection.
- Living Trusts: – Living Trusts are designed to hold and protect your assets for you during your lifetime. With a revocable living trust you can designate yourself as the trustee (either alone or together with others) and take control of assets within the trust. This means the assets in the trust remain part of your estate while you are alive and have mental capacity and you will usually be named as a the ‘principal beneﬁciary of the trust. For instance, as the principal beneﬁciary of the trust, you can be guaranteed right of occupation of your property for the remainder of your life meaning that your trustees, usually your children, cannot evict you under any circumstances. You are also at liberty to move home, or release equity from the trust at any time. You can also direct your trustees to sell the property and to buy a new property of your choice. As the grantor or settlor, you retain the power to change and amend the trust deed at any time including changing the beneﬁciaries. Equally, you can even dissolve the trust altogether. This type of trust is equally applicable to married couples as well as to single people.
With an irrevocable living trust, you as the settlor or grantor relinquish certain rights to control the trust fund and appoint an independent trustee or trustees who effectively become the legal owners. Once the trust has been established, the named beneﬁciaries are set and as a settlor you can do little to amend the trust deed.
4. Marital Trust: – This trust will usually provide that the assets will automatically pass to a surviving spouse upon the death of the ﬁrst spouse. Once both have passed, the trust assets will go or be administered for the beneﬁt of designated beneﬁciaries.
Advantages and Disadvantages of Family Trusts
The advantages of setting up a family trust include:
- Creditor protection – assets held in trust are usually accessible to the creditors of the grantor or beneﬁciaries, or the trustees
- Protection against partners in divorce – If your assets are owned by a trust, or are given to your trust upon death, your children can continue to receive the beneﬁt of those assets but the assets do not form part of their personal property, and therefore cannot be subject to claims by your children’s partners in the event of Moreover, if those assets are transferred into a family trust prior to entering into a marriage, the assets in the trust are less likely to be subject to claim at the end of the relationship.
- Protecting property from or for beneﬁciaries – For purposes of protection of your children from bad company or frauds or bad marriage, it may not be advisable to simply give your assets to your children during your life or on death. If you employ a family trust, then the trust can provide a vulnerable child or dependent with income and/or capital to meet their cash requirements as they arise. This can help protect the long- term value of your family’s assets. With an airtight trust deed, assets can be protected from the threat of lawsuit, bankruptcy or divorce.
- Reducing or preventing claims against your estate – Under the Succession Act, the court can effectively rewrite your Will if it considers that members of your family have been disadvantaged by its provisions and have not been adequately provided for. However, the court cannot rewrite your trust.
- Conﬁdentiality – Family trust are not publicly registered and therefore can be kept conﬁdential and private.
The following are a number of the disadvantages of having a family trust:
- Loss of ownership of assets – Once you have funded the trust, especially an irrevocable trust, then the trustees of that trust will have the ownership and the control the assets. Therefore, even if you can retain some control by holding the power to appoint and/or remove trustees, or even by being a trustee yourself, the assets you transfer to the trust are no longer your If you continue to treat the assets as your own, any trust could be open to challenge as a sham.
- Legal costs of formation of the trust and the transfer of assets – There are costs involved with establishing and funding a trust. These will depend on the complexity of your trust and the nature of the assets to be Nevertheless, there are certain stamp duty and capital gain tax exemptions under Kenyan laws for transfer of assets to a family trusts.
- Continuous Administration Costs – If you establish a trust, you need to allow for the time and cost involved with meeting the trust’s annual accounting and administrative Additional costs may also apply if you appoint professionals trustee or corporate trustees.
Is a Family Trust Appropriate for you?
If you want your assets and your loved ones protected when you can no longer do so, then you will need an effective estate plan which may inevitably involve establishment of a family trust. As indicated above, there are a lot of advantages of establishing a family trust. Without one, your assets could be exposed to claims by third parties and your family left without protection. Moreover, your estate could be exposed to unwarranted legal contestations amongst your dependents and family members. In such case, the court could designate how your assets are divided — including who gets to raise your children in the event of death. Therefore, there are tangible beneﬁts of 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 venerable dependents
- Protection of estate from claims from business creditors; and
- Protection of estate from relationship breakdowns like divorce or separation;
If you have any further questions, or would like to talk to someone about establishing a family trust, make an appointment with us or contact us through email@example.com.