Trust law in Kenya is predominately based on the English common law that recognize the ordinary trust with a settlor, trustee and beneficiary relationship. There is a legal framework, however, for the operation of public and private Trusts i.e. The Trustees (Perpetual Succession) Act, which governs the incorporation of trusts for any religious, educational, literary, scientific, social, athletic or charitable purposes or the Trustees of a pension fund or provident fund and the Trustees Act which sets out the authorized investments, the general powers of trustees and the appointment and discharge of trustees. The Act however still refers to the Laws of England when setting out investments to be made by the Trustees.
What is a Trust?
A trust is basically a legal arrangement where one person, the Settlor (donor), appoints another person, the Trustee, to manage certain property or assets, the Trust Asset or Trust Fund, for the benefit of another person, the Beneficiary.
The Settlor appoints the trustee pursuant to a written document called the trust deed, which sets out the manner in which the trustee is to administer the trust, the powers and duties of the trustee and the manner in which the beneficiaries can benefit from the trust.
Under a trust arrangement, the settlor must transfer the legal ownership of the property or assets to the trustees. This is called a settlement. The control of the assets lies with the trustee and the settlor cannot interfere with the assets or encroach upon the duties of the trustee. An interference into the trustees’ administration can result into the trust being a sham and as a result being unenforceable.
Failure to effect a transfer to the trustee will make the trust ineffective as held in the case of Milroy V Lord, where the settlor who owned shares in a Bank wanted to give the shares to his niece, signed a deed with a trustee to hold the shares in trust for his niece. The bank’s constitution required the shares to be transferred to the trustee. The shares were not transferred to the trustee and remained in the name of the settlor. The court held that no trust was created as the transfer of the trust property was not effective. In order for a trust to be valid, the settlor needs to do everything which is necessary to transfer the trust property and make that settlement binding.
Why establish a Trust?
A trust is a very useful tool used by high net worth individuals and family offices for the following purposes:
- Succession Planning
A trust can be used by a settlor who has established a successful family business to ensure that his assets and business continues for several generations. He may wish to provide for the financial security and opportunities to family members and to protect and manage family wealth through future generations. A trust, therefore, provides an efficient vehicle for the transfer of beneficial ownership interests on the death of a settlor.
A trust can be used to hold shares in a company owning immovable property situated outside Mauritius, rather than directly in the real property itself, with the effect of transforming characterization of an interest from immovable to movable, which can present attractive opportunities for tax and financial planning.
- Estate Planning
Trusts can be used to preserve the continuity of ownership of assets, such as a business, within a family. By vesting legal ownership of assets in a trustee, the appointed beneficiaries under a trust may be able to continue to benefit from the assets, whilst avoiding fragmentation of ownership among a future generation of beneficiaries. The use of a trust avoids, on the death of a beneficiary, the risk of a share of assets becoming owned outside the family, and thus enables trust assets to be preserved intact with the trustee for the benefit of future generations.
- Protective Trusts
A settlor can provide for protection of vulnerable members of a family or certain beneficiaries by providing for their special needs under the trust. Likewise, a settlor can also protect beneficiaries who may be extravagant and spendthrift from wasting the trust assets and preserve it for future generations.
- Asset Protection
Trusts can also be used as a shield to help protect assets against the potential future liabilities of a settlor or beneficiary, as the trust asset do not form part of the settlor or the beneficiaries’ asset that can be attached by creditors.
Trusts can also safeguard assets against strategic risks, such as confiscation or expropriation by the State.
- Avoid Probate Process
Where a settlor creates a trust and transfers his assets to the trustee during his lifetime, the trust assets will not form any part of the settlor’s estate upon his death. This may enable a settlor to avoid mandatory probate rules under the laws of succession, which dictate the persons to whom and proportions in which a settlor’s estate will devolve. In addition, the probate process is public and may require the assets of the deceased to be disclosed. A trust is a private document between the settlor and the trustee and there is no requirement for disclosure.
- Provide for Charitable and Philanthropic Purposes
A settlor can use a trust to provide for and achieve their charitable or philanthropy interests. The settlor can create a charitable trust to provide for a wide variety of philanthropic purposes.
The trust deed is a private document between the settlor and the trustees. There are no requirements for the trust deed to be filed with any public body or authority. Thus all information relating to a trust are not accessible to the general public.
Although trust have been used worldwide as a useful tool for succession planning, estate planning and wealth management, the trusts regime in Kenya is not flexible enough to accommodate more advanced relationships between Settlors and Beneficiaries. The Kenyan’ trust regime is based on the medieval English common law system where the legal ownership of the asset is transferred to the trustees absolutely. The trustee is granted far more discretion than the settlor would desire while the beneficiary have no control over the assets and the trustees in the performance of their responsibilities, particularly in a discretionary trust. The current trust regime does not provide an adequate protection to the settlor and beneficiary particularly from fear of loss of control and rogue trustees.
To address this challenge, other jurisdictions have introduced the position of a protector in the trust relationship. The protector is an independent party appointed under the trust instrument to direct or restrain the trustees in relation to their administration of the trust.