In Kenya, the saying that wealth rarely lasts beyond the third generation is often true, with few families managing to sustain their wealth across three generations. However, this doesn’t have to be the case. By leveraging legal tools such as trusts for estate planning, families can ensure their hard-earned wealth endures for future generations.
A trust is a legal entity with separate and distinct rights, similar to a person or corporation. In a trust, a party known as the settlor or guarantor grants another party, the trustee, the right to manage property or assets for the benefit of a third party, the beneficiary.
There are various types of trusts, but for private wealth management, the most relevant ones are testamentary trusts and living trusts. Testamentary trusts become operational upon the death of the settlor. Living trusts, on the other hand, become operational during the settlor’s lifetime and are divided into irrevocable trusts, which cannot be amended once created, and revocable trusts, which can be amended or revoked by the settlor.
To establish a trust, three conditions must be met. First, the intention to create a trust must be clear. Second, the subject matter must be clearly defined, specifying the assets or investments being placed in the trust, such as government bonds, company shares, pension benefits, savings, land, apartments, or commercial properties. Third, object certainty must be ensured, meaning all beneficiaries must be properly identified. Once these conditions are met, the trust must be registered under the Registration of Documents Act (Cap 164), which typically takes one to three weeks. After this, it must be registered under the Trustee (Perpetual Succession Act), which takes about a few months after which the trust become a separate legal entity.
Upon transferring assets to the trust, the settlor ceases to own them; the trust becomes the legal owner. The trustee’s role is to manage and diversify the investment portfolio, ensuring effective management systems are in place. The trustee is also mandated to transmit profits to the beneficiaries as specified in the trust deed.
Trusts offer several advantages. They consolidate property, promoting continuous growth and investment, unlike a will, which often divides property among individuals.
Trusts also provide tax benefits, as they are exempt from stamp duty when property is being transferred to the trust. Additionally, registered family trusts are exempt from income or capital gains taxes on incomes up to KES 10,000,000 if used for education, medical treatment, or early adulthood housing. Moreover, trusts offer asset protection, as assets owned by the trust are shielded from debt collection emanating family members as individuals.
In essence, a trust is a powerful estate planning tool that ensures the consolidation and continuous growth of family property, potentially preserving wealth for the fourth generation and beyond. By using trusts, families can break the cycle of wealth dissipation and secure their legacy for future generations.
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