Kenya has established a new legal framework for family and non-charitable trusts to accumulate and preserve wealth for multiple generations. This means that individuals now have the option of keeping their wealth in Kenya rather than setting up offshore trusts which are expensive to set up and maintain.
Historically, individuals have preferred to set up family trusts in offshore jurisdictions such as Jersey, the Isle of Man and the British Virgin Islands, which have well-established trust laws.
The Trustee (Perpetual Succession) (Amendment) Act 2021 received Presidential Assent on December 7, 2021. The Amendment Act introduces certain amendments to the Trustee (Perpetual Succession) Act (“TPSA”) which mainly dealt with the registration of trusts principally established for religious, educational, literary, scientific, social, sporting or charitable purposes.
The main changes to the TPSA Act are as follows:
Types of trusts
The amending law introduces new types of trusts, including:
- charitable trusts
- discretionary trusts
- non-charitable purpose trusts
- family trusts
Family trusts are now legally recognized and can be registered or set up by any person (the founder or the settlor), jointly or individually, for the purposes of personal wealth planning or management. The amending law states that a family trust is a non-commercial entity and formed for the purpose of preserving or creating an estate for future generations.
In addition to preserving wealth, a family trust is a useful succession planning tool in that once the settlor transfers its assets to the trustees, they cease to be the owners of the assets. The trustees are deemed to be the legal owners and the beneficiaries the beneficial owners.
So upon the death of a settlor, trustees continue to administer the trust without the need to go to court and obtain probate, which can be a time-consuming and costly process.
The amending law provides that the beneficiaries of a family trust need not be related to the settlor or living.
This gives settlers the option to include Moral people or charities as beneficiaries. Additionally, the settlor can also be a beneficiary of a trust. Through the trust deed, the settlor may provide for the addition or exclusion of persons eligible to be beneficiaries of the trust and also impose obligations or conditions on the beneficiaries. For example, the trust deed may provide that from a certain age, the beneficiaries may begin to receive income from the trust.
Property in trust
Any property of the settlor or any person or entity may be added to the trust. These include land, securities, cash, stocks, works of art, vehicles, etc.
A settlor, during and after the registration of a trust, may also add property to which he is entitled as a beneficiary, meaning that the settlor is not limited to adding property to the trust which is legally in his name.
The amending law introduces the concept of executor who can be a natural or legal person appointed by the settlor or the beneficiaries. The role of the performer is to oversee the administration of the trust for the benefit of the beneficiaries. An executor cannot, however, also be a fiduciary.
An executor has a duty to report any financial default to the settlor or trustees and, in such a case, can either require the trustees to take corrective action or take legal action against the trustees.
Although it is not mandatory for a trust to have an executor, the introduction of this concept helps to ensure transparency and accountability concerning the management of a trust.
Finally, the Amendment Act provides that trusts must be registered with the Principal Registrar of Documents rather than the Cabinet Secretary, a measure aimed at reducing bureaucracy in the process of registering trusts. The time frame for registration and issuance of a certificate of incorporation by the main registry is expected to be 60 days, while it usually takes two to five years for registration to be completed.
The Amendment Law gives context and links to the changes introduced in the 2021 Finance Law which was enacted earlier in the same year. The finance law made substantial changes to the taxation of registered family trusts, mainly by introducing various tax exemptions relating to transactions involving registered family trusts.
These include exemptions from stamp duty and capital gains tax when transferring assets into a registered family trust as well as income or capital gains tax exemptions on income earned by the registered family trust.
In addition, to the extent that the income paid by a registered family trust to a beneficiary does not exceed KES 10 million per annum, or when used exclusively for the purposes of education, medical treatment or housing for young adults, this income is not subject to tax on the beneficiary.
These changes are welcome because they allow people to preserve its heritage during estate and estate planning. There is, however, a need to clean up the drafting of tax amendments by providing greater clarity on the mechanics of their operation in order to achieve the desired results which, in turn, will build confidence in the use of local trusts.
Ultimately, these changes should have a positive impact on estate planning going forward. The expected result is that individuals will have the opportunity to protect their wealth for future generations in a tax efficient manner and within a more elaborate legal framework.