All you need to know about Trusts and Wills

Published in the Daily Nation of 9th September 2021

At the mention of the word Trusts, many of us imagine wealthy business moguls and celebrities setting up their children with lifetime fortunes or charitable organizations benefitting from the philanthropy of a kind billionaire. True, Trusts are popular among high-net-worth individuals. But have you ever wondered what will happen to the family home you spend years saving up for? Or the piece of land that may not be worth much today but will appreciate unbelievably in a few decades to come. A small investment today could be the gamechanger for a not-so-wealthy family. It could end a vicious cycle of mediocrity or poverty and lead to sustainable development.

Strings Attached
A trust, just like a will is one of the legal tools that help property owners pass on their assets to the right people; be it future generations, the less fortunate or educational bodies. But trusts are not limited to dictating who gets what when an owner passes on. Some people describe trusts as inheritance documents with strings attached. They dictate more than “who”, as the rules in a trust deed answer crucial questions such as when, what, how and why.
A Trust is a legal relationship in which the owner (referred to as a settlor) of a valuable possession transfers ownership to trustees who will then manage the possessions for the benefit of named beneficiaries. Christine Muthoga-Murithi, an advocate and a Senior Partner at Muthoga and Omari Advocates, explains that in Kenya, laws dictating how trusts are created, registered and administered are covered under three statutes; The Trustees Act, The Trustees (Perpetual Succession) Act and Perpetuities and Accumulations Act. Each of these Acts covers different aspects of the trust creation, registration and administration processes. The Trustees Act, for instance, regulates the powers of trustees, their appointment and discharge, the court’s powers to intervene and the kind of investments a trust can engage in. The Trustees (Perpetual Succession) Act governs registration procedures, the Trust’s legal personality and the type of trusts one can register. Currently, Muthoga explains that the law recognizes a limited number of trusts which include, testamentary trusts which come into operation = once the property owner passes on. The law also allows pension and provident trusts as well as trusts created for religious, educational, scientific, literary, athletic, social and charitable purposes.

Rigorous Vetting
Although Kenya’s trust laws date as far back as the early 20th century, there are limitations that make it difficult for families to use them as wealth management tools. For starters registering a Trust is an easy and painless process. It entails creating the trust deed, identifying trustees, identifying classes of beneficiaries and rules of the trust. The trust is then registered at the Ministry of Lands under the Registration of Documents Act. After the registration is complete one may start running the trust. However, the trust will not have a separate legal identity. In case of legal disputes involving its assets, the trustees will be held liable in their individual capacity. Also, in case one needs to remove or change trustees, they have to register the trust assets afresh, which makes the process tedious. These challenges can only be eliminated by incorporating the trust under the Trustees (Perpetual Succession) Act which then, gives it a separate legal identity, thus eliminating the tedious processes while placing liability on the trust rather than the trustees. One may assume that the incorporation process is as easy as the first registration step. But Muthoga reveals that, this second procedure requires NIS vetting. The rigorous vetting step discourages the ordinary individual from pursuing the process. While the vetting step may be applicable to those creating trusts for religious, research, scientific or other technical purposes; it is an unnecessary barrier for individuals in the middle and lower social classes trying to manage their personal assets for the sake of future generations.

Proposed Amendments
However, there are three bills currently under consideration which, if considered may expand the scope of trusts and eliminate barriers. Already, the Finance Act, 2021 (previously Finance Bill, 2021) signed into law on 29th June 2021, offers reasonable tax incentives to individuals who wish to register family trusts. Some of the Bill’s incentives include, removal of stamp duty charges for acquisition and transfer of assets to the registered family trust and removal of Capital Gains Tax. These adjustments make trusts less costly, viable tools for the average young professional who wishes to create generational wealth. The other two bills under considerations are to amend parts of the Perpetuities and Accumulations Act and Trustees (Perpetual Succession) Act. If passed the adjustments will create a legal framework for the registration of family trusts, ease incorporation processes and perhaps make it easier to create and run family and living trusts. For instance, one of the recommended changes is to delete the authority of registration of the trust from the Minister to a Principal Registrar to make it easier to register a family trust, and distinguish family trusts from charitable organizations during the incorporation processes; such that family trusts do not go through rigorous vetting similar to organizations.
If Trusts are more accessible, Kenyans might have a better chance at proper succession and the courts might even afford a breather from the countless succession cases that drag on and on. Muthoga explains that currently, Wills are the most popularly known yet rarely utilized succession tools. “Many people are aware of the importance of wills. Some will even consult and express a deep interest in creating a will but the majority never get to writing the will, probably due to stigma associated with the document,” she says. As a result, managing and passing family assets to future generations is left to chance. While in some cases, things work out seamlessly even without a will, in others, succession disputes turn out to be a lifetime nightmare. The advocate further explains that when property owners, die without a will or a legally recognized structure for sharing and managing existing assets, the legal process of transferring these assets to beneficiaries is time-consuming. In an event where there is no will, and the beneficiaries are not in dispute on the administration and distribution of the estate Muthoga says, it could still take a year and a half to conclude the court succession process.

Unlimited Rules
However, if disputes arise during a succession case, the dispute goes to trial and the case could drag on for years or even decades. Sometimes, it is messy if unexpected relatives or even surprise children from past relationships lay claim on the deceased’s properties. And even when the rightful beneficiaries are awarded properties, family relations may be severed for good and tensions may always remain high thereafter. In worst-case scenarios, future generations inherit the disputes which complicate the cases further.
A will, which is a simple legal tool could prevent the legal mess. But this tool is quite limiting when it comes to managing generational wealth. It’s common for people to inherit property, money and other assets, then squander them within a few years, or even months. “A fool is soon parted with his money,” so goes a popular adage. In the Kenyan context family assets barely make it to the third generation. While this may sound like an individualistic problem, the inability to pass down and grow family assets affects the economy. Family businesses account for at least two-thirds of businesses (both big and small) across the world. In Kenya, family-owned businesses contribute to about 75% of the GDP and create more than 70% of jobs. Better management of family assets can help tackle the ever-growing unemployment crisis.
Trusts are more elaborate and they enable property owners to communicate their visions for each asset clearly. In addition, the courts tend to respect the wishes of deceased property owners. Muthoga describes them as a sort of constitution for asset management. “When creating trusts, the rules one is allowed to set are unlimited,” she explains. Further, the kinds of assets one puts in a trust are not limited to property. Shares, bank accounts, income-generating ventures or even artworks and valuable heirlooms can be placed in a trust. The settlor is allowed to dictate explicitly when and how the beneficiaries shall benefit from an asset. And if they so please, they may lay out conditions for the beneficiaries. For instance, the settlor may decide that a beneficiary has to meet certain conditions before an asset is handed over to them. Take for instance, a father who is aware of a child’s weaknesses like compulsive buying, alcoholism or even laziness. Perhaps he may state in the trust that the child will only benefit from an asset if they go through rehabilitation, therapy or get a job. Further, if the settlor wishes that their assets be used or expanded in a certain direction, they are allowed to state so in the rules. These conditions are the attached strings, also known as gifts with conditions. However, it is prudent to ensure the conditions are not against the law, immoral or deemed wrong in the public eye.

Consider Semantics
Even though trusts can be empowering and even fun to create, one can never be too careful. The creation process is extremely important and Muthoga advises settlors to consider hiring the help of professionals such as accountants, financial advisors or lawyers. If one is dealing with high-net-worth assets, a wealth management company may come in handy. It’s also important to scrutinize trustees as they hold certain powers. They ought to be ethical and willing to manage your trust with the beneficiaries’ welfare at heart. There is a good reason they are called Trusts as you need people you can truly trust. If you are unsure about friends or close family members, engage professionals as they have a reputation to uphold and are guided by work ethics.
“Think through your objectives. What do you want to achieve with the trust, who are your beneficiaries, and what method will be used to change or remove trustees, will they retire? And what if they are unwell?” posits Muthoga. These are critical questions to ask when creating the trust. While at it, pay attention to semantics to avoid confusion and misinterpretation. Semantics is the study of meaning, a branch of linguistics that has proven to be extremely critical in legal matters. Think of this statement in a legal document; My grandchildren, shall receive Kshs. 500,000 held at Bank X in account Y, and they shall share the amount equally amongst themselves”. The statement sounds clear at first, but it creates room for misinterpretation as it does not clarify whom you consider as a grandchild. It would be best to clarify by stating it is your grandchildren born to your children with a particular spouse.

Lastly, when it comes to matrimonial property, Muthoga says putting such in a trust may or may not protect it depending on the relationship one has with their spouse. For instance, if a family house is put in a trust, it no longer belongs to either the wife or the husband, but rather to the trust. While this may protect the home against claims by previous partners and their children, in case of a divorce, there will be a legal dilemma. Therefore, discuss extensively with a partner and get written consent before placing matrimonial property in a trust.
Overall, trusts enable asset owners to exercise some legal powers even when they are deceased. Use the power well and have a futuristic mindset.

By Syovata Ndambuki
Contributor Author of Daily Nation

syovatandambuki@gmail.com