APPRECIATING THE LAW OF TRUSTS IN KENYA

APPRECIATING THE LAW OF TRUSTS IN KENYA

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Whereas in lay the term Trust connotes a firm belief, faith, or confidence in the reliability, truth or ability of someone or something, in law it is simply a legal relationship arising when a holder of right gives it to another who must keep or use it for another’s benefit.

It cannot be authoritatively said that there is an all-encompassing and comprehensive definition of what a Trust is. According to the Black’s Law Dictionary, 9th Edition; a Trust is defined as “The right, enforceable solely in equity, to the beneficial enjoyment of property to which another holds legal title; a property interest held by one person (Trustee) at the request of another (settlor) for the benefit of a third party (beneficiary).” The foregoing arrangement as defined can be explained as follows; a settlor also referred to as founder of the trust, donates or transfers legal ownership of assets to an appointed person or an entity referred to as a trustee, upon who an equitable obligation arises, compelling him to hold the assets for the benefit of another, referred to as a beneficiary.

To fully appreciate how a trust operates, it helps to know the following three terms: Settlor/Grantor – essential the original proprietor of the interest and one who eventually transfers the said assets/interest to a trust. Beneficiary – This is the person who is endowed with the legal right to the interest/assets in a trust, can be an individual, entity, or even charitable institution. Finally, the Trustee is the decision maker responsible for ensuring the interest donated to the trust are appropriately managed and distributed.

It is important to understand that trusts are not only limited to personal properties or estates, trusts can also be used to own and run businesses, hold securities, bonds and even stocks.

The institution of Trusts in Kenya heavily relies on English law as codified under the Trustee Act, Chapter 167 of the Laws of Kenya and the Trustees (Perpetual Succession) Act, Chapter 164 of the Laws of Kenya. Similarly they are provided for under several other pieces of legislation, including the, Trusts of Land Act, Tax Procedures Act, and the Income Tax Act.

A trust is mainly established through a Trust deed, the deed sets out the terms of the trust, duties of the trustees, identifies the beneficiaries, objectives and may include provisions on termination. This article will endeavor to discuss the essentials of a trust with a particular stress on incorporation of a trust.

A properly drafted Trust Deed should at least incorporate the following provisions for effective administration of the trust;

• Additional powers of the Trustees – this relates to provisions in respect of powers not specifically contemplated under the different legal regimes but necessary for operationalizing the objectives and purposes of the created trust, e.g. powers to invest, appointment of management committee and other committees etc.
• Amendment of Trust Deed - to make provisions for amendment of the Trust Deed if, in the course of the management or administration of the Trust, the Trustees consider any transaction is expedient but cannot be undertaken for lack of the necessary power, or they wish to amend or remove any of the provisions of the Trust Deed, without the need to obtain an order of the Court.
• Appointment of Trustees – to make provisions for the setting of minimum and maximum number of trustees and provide for their service terms.
• Removal and Resignation of Trustees – to provide for the suspension and or resignation of Trustees.
• The following general clauses are also deemed necessary: Trustees’ Charges and Expenses, No Trustee Liable for Loss; Power for Majority to Act and Quorum; Meetings; Accounts; Dissolution; and Dispute Resolution.

Having considered the above preliminaries, it is noteworthy that Law of Trusts is a borrowed concept, as such its purely based on the Common law and by virtue of that, there are general accepted duties and obligations of Trustees which have by practice in England become necessary in the management and administration of Trusts and Trust Funds, without any statutory underpinning. The following are a few of the generally accepted duties:

1. Duty to the terms: A trustee must know and adhere to the terms of the trust which are prescribed by the trust deed.
2. Duty of loyalty: Trustees have a fiduciary duty towards beneficiaries. A trustee must administer the trust solely in the interest of the trust beneficiaries and cannot place his or her interest in conflict with beneficiaries. Trustees should not profit personally from their role as trustees other than a fee which they may receive for their trusteeship.
3. Duty to manage the trust efficiently: To manage a trust efficiently, a trustee must be very familiar with the terms of the trust, the trust’s assets and liabilities, the circumstances of the beneficiaries and the purpose of the trust. Effective management systems should be in place to ensure that the appropriate decisions are made in a timely manner and taking into account the terms of the trust and the interests of the beneficiaries. This also includes effective communication with related parties and proper record keeping. A trustee also has a duty to invest prudently on behalf of the trust and should diversify the investment of trust assets in the interest of beneficiaries.
4. Duty to act personally: Trustees act personally and must be involved in decision-making in respect of a trust. While trustees are typically permitted to engage advisers such as lawyers and financial advisers, the final decision on trust matters should be made by the trustee. In certain circumstances, trustees may delegate powers to third parties by power of attorney or deed of delegation. This must be permitted by the trust deed. For example, delegating powers to an agent to purchase or sell property overseas. The trustee is still obliged to properly instruct and supervise the agent. Where there is more than one trustee, decisions must be made unanimously unless otherwise permitted by the trust deed.
5. Duty to consider the beneficiaries: A trustee must act impartially with respect to the beneficiaries by considering all beneficiaries in their decision making. They should also not follow the instructions of the settlor but may give consideration to the wishes of the settlor which are not binding unless included in the terms of the trust.
6. Duty to account: Unless otherwise provided by a trust, a trustee must keep trust accounts and other records. They must also respect beneficiaries’ rights with regard to requests for trust information. Generally, beneficiaries have a right to receive information about the trust but not the decisions of the trustee.

In concluding this brief, I will highlight the process of registering a Trust as provided for under the relevant statutes.

Registration of Trusts is provided for under the Trustee (Perpetual Succession) Act Cap 164, the Act governs the incorporation of Trusts and provides for a well-defined structure on operations of Trusts and appointment of trustees, while the powers and trustee duties are well provided for under the Trustees Act, Cap 167.

Once a Trust Deed has been prepared, it is submitted for Stamp Duty and thereafter registered at the Lands Registry pursuant to provisions of the Registration of Documents Act, Cap 285 Laws of Kenya. At this stage you have a legally recognized Trust which is capable of effecting its objectives.

However, it is important to note that the kind of registration offered under the Registration of Documents Act does not confer an independent legal status upon the Trust. Independent legal status enables the Trust created to be considered a body cooperate, separate from its founder and complete with powers to sue and be sued without reference to the founder. It is advisable therefore to pursue incorporation of the trust under section 5 of the Trustee (Perpetual Succession) Act, Chapter 164 of the Laws of Kenya.

Section 3 (1) of the Act as read with Regulation 2 of Trustees (Perpetual Succession) Regulations, 1976 make provisions for the application for incorporation of a trust.

In winding up, it is important to note that Trusts can be used individually or as part of general approach, the following uses are utmost of interest amongst many others;

Succession Planning; Trusts can be used to organize your affairs during your lifetime, with preciseness on when, how and to whom certain assets will devolve to in the event of your demise. Trusts are excellent alternatives to the Probate and Administration Procedures under the Law of Succession Act Cap 160. Importantly, note that while a trust can offer many benefits to those wishing to avoid probate and protect their assets, establishing one doesn’t necessarily eliminate the need for a will.

Tax planning ; Assets transferred into a trust are no longer considered as belonging to the founder, this means that income and capital gains generated by those assets may be exempted under the Income Tax Act and or the Tax Procedures Act where applicable.

Confidentiality; Trusts offer a sense of confidentiality, it allows one to arrange and order their affairs in privacy, contrary to the litigious alternative of proving wills in Probate Court.

Asset protection; Trusts can be one of the most effective ways of protecting assets. In simple terms, assets transferred to a properly constituted trust will no longer form part of the settlor’s estate and therefore cannot be seized in the event a settlor gets into financial difficulties.