Authored By: Loreen Chebet
Kenya School of Law
Introduction
Family trusts have recently been gaining traction in the changing landscape of estate planning and securing a stable financial future for future generations. The Trustees (Perpetual Succession) Act defines a family trust as “a trust, whether living or testamentary, partly charitable or non-charitable, that is registered or incorporated by any person or persons, whether jointly or as an individual, for the purposes of planning or managing their personal estate.”[1] This refers to a non-trading legal arrangement that involves a Settlor who is the individual who creates the trust and transfers assets into it. Trustees who may be individuals or institutions tasked with managing the trust assets according to the trust deed’s provisions and lastly beneficiaries who are Individuals or entities for whom the trust is established, often family members.
Key benefits of Family Trusts in Wealth Management
A family trust differs from other types of trusts in that, beyond serving typical trust functions, it also acts as a succession planning tool. Creating a trust is an alternative to disposing of an Estate vide a will. They are not subject to Probate and Administration court process because once the property is transferred to the trust, the same is no longer considered as part of the settlor’s Estate. As a result, creation of trusts accords some level of privacy as such arrangements are not a matter of public record, unlike wills.
Unlike a will, a settlor may also be a beneficiary of the trust they create, thereby continuing to benefit from the trust property in proportions they determine.[2] Once the settlor transfers their 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.[3]
Another crucial advantage of a family trust is that there is a certainty of intention to create the same which is evidenced by the provisions of a properly executed Trust Deed. Additionally, there is certainty of the subject matter where the property owned by the trust is clearly defined and easily identified. [4] As such, upon the demise of a settlor, the trustees continue administering the trust without the need of going to court and obtaining probate which can be a time-consuming and costly process.[5]
Additionally, where the trust has been incorporated in accordance with the Trustees (Perpetual Succession) Act, it gains a separate legal personality which protects the assets therein from any lawsuits by creditors that may arise against the settlor in his personal capacity.[6] This safeguard allows the settlor to engage in high-risk ventures without putting the trust’s assets at risk. By transferring properties and assets into the trust, they are effectively removed from personal ownership of the settlor and are held by the trustee for the benefit of the beneficiaries. Creditors cannot access or seize these assets to settle debts, liabilities, or judgments.[7]However, it’s important to note that family trusts should be established during financially stable periods to ensure their effectiveness.
Thirdly, family trusts serve as a valuable estate planning tool by separating assets from personal ownership and protecting them within the trust. This distinction ensures streamlined asset distribution and reduces the likelihood of challenges to the settlor’s intentions. The use of a family trust may provide a considerable benefit to a person in optimizing their estate planning objectives as it can facilitate the transfer of wealth to future generations while maintaining flexibility over the management of the trust’s assets. A settlor can set specific conditions for how and when beneficiaries receive their entitlements, such as achieving certain milestones like education or age.
Furthermore, family trusts can protect generational wealth by preventing the splintering of assets in cases of separation or divorce, shielding them from relationship property claims.[8]
Lastly, family trusts are exempted from taxes. The Amendment Act gives context and ties in with the changes introduced in the Finance Act 2021 which was enacted earlier in the same year bringing material changes to the taxation of registered family trusts, principally, introducing tax exemptions relating to transactions involving registered family trusts. These include exemptions from stamp duties and capital gains taxes on the transfer of properties into a registered family trust as well as exemptions from income or capital gains taxes on incomes earned by the registered family trust.
Legal framework and considerations governing trusts in Kenya
The implementation of the Trustees (Perpetual Succession) (Amendment) Act, 2021 which has been effective from 23 December 2021, introduced new categories of trusts, including family trusts as a legal entity.
Family trusts must be created with intended beneficiaries in mind, regardless of whether they are related to the settlor or are living at the time of creation.[9]This Act outlines the duties and responsibilities of trustees, the rights of beneficiaries, and the procedures for setting up and managing trusts.
The trust is governed by a trust deed, which outlines its purpose, the role of the trustee(s), the rights of beneficiaries, and other operational details. Family trusts in Kenya can either be discretionary or fixed. In a discretionary trust, the trustee has the power to decide how income or assets are distributed among beneficiaries. In a fixed trust, the entitlements of beneficiaries are clearly defined.
Family Trusts in India: A Comparative Perspective
Family trusts also play a crucial role in estate planning in India, governed by the Indian Trusts Act, 1882. Similar to Kenya, Indian family trusts are widely used to protect assets, ensure orderly succession, and provide for future generations. There are two main types of family trusts in India: revocable trusts, which the settlor can alter or dissolve, and irrevocable trusts, which cannot be changed and typically offer stronger asset protection and tax advantages. Additionally, family trusts may be discretionary, where trustees determine distributions among beneficiaries, or fixed, where distributions are predetermined.[10]
The taxation of family trusts in India depends on their structure. Revocable trusts are taxed at the settlor’s personal income tax rate, whereas irrevocable trusts are taxed either at the trust level or at the level of the beneficiaries, depending on how the trust is structured. [11]Like in Kenya, Indian trusts must adhere to regulatory requirements, including record-keeping, annual filings, and trustee duties. The increasing use of family trusts in India reflects similar motivations to Kenya: asset protection, succession planning, and tax efficiency.
Registration process of a Trust Deed
Subject to the Amendment of the Trustees (Perpetual Succession Act) Cap. 164 Act, the Business Registration Service (“BRS”) has been in charge of the registration and incorporation of trusts.
The registration process and issuance of a certificate of incorporation by the Principal Registrar is typically expected to take between 60 to 90 days. However, in practice, the process currently averages 2 to 5 years for completion which is largely attributable to administrative procedures.
Trust funding and Investing
Any property from the settlor, his/her relatives, any person or entity may be added to trust. These include land, securities, cash, shares, artwork, vehicles etc.
A settlor, both during and after the trust’s registration, can contribute property to which they have beneficial ownership, meaning they are not restricted to adding only property that is legally registered in their name.[12]
Management of the Family Trust
Trustees are responsible for managing the trust’s assets, making investment decisions, and ensuring that the trust’s terms are adhered to. They must act in the best interest of the beneficiaries and fulfill their fiduciary responsibilities with integrity.
Conclusion: Best Practices for Wealth Management
In conclusion, a family trust offers significant advantages for estate planning, including tax benefits, asset protection, and greater control over wealth distribution. It allows families to safeguard assets, prevent misuse by beneficiaries, and preserve wealth across generations. With safeguards against trustee misconduct and the benefits of long-term asset growth, a family trust can create a lasting legacy. This powerful tool provides flexibility, security, and long-term financial stability for families.
Reference(S):
[1] Trustees (Perpetual Succession) Act s 3 (D).
[2] Ouma, D. (2023) To will or not to will? setting up of a trust as an alternative to writing a will in estate planning, Oraro & Company Advocates. Available at: < https://www.oraro.co.ke/to-will-or-not-to-will-setting-up-of-a-trust-as-an-alternative-to-writing-a-will-in-estate-planning/#:~:text=Trusts%20are%20created%20through%20a,of%20properties%20in%20the%20trust. >(Accessed: 26th May 2025).
[3] Comprehensive guide to setting up family trusts in kenya; benefits, processes, and legal insights into family trusts (2024) mms advocates. available at: < https://mmsadvocates.co.ke/comprehensive-guide-to-setting-up-family-trusts-in-kenya-benefits-processes-and-legal-insights-into-family-trusts/#:~:text=what%20are%20the%20tax%20exemptions,million%20in%20a%20given%20year. > (accessed: 26 May 2025).
[4] Ibid 4.
[5] Odhiambo, A. et al. (2022) The introduction of Family Trusts will help keep wealth in Kenya, Wealth & Asset Management – Kenya. Available at: < https://www.mondaq.com/wealth-asset-management/1187574/the-introduction-of-family-trusts-will-help-keep-wealth-in-kenya. > (Accessed: 26May 2025).
[6] Ibid 2.
[7] Parr, S. (2024) Benefits of family trusts, Parr Business Law. Available at: < https://www.parrbusinesslaw.com/blog/benefits-of-family-trusts#:~:text=By%20transferring%20properties%20and%20assets,debts%2C%20liabilities%2C%20or%20judgments. > (Accessed: 26 May 2025).
[8] Ibid 3.
[9] Trustees (Perpetual Succession) Act s 3 (D)(2).
[10] ASC Group, ‘Taxation of Private (Family) Trusts in India: Family Trust in India’ (13 November 2024) https://www.ascgroup.in/taxation-of-family-and-private-trusts-in-india/ accessed (27 May 2025.)
[11] Ibid 11.
[12] The introduction of Family Trusts will help keep wealth in Kenya (no date) ENS. Available at: < https://www.ensafrica.com/news/detail/5594/the-introduction-of-family-trusts-will-help-k > (Accessed: 29 May 2025).
