A trust can be defined as a legal relationship that exists between a settlor (creator of the trust) and trustee (a protector of the trust) and a beneficiary. It is important to note that the parties to a trust can either be individuals or legal entities. In this trust arrangement, the settlor transfers legal ownership of assets to the trustee to hold the assets for the benefit of the beneficiaries.
Trusts are created in Kenya under either one of the following laws:
a) The Trustee Act (Cap. 167 Laws of Kenya) (“TA”) which sets out the duties and powers of a trustee under a trust; or
b) the Trustees (Perpetual Succession) Act (Cap. 164 Laws of Kenya (“TPSA”) that provides for the creation and incorporation of trustees as a body corporate, provides for a defined structure for the operations of trusts and trustees duties and further provides for various types of trusts including charitable and non-charitable trusts and family trusts.
The process of registration of an incorporated trust under the TPSA involves the trustees executing a trust deed which is presented to the Cabinet Secretary for Lands together with the prescribed forms for registration. The registration process is costly and can take between twelve to thirty-six months.
II. FORMS OF REGISTRATION OF A TRUST
Registration of a trust may take two forms:
a) Registration under the Registration of Documents Act (Cap. 285 Laws of Kenya), which does not make a trust into body corporate,’ or
b) Registration under the TPSA, in which the trust becomes a separate legal person with legal status (body corporate). However, the trust can commence implementing its objects of the trust as a simple trust. After registration of this trust in the Registry of Documents, a certified copy of the trust deed and a petition for incorporation is lodged with the Ministry of Lands for the incorporation of trust.
The TPSA was amended to streamline the registration of trusts and shift the administration duties from the Cabinet Secretary to the Principal Registrar of Documents. It now provides for the irrevocability of trusts, gives a definition of the various types of trusts, and includes property to trusts, validity of trusts, beneficiaries of a trust and their class, and the introduces enforcers of the trust.
Upon the incorporation of trust, the trustees are required to provide a representation of the common seal of trust which is rounded in shape and with the name of the trust inscribed.
III. ADVANTAGES AND DISADVANTAGES OF TRUSTS.
The advantages of forming a trust include:
a) The trust may enjoy limited liability status if a corporate trustee is appointed.
b) The trust structure provides more privacy than that of a company.
c) There can be flexibility in distributions among beneficiaries of a trust.
d) Trust income is generally taxed as income of an individual.
The disadvantages of forming a trust are that:
a) The structure is complex.
b) The trust can be expensive to establish and maintain.
c) Problems can be encountered by a trust when borrowing due to additional complexities of loan structures.
d) The powers of trustees are restricted by the trust deed.
IV. DISSOLUTION OF A TRUST
The Cabinet Secretary can order an incorporated trust to be dissolved if it has ceased to exist or if its objectives have become incapable of fulfilment. Upon dissolution, where the trust had land which was vested in it, the land shall be transferred to the County Government in the jurisdiction where the land is situated and, if the land is not the trust’s land, it shall be transferred to the National Government.
NOTE: Trusts not incorporated under the TPSA are dissolved in accordance with the law of equity.
V. AMENDEMENTS TO TRUST LAWS: REGISTRATION OF FAMILY TRUST AND OTHER NON-CHARITABLE TRUSTS
Under the previous legal regime on trusts in Kenya, only public trusts created for charitable or religious purposes were registrable. The TPSA provided for the incorporation of trusts for any religious, educational, literary, scientific, social, athletic or charitable purposes or the trustees of a pension fund or provident fund.
Furthermore, family trust and other kind of non-charitable trust are not registrable and are instead created as simple trusts under a trust deed by the settlor appointing trustees to own and manage the trust property on behalf of the beneficiaries.
The Trustees (Perpetual Succession) (Amendment) Act was amended to provide for the registration regime for family trusts, and other non-charitable trusts.
Under the amendment Act, a family trust is not a trading entity and is created for purposes of planning or managing personal estates. A family trust is made in contemplation of beneficiaries other than the settlor for the purpose of preserving or creating wealth for multiple generations and.
Under the new amendment, any form of trust can apply to the Principal Registrar for a certificate of incorporation. Unlike the previous position an application for incorporation was made, trustees were required to be appointed or associated with either a religious, educational, literary, scientific, social, athletic or charitable body, or were trustees of a pension or provident fund.
In addition, the Principal Registrar is required within a fixed period to deal with the application for incorporation, unlike previously where applications took an inordinate period. This change brings predictability to the registration process.
All trusts are now deemed to be irrevocable upon the death of the settlor unless the trust deed contains an express power of revocation or the settler exercises an express power of revocation during his/her lifetime.
When a trust is irrevocable, it cannot be amended or modified except by consent of all beneficiaries or by a court order.