Evolution of Family Trust Laws in Kenya: Key Milestones

Evolution of Family Trust Laws in Kenya: Key Milestones

  1. Colonial Foundations
  • Trustee Act (Cap 167) and Trustees (Perpetual Succession) Act (Cap 164): Introduced during the colonial era, these Acts laid the groundwork for trust law in Kenya, mirroring English common law principles.
  • Before the 2021 amendment, Cap 164, the Trustees (Perpetual Succession) Act, primarily governed the incorporation and perpetual succession of trusts. Cap 167, the Trustees Act, focused on general trustee duties and powers, including those related to the management of trust property. The key difference was that Cap 164 dealt specifically with perpetual succession, allowing trusts to continue indefinitely, while Cap 167 provided the general framework for how trustees operate.

Here’s a more detailed breakdown:

Cap 164: Trustees (Perpetual Succession) Act, commencement Date-31st May 1923.

  • Perpetual Succession:

The primary purpose of Cap 164 was to enable trusts to have perpetual succession, meaning they could continue indefinitely, even after the original trustees passed away or were replaced.

  • Incorporation:

It provided a mechanism for incorporating trusts, allowing them to act as legal entities with the capacity to own property and enter into contracts.

  • Registration:

It required trusts to be registered with the Registrar of Documents, allowing for public record of their existence and details.

 

Cap 167: Trustees Act, commencement Date-16th November 1929.

  • General Trustee Duties:

This Act established the general duties and powers of trustees, including their responsibilities in managing trust property, investing assets, and distributing income.

  • Appointment and Removal of Trustees:

It outlined the procedures for appointing new trustees when vacancies arose and for removing trustees.

  • Power of Court:

It gave the court the power to intervene in trust matters, such as when there were disagreements among trustees or when a trustee was not acting in accordance with the terms of the trust.

 

  • In essence, Cap 164 focused on the “how” of perpetual succession and trust incorporation, while Cap 167 focused on the “what” of trustee duties and powers within the trust framework. The 2021 amendments, specifically the “Trustees (Perpetual Succession) (Amendment) Bill, 2021”, aimed to clarify and modernize these provisions, particularly regarding the registration and operation of trusts.The 2021 amendment, and other changes, aimed to facilitate the incorporation of trust and to streamline the process for holding and acquiring trust properties.

 

After the Trustees (Perpetual Succession) Act 2021, Cap 164 and Cap 167 remain distinct legal frameworks for trusts in Kenya. Cap 164 focuses on enabling trusts to achieve perpetual succession, becoming a corporate body for ongoing operations and management. Cap 167, on the other hand, deals with the general administration and duties of trustees, including their powers and liabilities.

Key Differences: 

  • Purpose:

Cap 164 is primarily concerned with the legal status and perpetual succession of trusts, allowing them to operate as a legal entity. Cap 167 addresses the day-to-day management and responsibilities of trustees within a trust.

  • Scope:

Cap 164 specifically focuses on the incorporation and operation of trusts as legal entities. Cap 167 covers a broader range of trust-related matters, including the duties and liabilities of trustees.

  • Structure:

Cap 164 defines how trusts become incorporated and operate as legal persons. Cap 167 outlines the general principles of trust law, including the powers and duties of trustees.

  • Perpetual Succession:

Cap 164 is the primary tool for achieving perpetual succession, allowing trusts to continue indefinitely. Cap 167 doesn’t directly address perpetual succession but deals with the general management of trusts.

 

In simpler terms:

 

  • Cap 164 is like the “constitution” for trusts, defining how they become a legally recognized entity with perpetual succession.
  • Cap 167 is like the “rules of conduct” for trustees, outlining their responsibilities and powers in managing the trust.

 

  1. Trustees (Perpetual Succession) (Amendment) Act, 2021, Amendments to Cap 164
  • Enacted: December 23, 2021.
  • Significance: Formally recognized family trusts as distinct legal entities.
  • Impact: Streamlined the registration process, allowing incorporation within 60 days, and provided clarity on the structure and purpose of family trusts.

 

  1. Perpetuities and Accumulations (Amendment) Act No. 10 of 2022, Amendments to Cap 161
  • Effective: March 21, 2022.
  • Key Changes:
    • Removed the 80-year limit on the duration of family trusts, permitting them to exist indefinitely.
    • Lifted restrictions on income accumulation, enabling wealth preservation across generations for Family Trusts.
  • The main highlights of the Perpetuities and Accumulations (Amendment) Act of 2022 (Cap. 161) are: limiting the application of the Act to immovable property transfers, allowing for the accumulation of trust income for multiple generations, and clarifying that the perpetuity period does not apply to family trusts. It also aims to enhance the preservation of generational wealth by removing restrictions on perpetuity and accumulation, thus strengthening the effectiveness of family trusts.

Cap 161 in Kenya’s legislation, specifically the Perpetuities and Accumulations Act, is a law focused on the avoidance of future interests in property. It deals with issues like conditions that might unreasonably restrain the ownership of property and rules regarding the accumulation of income. The law aims to prevent situations where property ownership or income accumulation might be tied up indefinitely, potentially impacting the future use and disposal of assets.

Key aspects of Cap 161, commencement Date-8th June 1984.

  • Condition restraining alienation void:

The Act invalidates conditions in a disposition that absolutely prevent a beneficiary from selling or transferring their interest in the property. This ensures that property remains transferable, even if there are restrictions placed on its use.

  • Restriction repugnant to interest void:

If a disposition creates an absolute interest in someone but then tries to restrict how they enjoy that interest, the restriction is considered invalid. This means the beneficiary can use their property as they wish, as if the restriction didn’t exist.

  • Duration of perpetuity period:

The Act sets limits on how long future interests in property can remain uncertain before they must vest (become definite). This prevents property from being tied up indefinitely in a way that could hinder future use.

  • Accumulation of income:

The Act places restrictions on how long income from property can be accumulated (saved up) before it must be distributed. This is to prevent the accumulation of vast sums that could be tied up indefinitely.

In essence, Cap 161 is designed to ensure that property remains accessible and usable for the future by striking a balance between allowing for various ownership arrangements and preventing undue restrictions that could freeze property ownership or income for extended periods.

 

Tax Implications for Family Trusts

  1. Stamp Duty Act (Cap 480)
  • General Rule: Transfers of property are subject to stamp duty—4% for urban land and 2% for rural land.
  • Exemptions:
    • Section 52(2)(b): Transfers of property to a registered family trust as a voluntary disposition (gift) are exempt from stamp duty.
    • Section 52(6): Transfers from a trustee to a beneficiary of the trust are also exempt from stamp duty.
  1. Capital Gains Tax (CGT)
  • Standard Rate: 15% on the net gain from the transfer of property situated in Kenya.
  • Exemptions:
    • Paragraph 58, First Schedule, Income Tax Act: Transfer of immovable property to a family trust is exempt from CGT.
    • Paragraph 2(g), Eighth Schedule, Income Tax Act: Transfer of property from a trustee to a beneficiary who becomes absolutely entitled to it is exempt from CGT.
    • Paragraph 36(g), First Schedule, Income Tax Act: Transfer of property, including investment shares, into a registered family trust is exempt from CGT.
  1. Income Tax Act

Finance Act 2021 introduced the following:

  • Section 13: Income or principal sum of a registered family trust is exempt from income tax.
  • Section 11(3A): Distributions to beneficiaries are exempt from income tax if:
    • Used exclusively for education, medical treatment, or early adulthood housing.
    • The total amount paid to a beneficiary does not exceed KES 10 million in a year.

Tax Amendments Laws 2024 Repealed the above two sections. So, income is taxable both in the hands of the Trust if not distributed and of the beneficiaries if distributed.

Conclusion

Kenya’s legal and tax frameworks have progressively evolved to support the establishment and operation of family trusts. These developments provide individuals and families with robust tools for estate planning, asset protection, and intergenerational wealth transfer, while offering significant tax advantages.