Benefits Of Setting Up An Education Trust

Paying for your children’s education without proper financial planning can be a costly affair. These costs invariably increase as your child advances to various stages of education and may be higher depending on the kind of school your child attends or may attend in the future. For this reason, it is highly beneficial for parents to prepare for the cost of their child’s education well in advance and separate these funds from the pool of funds used for personal affairs, businesses, general upkeep, family welfare, to name a few. This can be done by setting up an education trust. 

What is an Education Trust?

 An educational trust is a type of trust arrangement that allows a parent or a donor to set aside and invest funds for the sole purpose of facilitating the education of their named beneficiaries. This arrangement can exist for the duration of the child’s minority up to age 25 or such other time as may be indicated in the trust deed. Once the duration of the trust is complete, the excess funds that were not used for purposes of education revert back to the parent or their estate or are transferred to the beneficiary, depending on the terms of the trust deed. 

What is the nature of an Education Trust?

 An education trust can take the form of a living trust and/or a testamentary trust. This means that the trust arrangement can become operational during the lifetime of the founder of the trust and can continue to take effect even after the death of the founder. It can also take the form of a testamentary trust whereby a parent can give specific directions for the creation of an education trust in their will. In such a case, the parent can allocate funds from their estate to be transferred to the trust for purposes of funding their child’s education. An education trust can also take the form of a revocable or irrevocable or a discretionary or fixed trust. It can also take a hybrid form whereby it can be an irrevocable discretionary trust or a revocable fixed trust. These different forms of trust are well enunciated in our previous article a Family Trust as a Tool for Protection of Family Wealth Before setting up an education trust, it is important to consult your Wealth and Private Client lawyer who will be able to guide you on the best form of education trust to set up for your family. That notwithstanding, our preliminary contention is that parents should consider setting up an irrevocable discretionary education trust. This is simply because it difficult or impossible for a parent to predict the exact school fees or the exact cost of their child’s extracurricular needs such as sporting activities, school trips, symposiums to name a few. In addition, the irrevocable nature of the education trust provides comfort to the parent that their wishes for their children’s education as per the trust deed cannot be easily changed. 

What are the benefits of setting up an Education Trust?

1. It separates and safeguards the education trust fund from your private investments, businesses and potential matrimonial disputes.

 An education trust gives you the ability to separate the funds that are meant for your private investments and businesses from those meant for your child’s education. Once you transfer the funds to the bank account of a duly incorporated trust, the trust automatically becomes the owner of the funds. This form of asset separation is an excellent financial planning tool as it removes the risk of claims by 3rd parties particularly in following key circumstances: 

• Potential Divorce or Separation (Matrimonial Property Disputes):

In the event of divorce or separation of a married couple, funds placed in the trust fund will not form part of the matrimonial property proceedings as it belongs to the trust. Setting up an education trust helps to secure and safeguard your child’s right to education in case of separation, divorce or even in the event of a new marriage. An education trust can also form part of a post-nuptial agreement. A post-nuptial agreement is a contract that is created by a married couple after entering into a marriage. It outlines the ownership of financial assets and responsibilities surrounding any children in the event of a divorce. Find out more in our article Post-Nuptial Agreements in Kenya . 

• Creditors:

In case you have given or are likely to give personal indemnities or guarantees in the course of running your business, consider yourself are a high candidate for setting up a trust.  Assets held by a trust are separate from the assets held in the personal name of the founder of the trust and are unavailable for seizure and recovery by creditors in the event a court order is issued in the name of the founder of the trust. 

2. It ensures that the money is used for its intended purpose:

 An education trust is usually set up for the sole purpose of funding the education of its named beneficiaries and cannot be used to facilitate any other financial needs of the beneficiaries. However, by engaging a seasoned wealth and private client lawyer, certain concessions can be made to the distribution clause in case a parent wants to leave a wholesome legacy or inheritance for their child, such that the trust fund can also be used to ease some of their child’s financial milestones, such as buying their first home, starting their first business or even caring for the additional needs of a disabled child. In addition, as difficult as it is to consider, if you have a child who struggles with substance abuse or whose spending habits you do not condone, putting restrictions on the instances where they can obtain pay outs from the trust can be the perfect way to guarantee that the money will be used for the well-being of your child. 

3. It ensures that the funds are available in the event you become incapacitated or pass away:

 While it is true that a written will can be used to bequeath your properties to your children, setting up a trust may help accomplish that goal much more efficiently and continually. As discussed in our previous article the Difference between a will and family trust , a trust arrangement takes effect during the life time of the founder of the trust and continues to take effect even after the death of the founder without going through any court process. A will on the other hand only takes effect after the death of its maker and requires the named executors to obtain a confirmation of a grant of probate in court. The beauty of the continuity of a trust arrangement is that it guarantees that the trust fund allotted for your children education is always available whether you are present, absent or incapacitated. It also gives your trustees the power to invest the trust fund and increase the cash pool available for your child’s education. 

4. Education trust in Kenya enjoy income tax exemptions for money paid out to facilitate the education of the named beneficiaries:

 Section 11 3(a) of the Income Tax Act in Kenya provides that in the case of a registered trust, any amount of money that is paid out of the income of the trust on behalf of a beneficiary, for the purpose of education, medical treatment or early adulthood housing, is income tax exempt. Notably, the Income Tax Act does not place a cap on amount of money that can be paid out so long as the money is used for purposes of education, medical treatment or adult housing. 

Key Takeaways

•  Establishing an education trust fund is an excellent way to leave a legacy for your children, grandchildren, nieces and nephews and future generations.
• An education trust ensures that the money set aside for your child’s education is used for the intended purpose.
• Funds held in an education trust can be invested by the trustees of the trust.
• A trust forms as an excellent safeguard against claims by creditors, matrimonial property disputes and other financial claims by 3rd
• Trust arrangements continue to take effect even after the founder of the trust passes away.
• Trust income disbursed for the purpose of education is income tax exempt.

Please click here to download the article. 

How can we help?

 The Wealth and Private Clients team at CM Advocates LLP prides itself in having a wide variety of resources, skills and experience on matters estate planning spanning, trust management and trust administration spanning across the East African Region. It offers an edge to its clients based on its legacy of having structured, re-structured, amended, incorporated several forms of trusts and therefore well capable of guiding you through the process of creating a valid blind trust. Should you have any questions regarding the subject of establishing a blind trust or a family trust, or related topic, please do not hesitate to contact  us on law@cmadvocates.com or dgichuru@cmadvocates.com

Contact Persons & Contributors

 Dianah M. Gichuru -Partner & Head of Unit Shalma E. Maina – Associate

Disclaimer

 This article is for informational purposes only and should not be construed as legal advice.