Choosing Trustees For Your Family Trust

Every time we give a talk, conduct a training or pitch the idea of a family trust as a tool for effective estate planning and protection of family wealth to a potential client, the Njenga Karume Trust always comes up. The Njenga Karume Trust was thrust into the news headlines just months after his passing at a time when the most popular succession planning tool was Wills and the concept of Trusts was uncommon and deemed as “innovative lawyering”. The late Njenga Karume was a renown Kenyan politician whose estate was estimated at being worth at least Kenya Shillings 40 Billion. Prior to his demise, he had gone against the grain and had chosen to register a family trust as the means of devolving his vast estate. He appointed various Trustees from different fields but who largely constituted his personal friends. The Trustees were charged with the running of his businesses and distribution of the trust fund to the Late Karume’s beneficiaries. Things seemed to be running well and the trust structure was even praised in various quarters as being a progressive way of ensuring continuity of business and avoiding family squabbles which had characterized several succession matters. Soon after, however, cracks started emerging with court battles which pitted some beneficiaries (children of the late Njenga Karume) against other beneficiaries and the Trustees of the Njenga Karume Trust. The legal principles re-affirmed by the Court in that matter shone a bright light on the lapses in the law on the establishment of family trusts in Kenya so much so that in December, 2021 our country adopted a new legal regime on registration of Family Trusts in Kenya The Njenga Karume case mainly brought to light the issue of errant Trustees who were accused of grossly breaching the terms of the Trust Deed by doing the following:

1. Appointing new Trustees unprocedurally;
2. Failing to account for the funds of the Trust;
3. Borrowing substantially from financial institutions without consulting the beneficiaries of the Trust;
4. Discriminating against some of the Beneficiaries;
5. Failing to completely meet the objectives of the Trust as set out by the Founder and expressly stated in the Declaration of Trust; and
6. Commencing various transactions with the aim of disposing off the assets of the Trust without notifying the beneficiaries and accounting for all such dispositions.

Some of the beneficiaries of the Njenga Karume Trust sought the removal of the Trustees alleging manifest breaches of the fiduciary and statutory duties owed by Trustees under the Trust Deed and the law. The Court in carefully examining the evidence adduced by the parties stated that when a Trustee is given legal title to the Trust property, in accepting that title, he or she owes a number of fiduciary duties to the Beneficiaries. The primary duties owed include the duty of loyalty, the duty of prudence and the duty of impartiality. These are supported by the duties of openness and transparency and the duties of record-keeping, accounting and disclosure which heavily lacked in the management and administration of the Njenga Karume Trust. Further, the court noted that it was apparent that the relationship between the Trustees and the Beneficiaries had irretrievably broken down and which was likely to jeopardize the proper administration of the Trust going forward.The Court in ordering the removal of all the Trustees save for one Trustee who was a Beneficiary pronounced itself as follows: “As stated elsewhere in this determination, the Trustees are found to have breached the provisions of the Trust Deed by failing to comply with its express provision in relation to appointment of the new Trustees to wit Mr. Gatabaki and Mrs. Kamithi. The Trustees further failed in their duty to keep proper books of accounts and further to provide information to the beneficiaries. The Trustees further failed to inform the beneficiaries in the dealing with the property of the Trust. Despite them having been bestowed with discretion by the Trust Deed the Trustees further discriminated against some of the beneficiaries by denying payment of allowances on the basis that the said beneficiary did not sign the handbook indemnifying the beneficiaries. Furthermore, Mrs. Kamithi ‘bought’ Trust property to wit an apartment which is part of Trust assets belonging to one of the Holding Companies but there is absolutely no evidence adduced by her to show that she paid for the said apartment. Albeit clause 9.11 allow contracting with the Trust, the clause does not permit Trustees to purport to acquire properties of the trust by way of purchase without consideration. If that were to be the case then every Trustee would rush to get a share of the Trust property and leave nothing for the beneficiaries. Mrs. Kamithi in her evidence admitted in her evidence in cross examination that she bought the Trust property, but could not demonstrate by way of documentation that she honestly acquired the said property. In my humble view, the Trustees substantially miserably failed to execute their duties with the diligence expected of them while managing their own private affair and thus in breach of the Trust.By dint of the above case, it is clear that what went wrong with the Njenga Karume Trust was not the establishment of the Trust, but the appointment of suitable Trustees in the Family Trust. Family Trusts are one of the most effective tools of estate planning as discussed in our previous article family trust as a tool for protection of family wealth The structuring of a Trust must take into account the proper wording of the Trust Deed as well as careful consideration when appointing Trustees as this is critical to the proper management and administration of the Trust. The Trustees are essentially the gatekeepers of the Trust and should always exercise good faith while exercising their duties in the Trust Deed. In truth, a Trust largely succeeds or fails with the choice of the Trustees.

Conclusion

One of the ways in which a Settlor can ensure the proper administration of their Trust is by appointing a Corporate Trustee solely or jointly with other Trustees along with an Enforcer whose mandate is to ensure adherence of the Trust Deed. A Corporate Trustee is a duly registered company with perpetual succession that is licensed to undertake corporate trustee services. A Settlor or a Founder should choose a reputable Corporate Trustee which has the requisite industry and practical experience of offering trust management and administration services. In addition, the Settlor or Founder should ensure that the Corporate Trustee is adequately capitalized and has adequate resources to perform proper administration of a Trust. Since it is a legal person and an autonomous entity, the Beneficiaries can be able to hold the Corporate Trustee to account in the event of unprofessional conduct or breach of trust and avoid a distasteful experience as was in the case of the Njenga Karume Trust. Furthermore, the actions by a Corporate Trustee must be properly sanctioned through proper resolutions to further discourage any arbitrary and unprocedural conduct. At CM Advocates, we pride ourselves in having a wide variety of resources, skills and experience on matters estate planning and trust administration spanning across the East African Region.  We also work alongside seasoned and professional Corporate Trustees such as Gabael Trust Corporation Limited to give our clients the option of choosing an independent and impartial body to be part and parcel of the administration and management of their Family Trusts in the capacity of a Trustee or Enforcer. Find out more in our full profiles below.Please click here to download the alert.

Contributors

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

Disclaimer

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