Exploring the benefits of Bare Trusts in Kenya

Published on May 11, 2023, 3:31 p.m. | Category: Wealth and Private Clients

What is a bare trust?

A bare trust is a trust arrangement in which the trustee holds the legal ownership of the trust assets while the beneficiary or list of beneficiaries retain the beneficial ownership of the trust assets. In this arrangement, the trustee's primary responsibility is to hold the trust assets as per the terms of the trust deed while the beneficiary retains the right to control and manage the trust assets and is entitled to any income or proceeds generated by the asset. Notably, the trustees in a bare trust have minimal to no control or discretion over the trust assets.

A bare trust is considered the most basic type of trust arrangement available and is sometimes referred to as a ‘simple’ or ‘naked’ trust. It is similar to a nominee relationship between a nominee and a beneficial owner where, for example, the nominee holds shares in a company on behalf of the beneficial owner when the beneficial owner does not want to hold the shares in his or her own name.

Who are the Parties to a bare trust?

A bare trust arrangement has three parties namely a settlor (the founder of the trust), a trustee (the person who holds the legal title to the trust assets) and a beneficiary (the person who manages or controls the trust assets and holds the beneficial interest to the trust assets). It is possible for an individual to take up dual roles within a bare trust depending on the trust's intended purpose. Often, the settlor and the beneficiary in a bare trust are one and the same person.

Since the trustee in a bare trust plays a minimal role of holding the assets of the trust, it is advisable for the founder of the trust to appoint a professional trustee such as Corporate Trustee as opposed to having an individual trustee such as a friend, peer or family member. Corporate Trustees have a professional duty to uphold the best interest of the beneficiary or beneficiaries during the period of the trust especially while holding assets or investments of high value which are often at risk of being dissipated by errant trustees.

What is the Difference between a bare trust and discretionary trust?

Unlike a bare trust, a discretionary trust gives the trustee much greater discretion over how the trust assets are managed and distributed to the beneficiaries. This type of trust arrangement is effective especially when the settlor wants the trustees to control the income or benefits that are given to the beneficiary or beneficiaries. In a discretionary trust, the beneficiary does not have a right to demand any income or capital from the trust and the trustee has the discretion to withhold or distribute assets as per the terms of the trust deed.

Why should you establish a bare trust?

1. Prevent see-through to assets

Bare trusts are an excellent way for an individual to control or prevent see-through to their assets and investments. For example, a business owner may opt to hold their shares in a company through a trusted individual or a company who acts as a trustee in the bare trust and have the name of the trusted individual or company appear on the official company search whenever a third party conducts a search.

2. Simplicity

Bare trusts are simple to set up and administer as the trustee’s primary role is to act as a custodian of the trust assets.

3. Asset Protection

Assets held in a bare trust are protected from claim by the beneficiary’s creditors or former spouses in matrimonial disputes, as the beneficiary has no legal ownership of the trust assets. Bare trusts can help you achieve what for example, Paris Saint-Germain’s defender, Achraf Hakimi, achieved whereby he had 80% of his assets held in his mother’s name. It also helps you avoid the often uncomfortable discussion of registering a prenuptial agreement.

4. Flexibility

Bare trusts can be tailored to suit the needs of the settlor and beneficiary, with the trustee having the mandate to hold the trust assets in accordance with the settlor’s wishes.

How do you Establish a bare trust?

A seasoned Wealth and Private Clients lawyer can help you establish a bare trust by preparing a declaration of trust or a trust deed which identifies the beneficial owner, the trustee and the settlor of the trust. The trust deed should also clearly outline the settlor’s intention to create the trust, the purpose of the trust, the responsibility of the trustee (to hold the trust assets) and the assets of the trust to avert the risk of having the trust declared a Sham Trusts.

Conclusion.

A bare trust can is an excellent trust arrangement that can allow you to own assets and make investments while preventing see-through of your holdings to third parties. Moreover, it provides for a simple way to hold assets without the complexities of a traditional trust structure. Nevertheless, it is advisable to engage a legal professional to help ensure that the bare trust is set up in the correct manner in order to avoid any complexities or potential issues down the line.

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, wealth management and trust administration spanning across the East African Region. We offer an edge to our clients based on our 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 trust.

Should you have any questions regarding the subject of establishing a trust, or related topic, please do not hesitate to contact us on law@cmadvocates.com or privatewealthlawyers@cmadvocates.com