A Big Win For Family Trusts- A Synopsis Of The Changes Introduced By Perpetuities And Accumulations (amendment) Act No. 10 Of 2022

Background 

The rule against perpetuities and the rule against excessive accumulations as provided in the Perpetuities and Accumulations Act are two different but related legal principles that are mostly used in relation to trusts and testamentary wills.   Nevertheless, both rules relate to the ability of one generation to restrict future generations from using property as they please. Originally, the rule against perpetuities was governed by common law but was later codified under the Perpetuities and Accumulations Act (the (“Act”) in 1984.  

Rule against Perpetuities and Accumulation 

The rule against perpetuities sets a time limit within which future dealings with property must occur.  This time limit is referred to as the perpetuity period. It was first promulgated in the Duke of Norfolk's case, 3 Ch. Cas. 1 (1682) where it was held that: "No interest is good unless it must vest, if at all, not later than twenty-one years after some life in being at the creation of the interest.” 

Under the Act, the perpetuity period is a maximum of 80 years. Therefore, within this period, all the trust property must have been distributed to the named beneficiaries. Breaching the said rule rendered the wishes of the maker of the trust ineffective. 

Under the Act, charitable trusts are subject to the rule against perpetuities, which prevents the creation of interests in property which are to vest at too remote a time except where this relates to a gift from one charity to another.

Unlike the rule against perpetuities, which originally developed as a common law rule, the rule against excessive accumulations is a statutory rule. It restricts the period during which income may be accumulated. The rule operates independently of, and in addition to, the rule against perpetuities. Capital accumulation refers to an increase in assets from investments or profits. The intention of capital accumulation is invariably to increase value of an initial investment as a return on investment (ROI); which can be through profits, appreciation, rent, capital gains or interest.

In UK, the rule against accumulation came about as a direct response to the case of Thellusson v Woodford ((1799) 31 ER 117, 171. In that case, the settlor’s direction that the income on his substantial estate should be accumulated meant that none of his descendants living upon his death could enjoy any benefit from the estate; this prompted much public criticism at the time. In addition, it was feared that the ability to accumulate income indefinitely could result in such a concentration of wealth in private hands that it might compromise the economic independence of the nation or even threaten the power of the Crown.

To prevent such a disposition of property in the future, the Accumulations Act 1800 (known also as the "Thellusson Act") was passed, by which it was enacted that no property should be accumulated for any longer term than either:

1.      the life of the grantor; or

2.     the term of twenty-one years from his death; or

3.     the minority of any person living or en ventre sa mere (French for ‘in its mother's womb’) at the time of the death of the grantor; or

4.     the minority of any person who, if of full age, would be entitled to the income directed to be accumulated. 

In Kenya, the rule against excessive accumulations placed restrictions on the time period during which the income of the trust may be accumulated. These time restrictions were provided in section 19 of the Perpetuities and Accumulations Act, but have now been amended in respect of family trust. 

The above rules are intended to prevent the growth and accumulation of family wealth and the enjoyment of the same by multiple generations in a family trust set up.  It was for this reason that the legislators propounded the amendment of the Act to improve the effectiveness of family trust as an estate planning tool.

The Perpetuities and Accumulations (Amendment) Act No. 10 of 2022 

The Perpetuities and Accumulations (Amendment) Act No. 10 of 2022 (“the Amendment Act”) took effect on 21st March, 2022. The main objectives behind the amendment is to limit the application of the Act to the distribution of immovable property to beneficiaries and to allow for the accumulation of the income of a trust so that it can benefit multiple generations of beneficiaries.

The intention of the Amendment Act was to create an enabling framework for the preservation of generational wealth by removing aforesaid restrictions on perpetuity and accumulation and thereby buttressing the effectiveness of family trust as a tool of estate planning.

Key Amendments

1. Transfer of Property

The Amendment Act added section 2(8) which clarified that any reference to transfer of property in the Act will be limited to immovable property (i.e. land, buildings and residential homes).  This amendment should however be read together with section 2(9) of the Amendment Act which is discussed below.

2. Duration of existence of the Family Trust

The Amendment Act also added section 2(9) which provides that the perpetuity period shall not apply to family trust.

Previously, the Act provided that once a Founder created a Trust, including a Family trust, the Trust could only exist for a maximum period of 80 years, which period should be specified in the Trust Deed. If the period of 80 years was not specified in the trust deed, then the trust could only exist for the lifetime of a person living when the trust was created plus 18 years; which failing, for a period of 18 years

With this amendment, family trust may remain in existence without a defined perpetuity period (that is, indefinitely). This will be a great benefit to multiple generations trusts. 

Tying it in with the new section 2(8) of the Act discussed above, noting that the perpetuity period does not apply to family trust, both movable and immovable trust property can be retained as trust property for as long as the trust remains in existence. This in turn empowers a family trust to be the one of the few estate planning tools that allows for the preservation and growth of family wealth and enjoyment of the same by multiple generations. 

3. Accumulation of Income

Before the Amendment Act, the Act limited the accumulation of all or part of the income of the family trust. This meant that the trustees were restricted from amassing the income of the trust as well as failing to distribute all of it to the named beneficiaries beyond the maximum period of the lifetime of the Founder.

This section limited the enjoyment of income of the family trust to the immediate succeeding generation defeating the creation of a dynasty trust which is intended to benefit multiple generations.

 Consequently, section 19 of Act was repealed and replaced by a new section which abolishes the general restriction on accumulation of all or part income of the trust to allow the trustees of a family trust to retain all or part of the income of the trust for enjoyment by multiple generations.

The above notwithstanding, the Amendment Act provides that the portion of the income that is not accumulated should be distributed to the intended beneficiaries in accordance with the trust deed.

 Conclusion 

The Amendment Act introduces timely improvements to family trust as an effective tool of estate planning following the amendment of the Trustees and Perpetual Succession Act which we discussed in detail in our article here. 

Family trusts can now be registered within 60 days by the Principal registrar, exist beyond the 80-year limit, foster the growth and accumulation of family wealth and benefit multiple generations in a tax effective manner. 

How can We Help? 

The Family-Owned Businesses and Estate Planning team at CM Advocates prides itself in having a wide variety of resources, skills and experience on matters relating to family-owned business and estate planning spanning across the East African Region. It offers an edge to its clients based on its legacy of having planned, administered and executed varied forms of trusts and estates and therefore well capable of guiding you through the process of structuring and set up of family trusts. 

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

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.