Avoid These Mistakes When Setting Up Your Family Trust

A family trust is an effective estate planning tool that allows the founder of the trust (“the settlor”) to protect and accumulate their wealth for their own benefit and the benefit of their whole family. Undoubtedly, establishing a family trust exposes the settlor to several benefits such as asset protection, tax incentives as well as other benefits that are well enunciated in our previous article New Legal Regime on Registration of Family Trusts in Kenya. In order to have quite enjoyment of these benefits, it is important for the settlor to engage a seasoned Wealth and Private Client lawyer, to assist them in devising the trust structure, drafting of the trust deed and other related documents as well as undertaking the registration formalities. In addition to engaging a seasoned lawyer, the settlor should take note and steer clear of the following common mistakes that can be made when setting up a trust: -

Mistake 1: Choosing the Wrong Trustee

Choosing the wrong trustee is a common mistake that most settlors make. It is often an honest mistake that stems out from lack of proper awareness of the proposed trustee’s character or willingness to manage the trust, especially after the settlor has passed away. Some trustees may be lazy or lack the beneficiaries’ overall interest at heart despite being closely related to both the settlor and the beneficiaries. Undeniably, choosing the wrong trustee can lead to various complicated issues with costly consequences, such as misappropriation of the trust fund. The most disheartening part is that the settlor may not be there to right their wrongs and appoint different trustees. It is therefore paramount to the survival of the trust that great consideration is given to the proposed trustees’ health, age, location, integrity, trustworthiness and judgment skills before they are appointed as trustees to the trust. The settlor can also choose to appoint a professional body such as a Corporate Trustee to manage the trust solely or jointly with other Family Member Trustees. A Corporate Trustee is a duly registered company with perpetual succession that is licensed to undertake corporate trustee services. The settlor should choose a reputable Corporate Trustee  which has the requisite industry exposure and practical experience to offer trust management and administration services. The settlor can also appoint an Enforcer whose mandate is to ensure adherence of the Trust. Details about the functions of the Enforcer in a trust arrangement are articulated in our article New Legal Regime on Registration of Family Trusts in Kenya.

Mistake 2: Not Reviewing the Trust Regularly

It is important for the settlor to review the terms of his or her trust deed annually, or at least upon the occurrence of a major life event such as:

1. Purchase or transfer of additional property in the settlor’s name;
2. When one of the beneficiaries passes away;
3. When the settlor or one of the beneficiaries marries or remarries;
4. When one of the beneficiaries is diagnosed with a disability either permanently or temporarily;

Regularly updating the trust allows the settlor to have an up-to-date trust deed, up-to-date trust fund portfolio (inclusive of any recent purchases) and gives them an opportunity to re-evaluate certain decisions such as their list of beneficiaries. Having an outdated trust deed or estate plan opens up the settlor’s family to challenges that are synonymous to not having a plan at all.

Mistake 3: Failing to talk to the Beneficiaries about the existence or objectives of the Trust

Another common mistake made by most settlors is failing to inform their beneficiaries of the purpose and objectives of the trust, or at the very least, the existence of the trust. Creation of a trust deed is as much a legal process as it is social. By discussing the contents of the trust deed, the settlor is able to ensure all family members are on the same page and are clear on the key provisions of the trust.  Most importantly an honest conversation with your loved ones can help communicate your hopes and expectations for their future and honour the spirit of your legacy. This in turn helps reduces the chances of family squabbles over properties and assets of the settlor or the risk of irreparably severing family bonds.

Mistake 4: Failure to consider the Beneficiary’s financial intelligence

It is important for the settlor to consider their child’s or beneficiaries’ financial intelligence and spending habits when they are deciding how much funds will be distributed to them through the Trustees. This is especially critical when creating a fixed family trust which normally prescribes fixed amounts of money or assets that are to be distributed to the beneficiaries at a given time or when the settlor intends to have the trust fund survive and subsist for a few generations. Establishing a discretionary trust instead of a fixed trust can assist the settlor achieve the goal of controlling the amount of money that is disbursed to beneficiaries at a given time. A discretionary trust allows the trustees to exercise their discretion when making distributions to the Beneficiaries. This way, the trustees can distribute the trust income to the beneficiaries, but do not have to, especially when the beneficiary is not yet capable of managing their finances or perhaps because the beneficiary has a pending divorce cause or bankruptcy proceeding and there is risk that the distributions might not benefit the beneficiary. A discretionary trust has the fail-safe option of delaying distributions until the beneficiary has extinguished or mitigated any impending financial risk.

How can we help?

Another common but dire mistake that most people make is failing to engage an experienced lawyer to guide them through the process of establishing a trust. There is simply no better way of averting the foregoing mistakes save for engaging a seasoned Wealth and Private Client Lawyer to help you avoid the common pitfalls. 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.Please click here to download the article

How can we help?

At CM Advocates LLP, we have an outstanding team of Wealth and Private Client lawyers with a wealth of experience in matters of marriage, divorce, children custody and maintenance, estate planning, family businesses, wealth management and trust administration, spanning across the East African Region. We welcome you to take advantage of our team of experts, consult on these critical family issues, and learn how to better protect your proprietary interests in your family.   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 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.