Modern-day Family Trusts: Why It Is Important To Review Your Trust Deed

For a long time, the use of trusts as an estate planning tool was deemed “innovative lawyering”. This was largely due to the absence of concrete statute provisions on the standing of family trusts. Accordingly, most of the jurisprudence for family trusts stemmed from common law principles and case law. 

The assent of the Trustee (Perpetual Succession) (Amendment) Act, 2021 on 23rd December 2021 fortified our local trust laws providing for a more stable legal and regulatory framework. The said Amendment Act was preceded by the Finance Act, 2021 which introduced stamp duty exemptions, capital gain tax exemptions, and income tax exemptions that are now being enjoyed by parties to a family trust.

Following the assent of these two laws, lawmakers saw it fit to also update the Perpetuities and Accumulations Act that introduced important changes on the accumulation of income of the trust and the period of existence of the trust.  These changes undoubtedly sweetened the deal and propelled family trust to the forefront of effective estate planning tools in Kenya. 

Due to the foregoing changes in law, it is imperative for families that have trusts that were registered before 23rd December 2021, to have their trust deeds reviewed and amended by seasoned Wealth and Private Clients lawyers to ensure that they are conversant with and take advantage of the new changes in the law.  

Families can leverage and benefit from some of the recent changes in the law, which include (to highlight a few):

a)     Family trusts can now be incorporated and acquire body corporate status. This allows the family trust to hold property in its sole name as opposed to holding it in the individual names of the trustees;

b)     Family members and 3rd parties who are not related to the family can now transfer property to the family trust without incurring capital gains tax which is currently at 15%. The family trusts in this instance will also be exempted from paying stamp duty which is currently at 4% or 2% depending on the location of the property;

c)     Family trusts can now exist for multiple generations. Previously, registered trusts could only exist for a maximum period of 80 years. This meant that the trustees of the trust were required to have distributed all the assets of the trust to the beneficiaries before the lapse of 80 years or the indicated period of the trust;

d)     Income of the trust can now be accumulated by the trustees of the trust to benefit multiple generations of the family. Previously, the law forbade the accumulation of the income of the trust making it difficult for the income to be retained in the trust and subsequently benefit multiple generations.

e)     The independent office of an enforcer has been introduced to ensure that trustees of the family trust do not abuse their office or breach the terms of the trust deed. This will reduce unwarranted litigation as the enforcer can also be given the power to remove any offending trustees and to replace them with other trustees in consultation with the founder or the beneficiaries. The enforcer can also be given the power to endorse the execution of certain transactional documents by the trustees. 

In addition to the above changes in law, the founder or the trustees of the trust can also amend their family trust deed due to the following reasons:

a)    Change in Family Circumstances: 

Amendments may be necessary to reflect changes in the family structure, such as births, deaths, marriages, divorces, or adoptions. 

b)    Tax Planning: 

Amending a family trust deed and modernizing the trust structure can help optimize tax planning strategies, especially in light of the Finance Act, 2021.

c)    Change in the goals, visions, and apprehensions of the founder of the trust:

Overall, a family trust is a succession planning tool that indicates the founder’s wishes on how their assets will be distributed to their beneficiaries. Therefore, amendments may be needed to address changes in the family's long-term goals, facilitate the smooth transfer of assets, or provide for contingencies, such as the incapacity or disability of beneficiaries of the trust.

d)    Modernising the trust structure: 

Amendments allow for the adjustment of trust terms to reflect changing financial circumstances, investment strategies, or the inclusion of new assets. This ensures that the trust remains relevant, effective, and aligned with the family's current objectives.

e)    Revising Administrative Provisions: 

Amendments may be necessary to update administrative provisions, such as the appointment and removal of trustees, specifying trustee powers and duties, or modifying reporting and accounting requirements. This ensures the trust operates smoothly and efficiently.

Remember, it is crucial to consult with your Wealth and Private Clients’ lawyer  to assess your specific circumstances before amending your family trust deed.

What is the Process of Amending a Family Trust Deed?

Amending a trust deed involves changing or varying some or most of the clauses in the trust deed. The process of amending a trust deed is complex, and it is essential to ensure that the amendment is legally valid.

Generally, the following steps are involved in amending a trust deed: -

 Step 1: Determine the need for an amendment: 

The first step in amending a family trust deed is to determine the need for an amendment. This may be due to changes in the law, changes in the family circumstances, or the need to revise the administrative provisions as discussed above.

Step 2: Refer to the trust deed: 

The founder or trustees should read the trust deed and be guided by the ‘Powers of the Trustees’ and the ‘Amendment of Trust’ clauses of the trust to determine whether the proposed amendment is consistent with the trust's overall purpose and whether it is legally permissible. Should the trust deed lack these clauses, section 57 of the Trustees Act in Kenya authorizes the trustees to move the court to be granted such orders. Further, section 62 of the Trustees Act grants the court the power to vary or revoke the trust or enlarge the powers of the trusts in certain circumstances. 

Step 3: Prepare the amendment: 

Most properly drafted trust documents have an ‘Amendment of Trust’ clause providing that the terms of the trust deed can be amended by deed or by resolution of the trustees or both.

A resolution of the trustees to amend the trust deed could either be passed by the majority of trustees or by unanimous agreement of trustees depending on the provisions of the trust.

However, best practice dictates that amendment should be done by deed as opposed to by resolution for the following key reasons:

a)     Legal Formality and Recordkeeping: A deed provides a clear and formal record of the changes made, making it easier to establish the validity and enforceability of the amendment. This record can be crucial for future reference, or potential legal proceedings. 

b)     Evidence of Intent: A deed serves as clear evidence of the founder’s or trustee's intention to modify the terms of the trust. It helps avoid any ambiguity or misunderstandings regarding the changes being made as it provides a written record of the parties' intentions.

c)     Transparency: Utilizing a deed ensures that any modifications made to the trust are done transparently. It provides an opportunity for beneficiaries to review and understand the changes, minimizing the potential for disputes or challenges later on.

d)     Third-Party Reliance: A deed provides a reliable document that can be presented to third parties, such as financial institutions when the trust is obtaining a loan facility. 

It is essential to consult with a qualified and have the deed drafted by a Wealth and Private lawyer (hyperlink) who should ensure that it is consistent with the existing terms of the trust deed and are legally valid.

Step 4: Execute the deed: 

The deed of amendment or variation must be properly executed by the trustees as per the trust deed and their signatures witnessed by an Advocate of the High Court of Kenya.

 Step 5: Registration of the deed: 

Once the deed of amendment has been properly executed, it should be lodged for registration at the Registry of Documents to officially reflect the new terms of the trust deed.

Step 6: Record Keeping:

Finally, it is essential to ensure that the deed of amendment or resolution of trustees is properly filed with the rest of the trust records. This will help to ensure that the beneficiaries and other interested parties are aware of the changes made to the trust deed.

Conclusion

In conclusion, amending a trust deed involves changing the terms of the trust. This process can be complex and requires careful consideration of the trust's purpose, the beneficiaries' entitlements, and the laws governing the trust. If you are considering amending your trust deed, it is advisable to seek the advice of a qualified legal professional to ensure that the process is handled correctly.

How we can help

The Wealth and Private Clients team at CM Advocates LLP prides itself in having a formidable team with the resources, skills, and experience on matters of estate planning, wealth management, and trust administration spanning across the East African Region. We offer an edge to our clients based on our ability to offer compassionate and effective legal services. We draw from our industry experience of having structured, re-structured, amended, and incorporated several forms of trusts. We are therefore well capable of guiding you through the amendment of your family trust to adapt to the current circumstances of your family.

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

Contact Persons & Contributors

Dianah M. Gichuru – Head of Unit

Shalma E. Maina – Associate 

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