Securing Your Family Trust

In our previous articles titled ‘A Family Trust as a Tool for Protection of Family Wealth’ and ‘New Legal Regime on Registration of Family Trusts in Kenya’, we introduced you to the concept of family trusts as the ideal estate planning tool. The preparation of the trust deed is one of the most critical parts of creating a trust. The trust deed encompasses the wishes of the settlor or the grantor on the management and administration of the trust fund and therefore it has to be customised to meet the specific needs of the settlor. Even so, the law dictates that for a trust to be valid the following three certainties must be met in the trust deed. Failure to meet either of these certainties would amount to a sham trust.

1. The Certainty of Intention

   It is critical for the trust deed to ascertain the clear and unequivocal intention of the settlor to create a trust and to transfer the legal ownership of assets to the trustee, to hold for the benefit of their beneficiaries. In the event the intention of the settlor to create the trust is in doubt, the trust may be considered a sham. A sham trust is a trust that it is established under duress, fraud or misrepresentation or when the settlor transfers property to the trust for an illegal purpose for example to avoid tax responsibilities or to prevent the recovery of assets in a bankruptcy or insolvency proceedings. A trust may also be considered to be a sham when the settlor retains too much control in the trust through his appointment as a trustee and beneficiary of the trust. Stay on the lookout for our next article on sham trusts where we shall discuss balancing the settlors interest and control in a trust set up.

2. The Certainty of Objects

   The objects of the trust are the beneficiaries of the settlor. The trustees through the trust deed should at all times be able to make a full list of beneficiaries and if the same is uncertainable, the trust would fail due to the uncertainty of the objects. In the classical English case of Re Astor’s Settlement Trust (1952) ch 534, the settlor created a testamentary trust with the objective of establishing, maintaining and improving good understanding and corporation between nations and the preservation of the independence and integrity of newspapers. The trust was to be funded by liquidating the settlor’s shares in a well-known newspaper company known as The Observer. Upon the death of the settlor, the testamentary trust was challenged on the basis that it was created for a general purpose and not for the benefit of specific people. The court in its judgement held that the trust could not be valid due to the ambiguity and uncertainty of the beneficiaries or objects of the trust and as a result, the settlor’s shares reverted back to the estate to be inherited by his beneficiaries through intestacy.

3. The Certainty of Subject Matter-

   The trust deed should also clearly indicate the list of assets that form part of the trust fund. This position was held in Civil Case No. 37 of 2013 (O.S) Re Estate of Chadrakant Devchand Meghji Shah (Deceased) eKLR where the court pronounced itself on certainty of the subject matter of the trust. In the above case, the deceased made a will that created a testamentary trust by stating that the executors of his will should hold his estate for the benefit of his son and daughter in the portion of 60% and 40% respectively. However, the trust failed to indicate the assets that will constitute the trust fund and consequently it was unclear the amount of income that was to be obtained from the trust. The court found that even though there was certainty of intention and objects of the testamentary trust, the trust lacked certainty of subject matter (i.e. the assets that were to form the trust fund) and therefore the trust was held to be null and void. Failure of the trust in the above case resulted in the whole estate being distributed in accordance with the rules of intestacy as opposed upholding to the wishes of the deceased or settlor in the trust.

Conclusion

An import of the above cases underscores the importance of clarity and non- ambiguity in creating a trust. The starting point is thus having a good lawyer to advise you on your estate planning taking into account factors such as your goals, tax obligations, how the property will devolve to your beneficiaries and the type of trust that is best suited for your situation. These factors ought to be discussed before the trust deed is drafted. Creating a trust can be likened to performing a delicate surgery. The surgeon has to know what he is doing as the life of the patient is in his hands. This is especially crucial when the property is in multiple countries or is vast in nature. Moreover, trusts are usually long-term spanning into 80 years and should therefore be carefully and meticulously crafted. Noting the above, it behoves you to procure the legal services of a capable team before commencing the process of creating a valid and effective trusts. This is especially critical if the settlor intends to have some input in the administration of their estate upon their death as opposed to having it inherited through intestacy, an often lengthy and tedious court process.Please click here to download the alert.

Contributors

Dianah M. Gichuru –Partner & Head of Unit  Brian Okwalo Ekutu- Associate Shalma E. Maina- Associate

Disclaimer

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