INTERNATIONAL TRUSTS
A trust is a legal structure that allows one or more people (or companies) to manage property for somebody else’s benefit. Trusts are an excellent way to manage your tax and protect your assets. Likewise, owning your business through a trust offers many advantages. This article will explain the difference between discretionary and family trusts.
What are discretionary trusts?
Discretionary trusts are set up to allow the person or people managing the trust to choose:
- who can benefit from the trust; and
- how much money beneficiaries will receive.
Accordingly, the amount of money beneficiaries receive under a discretionary trust is not fixed, nor are the beneficiaries who may receive money from the trust. This is because the trustee has the discretion to choose the trust’s beneficiaries. Likewise, the trustee can choose how much each beneficiary will receive from year to year.
What are family trusts?
Individuals usually set up family trusts as discretionary trusts that hold a family’s assets, which may include owning a family business. Usually, one or more family members will manage the trust assets for their family as a whole. While the trustee can choose who benefits from the trust, beneficiaries will only be family members since the trust is managed within the family.
What is a trust deed?
This is the legal document that formally creates the trust and outlines how it will work. It will usually set out:
- the objectives of the trust fund;
- who the beneficiaries are;
- who the trustee and appointor is; and
- how income and assets will be distributed from the trust.
Advantages of Discretionary Trusts
Asset Protection: A discretionary trust allows a person to hold onto their assets without being the legal owner of the property. This can have significant advantages.
For example, if a creditor pursued a beneficiary’s assets, the trust property is generally protected because the trustee is the legal owner rather than the beneficiary.
Tax Management: A company structure has to pay income tax on its net income every financial year. Discretionary trusts, however, generally do not have to pay income tax. Instead, the beneficiaries pay tax on their share of the trust’s net income. In a family trust, this means that the trustee can distribute assets to reduce the overall tax paid by the family.
Beneficiary Income : Discretionary trusts are a great way of providing income to beneficiaries who may be dependent or otherwise unable to manage their assets. For example, the trust can explicitly list the names of individuals that you wish to benefit from the trust. You can name the primary beneficiaries of your trust and also nominate unnamed beneficiaries. These unnamed beneficiaries can include the extended family of the named primary beneficiaries.
For example, the trustee can nominate for “the children from the marriage of John Smith and Jane Smith” (your unnamed primary beneficiaries) to be entitled to receive the trust income in the trust deed.
CONSIDERING WEALTH PROTECTION?
- Trusts are a popular way of safeguarding family wealth, protecting assets from unexpected claims from third parties or avoiding forced heirship.
- Trust arrangements typically have three parties to the trust:
- Settlor
- Trustee(s)
- Beneficiary
- Appointor
Beneficiaries
Beneficiaries rights in a trust refer to the legal rights that a beneficiary has to the assets held in the trust.
The specific rights that a beneficiary has will depend on the terms of the trust document and the applicable state law.
Some common beneficiary rights in a trust:
- Right to information: Beneficiaries have the right to information about the trust, including the terms of the trust, the assets held in the trust, and the actions of the trustee.
- Right to distributions: Beneficiaries have the right to receive distributions of income or principal from the trust, as specified in the trust document.
- Right to enforce the trust: Beneficiaries have the right to take legal action to enforce the terms of the trust.
- Right to remove the trustee: In some cases, beneficiaries may have the right to remove the trustee if they believe the trustee is not fulfilling their duties properly.
N/B – Specific beneficiary rights can vary depending on the type of trust and the jurisdiction in which it is established. It is always recommended to consult with a qualified attorney to understand your specific rights as a beneficiary of a trust
Settlor: This person sets up the trust. Usually, the settlor will be a lawyer or accountant. Once the settlor does their part in creating the trust, they generally have no further involvement. Therefore, the settlor cannot benefit from the trust.
Trustee: This person is the legal owner of the trust property. The trustee decides how to manage the trust assets. Likewise, they make all decisions, choices and transactions relating to the property’s management. However, they do so in the interests of those benefiting from the trust. The trustee must act in the best interests of these people.
The role of a trustee is something like the role of a company director. Directors must act in the best interests of the company and its shareholders.
Appointor: This person has the power to remove and nominate trustees. Usually, this will happen when a trustee passes away or otherwise cannot continue to manage the trust. The Appointor is usually the person who is the director of the corporate trustee of the trust.
FAMILY TRUST IN KENYA – commonly adopted in Kenya
A family trust in Kenya is a legal arrangement where one party (the grantor) transfers property or assets to a second party (the trustee) for the benefit of a third party (the beneficiary). The trust is established through a trust deed, which outlines the terms and conditions of the trust.
Essentials of a trust include:
- certainty of intention,
- certainty of subject matter (identifiable property), and
- certainty of object (identifying the class of beneficiaries).
There are two main types of trusts used in estate planning:
- living trusts, created while the trustor is alive and revocable, and
- testamentary trusts, created through a will to avoid probate.
In a family trust, the income and assets owned by the trust are not owned outright by the trustees or beneficiaries. The trustees have the responsibility of administering the assets for the benefit of the beneficiaries, and the assets become the property of the beneficiaries when transferred by the trustees.
The parties involved in a living trust are:-
- Settlor (the person who establishes the trust)
- Trustees (who receive and administer the assets)
- Beneficiaries (individuals or classes of persons entitled to the trust’s income and capital).
To establish a family trust, the settlor creates a trust deed and transfers assets to the trustees. The trust deed provides guidance to the trustees, and the transfer of assets to the trust varies depending on the type of property involved.
The establishment of a trust requires a trust deed signed by all trustees, stamped, and registered at the Lands Office. The trust is considered an unincorporated trust and does not have its own legal personality. It can only operate through the trustees’ names and not in its own name.
The necessary requirements for establishing a trust include the name of the trust, its main objective, the name of the settlor/donor, the physical address of the trust, and the description of beneficiaries and the trust fund. Additionally, details of the trustees and the administration of the trust must be provided.