The era of trust fund babies finally is here

Succession planning involves more of a holistic preservation of wealth for future beneficiaries. PHOTO | SHUTTERSTOCK

When the will of a fabulously wealthy Kenyan lawman, notorious for his English mannerisms and adoration of Queen Elizabeth was made public, many Kenyans gawked in wonderment, doubting whether what he had disclosed in the will was all he owned and, if not, where the rest was.

Contrary to what has, shamefully, become Kenyan culture in recent years among the propertied class, there is no report to date of any court case filed by family members or others seeking a slice of the vast estate. Did he, perhaps, know something that other wealthy Kenyans do not know?

As Kenyans advance in age, they increasingly become paranoid about their mortality. They act as if in fear of a malevolent deity waiting to punish them upon arrival at the hereafter should they fail to leave all their earthly possessions to their offspring before signing off from this world.

To be fair, this worry is not unfounded. Many parents are understandably wary about their offspring’s ability to prudently manage, let alone preserve, the wealth the parents have created after a lifetime of back-breaking travail. They have seen enough to know that people rarely safeguard what they have not toiled for.

This begs the question of whether parents owe a debt of inheritance to their children, or more specifically, whether a parent’s wealth must necessarily land in the hands of irresponsible children who, themselves, require to be managed.

The Law of Succession Act stipulates that where a person dies intestate, that is, without leaving a valid will, their earthly possessions are inherited by their family in descending order, starting with the spouse, children, parents and, finally, relatives of all shades and form up to the sixth degree of consanguinity at the bottom of the food chain.

Under intestacy, the wishes of the person who created the wealth do not count. Having elected not to make a will for whatever reason, including superstition, they are presumed to have forfeited their right to dictate what should happen to their possessions after death. Informal instructions, whether oral or written, are not legally binding unless they meet the statutory threshold of a valid will. Such a person is deemed to have left that vital decision to others including their squabbling family, ravenous relatives and, ultimately, the courts.

Writing a will and registering a family trust can go a long way in avoiding inheritance by default which inexorably follows intestacy.

A will ensures that the estate is inherited by the intended beneficiaries in the right proportions while a trust ensures that the bulk of the wealth is preserved for the immediate and future generations without squabbles over distribution or ownership.

Unlike the norm in the more sophisticated societies where family wealth is designed to run through generations, Kenyans rarely look beyond the immediate generation of their children even where it is abundantly clear they are ill-equipped to manage the estate.

There is no legal obligation for parents to leave wealth to their children provided they make a reasonable provision for them. Put differently albeit more starkly, unless the parent died intestate, no child is entitled to any share of their parent’s estate.

Kenyans should, therefore, rethink their pathological fixation with the desire to saddle their offspring with the burden of wealth which may be beyond their capacity to manage.

The story almost always ends tragically with a macabre race between the child and the wealth to finish each other, one of which normally occurs within a few years.

The Trustee (Perpetual Succession) (Amendment) Act, 2021 created an enabling legal framework for transferring wealth during one’s lifetime to a family trust instead of the children directly.

This law provides attractive tax incentives for registered family trusts, including exemption from stamp duty and capital gains tax on the transfer of properties to the trust as well as income tax on the earnings of the trust. The income received by a beneficiary from the trust is also tax-exempt up to a maximum of Sh10 million per annum. Where trust funds are expended exclusively on a beneficiary’s education, medical treatment or early adulthood housing, they are also tax-exempt.

A registered family trust has perpetual succession and can, therefore, hold property indefinitely.

The beneficiary of a family trust is colloquially known as a “trust fund baby”. The term, however, has a negative connotation in the West where it refers to someone who was born in wealth, lives in wealth and will die in wealth without having to work for a single day in his life, thanks to the financial arrangements made by his ancestors before he was born.

This stereotype, which represents only a minority of trust fund babies should not, however, disparage the concept of family trusts by implying that all beneficiaries lead wasteful and self-destructive lives. Most of the world’s best-known foundations were started for the basic purpose of securing the financial future of the family for generations.

Trusts have been used for centuries to provide financial security for the immediate family and ensure the preservation and multiplication of generational wealth where everyone eats from the same pot but with no ownership or disposal rights.

A trust is managed by trustees appointed by the founder from among his trusted friends but may also include some of the more reliable beneficiaries. The founder may also appoint an institutional wealth management firm to advise the trustees on a prudent investment policy.

The trust deed typically provides for the maintenance and upkeep of the founders’ immediate family and other named beneficiaries during their lifetime but with no power to own or dispose of the assets. This ensures that regardless of the waywardness of the offspring, they will not become destitute after squandering their inheritance like the biblical prodigal son.

The concept ensures that once the bulk of the assets has been transferred into the trust, there is very little left in the estate to fight over. By law, a property which has been transferred into an irrevocable trust cannot revert to the founder and does not, therefore, form part of the estate.

In addition to his bloodline, the founder may also include, as beneficiaries, his cherished charitable causes such as his local parish or an endowment fund for the education of needy children from his village.

A trust also puts paid to the manipulative designs of scroungers who marry into wealthy families with ulterior motives.

Parents should start socialising their children with this idea from an early age to motivate them to work hard and create wealth instead of going through life staring unblinkingly at inheritance while offering prayers and supplications for their parents to exit the stage.

The writer is a Senior Partner at Iseme, Kamau & Maema Advocates. Email: [email protected]