Trusts have been in existence since the 12th Century from the time of the crusades under the jurisdiction of the King of England. English land owners went to the battlefield, leaving ownership of their lands to the crusaders who would manage the land in their absence. However, the Trust system faced one major challenge; on their return, the crusaders refused to hand over the land to the owners. Unfortunately, as far as the King’s Courts were concerned, the land belonged to the Trustee, who was under no obligation to return it, i.e. the crusader had no legal claim.
What is a Trust?
A Trust is an equitable relationship arising when property is held by a Trustee for the benefit of a third person, a beneficiary, and subject to obligations owed in favor of the beneficiary. As such, a Trust can be described as an entity created for purposes of ensuring that a property interest is held by one person; a Trustee, at the request of another; a settlor, for the benefit of a beneficiary.
A Trustee therefore holds the property subject to personal obligations to manage and apply it in accordance with the terms of the Trust deed for the benefit of the beneficiaries or in the manner prescribed. In a Trust, it is not easy for a Trustee to use the settlor’s property for personal gains. A Trustee who deals with the Trust property inconsistently with the terms of the Trust is personally liable to the beneficiaries for breach of trust and in the absence of any defences; the Trustee will be required to compensate the beneficiaries for the loss.
Trusts can be designed in a way that the benefits of the Trust belong to the settlor in their lifetime ensuring early set off of the management of the Trust.
A Family Trust is a relationship between the settlor, who creates the Trust and decides what goes into the trust deed (the trustees, who hold title to the Trust assets in their own names and deal with them as instructed in the trust deed) and the beneficiaries, who receive the benefits from the Trust. The income and assets owned by a Family Trust are not owned outright by either the trustees or the beneficiaries. Trust assets only become the property of the beneficiaries when trustees transfer the assets from the Trust to the beneficiaries personally.
Unlike a will, a Family Trust provides continuity of the estate of a deceased person by ensuring that the estate devolves to future generations and more importantly through capable and reliable people. The concept of a Trust is one that involves an owner of a specific property being able to govern how the same property should be used or administered over.
Establishment of a Trust
A Trust is established by way of a Trust deed. The Trust deed, amongst other things, contains the objects of the Trust, the name of the Trust, the properties held under the trust, the power of the trustees, meetings of the Trustees and the Trust’s administration. The Trust deed has to be signed by all the trustees, should be stamped and then registered at the Lands Office under the Registration of Documents Act (Chapter 285 of the Laws of Kenya). Once registered as indicated above, the Trust is duly established as an unincorporated Trust which does not have a legal personality of its own. Thus, the Trust can only own property, enter into contracts or do any other thing in the names of its trustees but not in its own name.
As noted above, an unincorporated Trust does not have a separate legal existence of its own separate from its trustees. Therefore, in order for the Trust to be able to have a separate legal status and be able to own property, enter into contracts and do any other thing in its own name, it has to be incorporated.
The law providing for the incorporation of certain Trusts and related matters is set out in the Trustees (Perpetual Succession) Act, (Chapter 164 of the Laws of Kenya). Section 3 (1) of the Act provides that the trustees who have been appointed by anybody or association established for any religious, educational, literary, scientific, social, athletic or charitable purpose or who have constituted themselves for any such purpose may apply in the manner provided for in the Act, for a certificate of incorporation of the trustees as a corporate body.
Section 5 of the Act provides that for the Trust to attain its own legal personality, an application has to be made to the Cabinet Secretary in charge of matters relating to lands. This application shall be in writing, signed by the person or persons making it, and shall contain the prescribed particulars. This application must be accompanied by the registered Trust deed and the evidence of a parcel of land that is owned or to be owned by the Trust.
A Trust as a tool of Tax Planning
It is noteworthy that Trusts are not only instrumental towards estate planning but can also be used as a tool for tax planning. This is particularly so where the beneficiaries of the estate are resident in different jurisdictions and also where the properties of the estate are situated in different jurisdictions, which may trigger high tax obligations on the estate. In this regard, offshore Trusts have gained popularity as an avenue not only for estate and tax planning but also for purposes of protecting assets from creditors, to postpone the time of vesting of property, to pass on to Trustees the decision of who receives the Trust income or the Trust capital and to enable the settler to choose professional persons to administer and pass on assets according to his wishes, among others.
As such, it is advisable for an estate to consider establishing a Trust in a favorable jurisdiction to mitigate against high tax implications. The question therefore is what are the benefits of establishing a Trust and should one consider a local or an offshore Trust? In Kenya for instance, Trusts are considered to be corporate bodies and therefore they will be taxed at a considerably high rate. As already stated above, an estate may have properties in different jurisdictions; furthermore the beneficiaries of the Trust may be resident in different countries. This may have high tax implications and may also result in double taxation especially considering Kenya’s current double tax treaty network. Therefore, it may be prudent for estates to consider establishing Trusts in other countries, which will not only benefit them from a tax perspective but will also help facilitate estate planning.
While deciding on a suitable location, it is important to consider the regulatory framework and the taxation regime in the respective jurisdiction. In this regard, Mauritius is considered a favourable location for offshore Trusts on the basis of its tax regime, regulatory framework and its proximity to Kenya. New Zealand has also of late become a strong contender in the race towards being the most favourable offshore Trust jurisdiction.
Should we go the Mauritius Way?
Mauritius has integrated its laws on Trusts under the Trust Act of 2001. This law applies to both residents and non-residents of Mauritius and incorporates the latest trends in international Trusts legislations.
Non-residents can set up different types of Trusts in Mauritius. These can either be Trusts with interest in possession, charitable Trusts, purpose Trusts, accumulation and maintenance Trusts, bare Trusts, protective Trusts, discretionary Trusts, employee benefit Trusts and Trusts for the disabled, among others. Discretionary Trusts have proven to be very popular with non-residents due to the optimum flexibility they offer in the organization of the Trust property and for the distribution of income to beneficiaries. A Discretionary Trust is basically a settlement where both capital and income may be paid or applied, at the sole discretion of the Trustee(s), to any one or more of a class of beneficiaries, as the Trustee(s) deem(s) fit.
Mauritius-resident Trusts are taxed at the rate of 15% on their chargeable income (gross income less expenses but before any distribution). They are also eligible for an 80% presumed foreign tax credit on foreign source income and entitled to tax treaty benefits, under the various double taxation agreements between Mauritius and some 33 countries.
An offshore Trust of which the settlor is a non-resident and of which all the beneficiaries are also non-residents, is exempt from income tax in Mauritius, where it has deposited a declaration of non-residence with the local tax authority. Furthermore, non-resident beneficiaries of a Trust are exempt from tax in respect of income under the terms of the Trust, as well as from value added tax, whereas resident beneficiaries having received such income will be taxed at a flat rate of 15%.
Or is New Zealand a better option?
New Zealand is a jurisdiction that has in the recent past gained popularity as a location for offshore Trusts. This is not only because of the favorable tax and regulatory framework that it has in place in relation to Trusts but unlike other traditional tax haven jurisdictions (like Mauritius), New Zealand is a reputable member country of the Organization for Economic Co-operation and Development (OECD) with a highly regarded legal, political and economic environment.
In New Zealand, Trusts are exempt from assessment in respect of tax on income and capital gains arising outside of New Zealand, in the event that the settlor of the Trust is non-resident. Accordingly, the Trustee may make distributions out of a Trust fund established in New Zealand without any withholding or deduction for New Zealand income or capital gains tax.
New Zealand’s tax regime does not have inheritance, wealth or capital gains tax regimes. This means that any creation or transfer of assets to a Trust by a non-resident of New Zealand will not be taxed. Furthermore, the same transaction will not be subject to indirect taxes including gift duty, stamp duty, value added tax as they are not applicable to New Zealand Trusts.
From a compliance perspective, foreign Trusts established in New Zealand are not obliged to file income tax returns with the New Zealand Inland Revenue Department, in so far as they do not have New Zealand sourced income, nor distribution made to a New Zealand resident beneficiary. Moreover, New Zealand has very limited disclosure obligations in relation to the settlor and the beneficiaries. It is also noteworthy that New Zealand, like Mauritius has an extensive network of double taxation agreements in force with its main trading and investment partners.
It is never too late for taxpayers with expansive estates to organize their affairs in a way that not only enables easy and more efficient management of their affairs but also allows them to take advantage of tax planning opportunities that may alleviate the tax burden on both the estate and its beneficiaries. It is therefore a viable option to consider establishing a Trust, and where appropriate consider establishing offshore Trusts in a favourable jurisdiction