Introduction

The legal process of distributing a person's assets upon their demise is traditionally governed by the Law of Succession. Property may devolve in succession matters either testate (through the use of a will) or intestate (where there is no will). However, a family trust can be used as an alternative succession vehicle in Kenya, offering greater flexibility and potential tax advantages.

What is a Family Trust?

The Trustees (Perpetual Succession) (Amendment) Act, 2021 defines a family trust as a trust, whether living or testamentary, partly charitable or non-charitable, that is registered or incorporated by any person or persons, whether jointly or as an individual, for the purposes of planning or managing their personal estate.

A family trust may be either incorporated or unincorporated. An incorporated family trust has a distinct legal personality of its own, whereas an unincorporated family trust does not; its assets are held by a trustee on its behalf.

Key Features of Family Trusts

We have outlined some key aspects of a family trust below:

• Trading Restrictions: A family trust is prohibited from engaging in trading activities directly. However, it can hold trust property that engages in trade and is income-generating.

• Protection Against Fraudulent Use: The Court may declare a family trust void where it is proven that the trust was established for fraudulent purposes, including to evade creditors of the settlor.

• Perpetuity: There is no limitation on the perpetuity of a family trust; it can remain in existence until it is formally terminated.

• Income Accumulation: There is no limitation on the period during which the income of a family trust can be accumulated. (Accumulation occurs when trust income is added to the trust capital rather than distributed for the benefit of the beneficiaries.)

Tax Treatment of Family Trusts

Several tax exemptions have been accorded to family trusts:

• Transfer Exemptions: The transfer of property to a family trust is exempt from stamp duty and capital gains tax (CGT) on the transfer of all property by individuals and on the transfer of immovable property in the case of non-individuals. Note that the CGT exemption is only available to incorporated family trusts.

• Trust Income Taxation: However, income earned by a family trust is subject to tax. The Finance Act, 2026 repealed Section 11 on trust income and replaced it with new provisions that stipulate:

  1. Any income chargeable to tax and received by a person in the capacity of a trustee, executor, or administrator shall be deemed to be the income of that trustee, executor, or administrator.

  2. Qualifying dividend or qualifying interest which is included in the income of the trustee, executor, or administrator under subsection (1) shall not be subject to further tax under this Act.

  3. Where a trustee, executor, or administrator has paid tax on the chargeable income of the trust, a beneficiary of the trust shall not be liable to pay tax on that income.

This represents a significant shift in tax treatment, eliminating double taxation by ensuring that once tax is paid at the trust level, beneficiaries receiving distributions are not taxed again on the same income.

Conclusion

Family trusts offer a flexible and tax-efficient alternative to traditional succession planning in Kenya. With key advantages including exemptions from stamp duty and capital gains tax on transfers, no perpetuity limitations, and the elimination of double taxation following the Finance Act, 2026, family trusts have become an increasingly attractive vehicle for estate planning and wealth preservation.

However, potential settlors should be mindful of the restrictions on trading activities and ensure that trusts are established for legitimate purposes to avoid potential voidance by the courts. Given the complexity of trust law and taxation, individuals considering establishing a family trust should seek professional legal and tax advice to ensure compliance and maximize the benefits available under current legislation.

Planning for your family's future through a trust requires expert guidance. The Irish Chamber of Commerce in Kenya is proud to have among its members leading professionals who specialize in:

• Establishing and structuring family trusts

• Preparing comprehensive trust deeds

• Providing reliable trustee services

Our secretariat would be happy to connect you with the right advisor to help navigate your succession planning journey. Please contact us for a confidential introduction.

info@vivaafricallp.com