A Tale of a Sleeping Giant to Wealth Accumulation

Economic prosperity in a nation is, to a large extent, linked to a family. Many formidable business ideas have first been floated round the dinner table to family members, who critique and fine tune the business model and see it to actualisation. This may be attributed to the fact that the Patriarchs and Matriarchs desire to invest and accumulate wealth either as a security in the old age days or as their legacy to their progeny.

Several family businesses thrive and succeed during the life of the founders who are the vision carriers. However, because of the lack of a succession strategy for the businesses, they face a huge continuity threat and collapse due to disputes and infighting among the successors in the second, third generations and subsequent generations over the distribution of the estates as part of inheritance.

Lack of a founder exit strategy, and no long-term continuity plan lead to the eventual collapse of renowned family businesses. This has limited economic growth both to the respective families and the country. The ripple effect of the collapse of such business entities has an adverse effect on the supply chain that it is a part of and eventually increasing unemployment rates and reducing the taxes collected by government. The question is, what can be done to ensure business continuity? How can it be done? And what are the requirements?

This article looks at TRUSTS as a key tool for wealth accumulation.

A trust is an arrangement where the settlor(s) sets up “a trust” and transfer a portion of their estate to the trust. The settlor is often the Matriarch or Patriarch of the family. The settlors then nominate trustees who manage the trust on behalf of the settlors and safeguard the interests of the beneficiaries. Managing a trust entails drafting a trust deed with the settlor and administering it according to the deed, investing and managing the assets, processing the payments, maintaining detailed records, as well as managing the tax affairs of the trust.

The beneficiaries of the trust can be the immediate children and subsequent generations or any other person as the settlors may deem fit. In Kenya, a trust can either be unincorporated or corporate bodies. Incomes of a corporate trust are taxed as a normal company; at 30% for a local trust and 37.5% for foreign trusts operating in Kenya.

Unfortunately, the idea of Trusts has not gained traction in Kenya. This can be attributed to the lack of proper regulations to govern the running and management of Trusts. This lack has created an environment of mismanagement and embezzlement of hard-earned money and properties by rogue trustees at the expense of the beneficiaries and the legacy of the settlors.

In the recent past, there has been a continuous growth in popularity for off-shore discretional trusts. This is where settlors set up a trust in a different jurisdiction where there is proper regulation to govern the management of trusts. Such trusts are common in countries like Mauritius, and Jersey which are tax havens and are used as a tool for tax planning. One can then accumulate wealth through tax savings. Further, in these jurisdictions, the settlors appoint a protector who ensures that the interests of the beneficiaries are jealously guarded. In case of any mismanagement, the protector has powers to change the trustees.

The question is, why should one consider setting up a discretional trust as compared to other tools of wealth accumulation?

Setting up of a Trust will:

  1. be used as a tool for tax planning;
  2. maintain secrecy and confidentiality in terms of assets held and distribution made from the trust as compared to other methods provided for in different succession laws;
  • allow settlors the final decision as to who the beneficiary of their estate will be and this cannot be altered; and
  1. preserve the family assets where the estate can be held as a continuing family business and the returns can be shared as per the trustee’s decision across all the future generations in a family.

Finally, in the words of Stephen Richards, “minds are like flowers, they open when the time is right.” This is the opportune time for entrepreneurs to start considering a Trust as a tool for wealth accumulation and to guarantee continuity of their legacy. As to how and what the requirements are for setting up a trust, as well as the vehicles to invest in that suit the settlor’s objectives, one should engage the services of a reliable tax consultant and a business advisor who can offer professional advice and provide the necessary assistance.

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  • Andersen Tax has found a home in Kenya and provides a wide range of tax, valuation, financial advisory and related consulting services to individual and commercial clients.

  • Andersen Tax has found a home in Kenya and provides a wide range of tax, valuation, financial advisory and related consulting services to individual and commercial clients.

  • A tax return is a form or forms filed with a tax authority that reports income, expenses, and other pertinent tax information. Tax returns allow taxpayers to calculate their tax liability, schedule tax payments, or request refunds for the overpayment of taxes.