Trust funds in Kenya are legal arrangements where assets are held by trustees for the benefit of others. These funds help manage wealth, protect assets, and ensure the orderly distribution of assets to beneficiaries according to specific instructions.
The Laws in Kenya recognize three main types of trusts:
- Family Trusts
- Charitable Trusts
- Unit Trusts.
Family trusts are especially popular as they focus on creating and preserving wealth for future generations.
The legal framework governing trusts in Kenya includes several regulatory bodies:
- Kenya Revenue Authority (KRA)
- Capital Markets Authority (CMA)
- Central Bank of Kenya (CBK)
Key elements of a trust fund include:
- Trustee: The person managing the assets
- Beneficiary: The person receiving benefits from the trust
- Trust Deed: The legal document outlining how the trust operates
When you create a trust fund, you transfer ownership of assets to trustees who manage them according to your wishes. This can help avoid the complications of the Law of Succession Act, especially in cases where someone dies intestate (without a will).
Trust funds offer several benefits including:
- Protection from creditors
- Tax planning advantages
- Ensuring family wealth stays within the family
- Providing for dependents with special needs
Unit trusts are also common in Kenya, with four main types: Money Market Funds, Growth/Balanced Funds, Equity Funds, and Bond Funds. These investment vehicles enable you to pool your money with that of other investors.
Setting Up Trust Funds in Kenya
Creating a trust fund in Kenya involves several legal steps and important decisions. The process requires careful planning to ensure your assets are protected and your beneficiaries’ interests are secured.
1. Legal Requirements
To set up a trust fund in Kenya, you must first prepare a trust deed that clearly states the purpose of the trust. This document needs to be stamped at the Lands Registry under the Registration of Documents Act.
You must pay stamp duty before registration can proceed. The current process allows for online incorporation through the manual.brs.go.ke portal.
Required information for trust registration includes:
- Names and details of the settlor
- Names and details of trustees
- Names and details of beneficiaries
- Clear description of trust assets
- Trust objectives and purpose
All trust deeds must be lodged with the appropriate registry after payment of stamp duty. This registration formalizes the trust and gives it legal recognition.
2. Choosing the Right Trustees
Selecting trustworthy and competent trustees is crucial to the success of your trust. Trustees will manage the assets and make decisions according to your wishes.
You can appoint individuals you trust, such as family members or close friends. Professional trustees, like lawyers or trust companies, are also options for more complex arrangements.
Important qualities to look for in trustees:
- Honesty and integrity
- Financial literacy
- Understanding of legal obligations
- Willingness to serve long-term
- Ability to make fair decisions
Consider appointing multiple trustees to ensure checks and balances. At least one trustee should have financial knowledge while another might have good family understanding.
Remember that trustees have a fiduciary duty to act in the best interests of beneficiaries. They must avoid conflicts of interest and maintain proper records of all trust activities.
3. Trust Deed Drafting
The trust deed is the foundation document that governs how your trust operates. It should be drafted with precision and clarity to avoid future conflicts.
Your trust deed must clearly identify all parties involved and specify how assets will be managed and distributed. Working with a lawyer experienced in trust law is highly recommended.
Key elements to include in your trust deed:
- Trust name and effective date
- Clear identification of settlor, trustees and beneficiaries
- Detailed description of trust property
- Distribution rules and conditions
- Trustee powers and limitations
- Duration of the trust
- Provisions for removing or replacing trustees
The deed should also address what happens in various scenarios, such as the death of a trustee or beneficiary. Ensure your language is specific about how and when beneficiaries receive assets.
Investment Vehicles within Trust Funds
Trust funds in Kenya offer various investment options to help grow your money. These vehicles range from pooled investments to government securities and stock market opportunities.
1. Unit Trusts and Managed Funds
Unit trusts are popular investment vehicles that pool money from many investors with similar financial goals. When you invest in a unit trust, you buy units in a professionally managed fund.
Money Market Funds focus on short-term investments like treasury bills and fixed deposits. They offer lower risk and steady returns, making them ideal for conservative investors.
Equity Funds invest primarily in stocks listed on the Nairobi Securities Exchange. These funds aim for capital growth and are suited for investors willing to accept higher risk for potentially higher returns.
Balanced Funds combine both equity and fixed-income investments. They provide moderate risk and return by diversifying across different asset classes.
The minimum investment amount for most unit trusts in Kenya is relatively low, usually starting from Ksh 5,000. This makes them accessible to many Kenyans looking to start investing.
2. Bonds and Treasury Bills
Treasury bills are short-term government securities that mature within one year. They’re considered low-risk investments backed by the Kenyan government.
Government bonds have longer maturity periods, typically 2-30 years. They pay periodic interest and return the principal amount at maturity.
Corporate bonds are issued by companies to raise capital. They usually offer higher interest rates than government bonds but come with slightly higher risk.
Types of Bonds in Kenya:
- Treasury bonds (government)
- Infrastructure bonds
- Corporate bonds
- Green bonds
The minimum investment for treasury bills starts at Ksh 100,000, while most bonds require Ksh 50,000. Your returns are predictable, making these instruments good for income-focused investors.
3. Equities and Securities Market
Shares represent ownership in companies listed on the Nairobi Securities Exchange (NSE). When you buy shares, you become a part-owner of the company.
The NSE hosts over 60 listed companies across various sectors, including banking, telecommunications, and manufacturing. This gives you options to diversify your investments.
Investing in equities offers two potential returns: capital appreciation when share prices rise and dividends when companies distribute profits to shareholders.
You can invest in the stock market through:
- Direct purchase of shares through stockbrokers
- Equity-focused unit trusts
- Investment clubs
The minimum investment varies by company but typically starts with purchasing at least 100 shares. Stock market investments are generally considered higher risk but offer potential for significant long-term growth.
Financial Management and Security
Proper management of trust funds ensures your money grows while remaining secure. Financial oversight is crucial for both investors and beneficiaries to maximize returns while minimizing risks.
Costs and Fees Associated With Trust Funds
Unit trust funds in Kenya typically charge several types of fees that impact your overall returns. The most common is the management fee, usually ranging from 1-3% of assets annually, which covers professional portfolio management.
Other potential charges include:
- Entry fees: 0-5% when you buy units
- Exit fees: 0-3% when you sell units
- Administration fees: For record-keeping and reporting
- Performance fees: Additional charges if the fund exceeds benchmark returns
These fees compound over time and can significantly reduce your wealth accumulation. When comparing funds, look beyond performance to examine the Total Expense Ratio (TER), which shows all costs as a percentage of your investment.
Some funds offer tiered fee structures where charges decrease as your investment grows, creating cost advantages for larger investments.
Performance Monitoring
Tracking your trust fund’s performance helps ensure your financial goals stay on track. Most Kenyan unit trusts provide quarterly statements showing growth, dividends received, and current values.
You should compare your fund’s performance against appropriate benchmarks like the NSE Index for equity funds or treasury rates for money market funds. This comparison reveals whether your fund manager delivers value.
Key performance indicators to monitor include:
- Total return: Capital growth plus income
- Dividend yield: Regular income as a percentage of investment
- Risk-adjusted return: Performance relative to volatility
Many fund managers now offer online portals or mobile apps for real-time monitoring. These platforms typically show your current holdings, transaction history, and performance metrics.
Set calendar reminders to review performance at least semi-annually. This schedule allows for timely adjustments if your trust fund consistently underperforms.
Ensuring Financial Security for Beneficiaries
Trust funds provide financial security through careful structuring and protection mechanisms. For beneficiaries, these funds can deliver current income through regular dividend distributions while preserving capital for future needs.
To maximize security:
- Diversify investments across different asset classes
- Choose funds with strong governance structures
- Verify the fund is properly regulated by the Capital Markets Authority
- Consider inflation protection mechanisms
You can establish distribution rules that balance immediate needs with long-term growth. For example, limiting withdrawals to only interest and dividends preserves the principal amount.
Compound interest becomes a powerful security tool when reinvested over long periods. A well-structured trust can grow substantially over decades, providing increasing support for beneficiaries as their needs evolve.
Regular reviews with financial advisors ensure the trust adapts to changing market conditions and beneficiary circumstances while maintaining its core security function.
Regulatory Framework for Trust Funds
Trust funds in Kenya operate under a set of rules and regulations that help protect assets and ensure proper management. These frameworks guide both the creation and operation of trusts to maintain integrity and transparency.
Capital Markets Authority Regulations
The Capital Markets Authority (CMA) provides oversight for trust funds that invest in securities markets. They set rules about how much of a trust fund can be invested in various securities. According to regulations, no more than one-eighth of a trust’s value or ten thousand shillings (whichever is greater) can be invested in specific securities.
Zimele Asset Management and similar firms must follow CMA guidelines when managing trust investments. These rules help protect your money by ensuring funds aren’t too concentrated in risky investments.
The CMA requires trust fund managers to provide regular reports about fund performance and investment decisions. This transparency helps you track how your money is being handled.
Legal Compliance for Trust Funds
Trust funds in Kenya must comply with the Trustees Act, which outlines the duties and responsibilities of trustees. Your trust deed must follow this law to be legally valid.
When establishing a trust, you need to file proper documentation with relevant authorities. The Trustees (Perpetual Succession) Act allows trusts to continue functioning even when trustees change.
The Law of Succession Act also impacts trust funds, especially those created as part of estate planning. Your trust must comply with succession laws to avoid future legal challenges.
Key Compliance Requirements:
- Regular auditing of trust accounts
- Proper documentation of all transactions
- Disclosure of conflicts of interest
- Adherence to investment guidelines
- Filing annual returns with the appropriate authorities
Fixed deposits and other investment vehicles used by trusts must also comply with banking regulations.
