Saturday, 29 June 2019

Trust Law and Workings


TRUST LAW

Trust arises out of confidence laid in and accepted by the owner or declared and accepted by the owner for the benefit of another. Thus it is an obligation attached to the ownership of property.

Trustee
It is the person in whom the confidence is laid.

Settlor
It is the person who lays confidence in creator of the trust.

Beneficiary
It is the person for whose benefit the confidence is laid.

Trust is a relationship in which a trustee is compelled to hold real or personal property for the benefit of the beneficiary. A trustee of property is usually considered as the legal owner and the beneficiary as the beneficial owner. Any document which creates a trust is called as a “Trust Instrument”.

Classification of Trusts
Trust may be classified as follows:
  1. Express Trusts
These are those trusts which are created in express words by the settler.
These trusts may be:-
(a)   Public Trusts / Charitable trusts.
These are created for general charitable purpose e.g. improving health or advancement of education. These trusts are established for the benefit of a large group of people.

(b)   Private Trusts
These are created by settler for the benefit of a particular person or group of persons. They are usually created in writing to ensure certainty of their terms. The Trust will be valid if the following certainties are present

(i)                 Certainty of words
The words must be capable of being constructed as imperative and not merely discretionary on the trustee of the property.

(ii)               Certainty of subject matter
The subject matter of a trust must be certain. The trustee should have no discretionary power to withdraw any part of the subject matter from the object of the trust.
(iii)             Certainty of object
The person intended to have the benefit of the recommendation, should be such as may be ascertained with reason able certainty i.e the person must be named or at least the class out of which he is to be selected must be defined.
Private trusts may be further classified as:-

(a)   Discretionary trusts
These are those trusts in which the trustee may have discretionary powers vested in them either by the trust instrument or by general law.

(b)   Non-Discretionary Trusts
These are those trust in which the trustees are required to follow the terms stated in the trust instrument strictly.

(c)    Protective Trusts
Are those trusts which give some protection to the beneficiaries against some misfortunes.

  1. Trust created by Operation of Law.
These trusts are:-
(a)    Statutory Trusts.
These are trusts created by law as an automatic consequences of certain circumstances e.g. If land is conveyed to two or more persons, the legal owners hold the land on trust.

(b)   Implied Trusts
It is a non express trust which is based on the presumed intention of the settler. It occurs

(c)    Constructive Trusts
It arises by operation of law either because of the implied intention of the parties or because it would be inequitable not to impose a trust.

SECRET TRUSTS

These are forms of constructive trust because they are imposed by the courts. The concept is applicable only to trusts created by will. They are of two types as under.

(i)                 Fully Secret Trusts
These are trusts where no trust is disclosed at all.

(ii)               Half Secret Trust
These are trusts where the fact of the trust is disclosed but the true nature of the trust and identities of the beneficiaries are not disclosed.

CREATION OF TRUST

A trust may be created by a deed or by Will. It may be created by word of mouth or in writing.

Essentials of a trust are;
1)      The existence of trust property.
2)      Express or implied intention to treat a trust.
3)      The identification of settler, trustee and beneficiary.
4)      Certainty of words, subject matter and object.
5)      Capacity to create a trust.
6)      Lawful purposes of creating a trust.

Capacity of Trustees
(i)                 A person is appointed as a trustee if he is full of age, is not bankrupt or criminal.
(ii)               A trust corporation has also the capacity to be appointed as trustee e.g. company, charity organization, local or public authorities e.t.c.

Appointment of Trustees
A trustee may be appointed in the following ways:-
(a) Under the Trust
The Settlor usually appoints the first trustees when the trust is created.

(b) Under Trust Act (1925)
According to the trust Act, trustees are appointed as follows;
(i) The person nominate by the trust instrument.
(ii) The last surviving trustee or his personal representative.

(c) By the Court
The court may appoint trustees whenever it is inexpedient difficult or impracticable to appoint trustee without the assistance of the court.

Termination of a Trustee.
A trustee may be terminated as under
i) Disclaimer
A trustee may disclaim a trust provided he has not already done something to signify his acceptance.

ii) Retirement
A trustee may retire;
(a) under an order of court
(b) With the consent of the beneficiary if they are all of full age.
(c) Under provision in the trust instrument
(d) Under the provision of Trust Act.

iii) Removal
A trustee may retire;-
a) Under a power contained in the trust deed.
b) By the court order.

iv) Replacement
If the trustee has been replaced under the provision of Trust Act.

DUTIES OF TRUSTEE
  1. He must fulfill the purpose of the trust and obey the directions given except as modified by the consent of beneficiaries competent to the contract.
  2. He must inform himself of the state of the trust property.
  3. He must protect the title of the trust property i.e he must take all possible steps to preserve the trust property.
  4. He must not change for himself or another set up any title to the trust property advance to the interest of the beneficiaries.
  5. The trustee must exercise reasonable care.
  6. The trustee must convert perishable security into that of permanent nature.
  7. The trustee must be impartial if there are more beneficiaries than one.
  8. The trustee must prevent waste.
  9. A trustee must keep clear and accurate accounts and at all reasonable time furnish the beneficiary full and accurate information as to the amount and state of the trust property.
  10. Trustee should invest only in authorized securities.
  11. A trustee must not make any profit from his office unless expressly authorized by the trust instrument.

Power of Trustee
The Trust Act gives trustees various powers which they can exercise at their discretion. These powers are;-

(a)    He has the power to use the trust properly for the maintenance, education or benefit of a beneficiary who is a minor.
(b)   He has the power to use the trust money for the benefit of beneficiary.
(c)    He has the power to sell the trust property or mortgage the property.
(d)   Power to settle claims by or against the trust.
(e)    Power to invest the trust funds at his own discretion provided the necessary requirements are followed.
(f)    Power to Insure trust property against loss upto three quarter of the value.
(g)   Has the authority to adopt necessary steps which are reasonable and proper for the realization, protection or benefit of trust property. And for the protection and support of the beneficiary who is not competent to contract.

MAINTENANCE
Where a trustee hold property on trust for an infant beneficiary, then they can make payments out of the income of the trust for maintenance, education or benefit of the infants.

ADVANCEMENT
Under Trust Act the trustee have the power to advance capital money to a beneficiary of any age entitled to the capital of the trust. The purpose of the advancement is to enable the beneficiary to establish himself on sound footing.

CONTROL OF TRUSTEES
The beneficiary can apply to the court for assistance if it appears that the Trustee are not performing their duties in a proper way.
In such cases, a beneficiary can apply to the court for;
  1. An order to be issued to the trustee.
  2. Removal of the trustees from office by court.
  3. Damages for breach of trust.
  4. The recovery of trust property wrongfully held by any person.

Liabilities of a Trustee
1)            A trustee as liable for any breach of trust.
2)            In case of breach of trust by him, the trustee is liable to pay interest in addition to damages for breach of trust.
3)            In case of breach of trust, the personal liability of the trustee when there are more trustees than one, is joint and several.
4)            A trustee is not liable for the default of his predecessor except under certain circumstances.

Contribution
If trustees jointly commit a breach or if one of them by neglect enables the other to commit a breach each of them would be liable to the beneficiary for the whole loss. A trustee may call upon his colleagues to contribute to the loss.

TRUSTEE ACCOUNTS

Trustees are required to maintain proper accounts of all transaction for which they are responsible as trustees.

There is no particular formal required by law by these accounts must include receipts and payments. The beneficiaries are entitled to examine these accounts and the accounts should be audited by the qualified auditors. Normally the following accounts are maintained

1.            Revenue Accounts
In this account, dividends, interest rent and other income are credited but expenses are credited. The apportionment in respect of trust income are made between capital account and Income account.

2.            Capital Account

Example 1

Robert died on 1st January 2003 and by his will, he left his house to his wife for her life, and on her death, to his eldest son Tom absolutely. He left the residue of his estate to be held on trust for the benefit of his wife for her life, and on her death, to be shared amongst his other children Njeri, Wanjiru, Wambui, Kamau and Mwaura. His will gave no directions as to the investment of trust funds.

On 1st  January 2003, his house was valued at sh.1,300,000. He held 10,000, shares in KBL valued at sh 42-48 and sh 500,000, nominal 12% Kenya Government Stock valued at 90-92, and sh 250,000 in the bank. His debts and funeral expenses amounted to sh.30,000.

On 1st July 2003, KBL shares were quoted at Sh 48-50 and the 12% Kenya Government stock was quoted at Sh.88-92.

Required:

Show the Estate Capital Account and the Balance Sheet on 1st July 19-3.



Answer:

Estate Capital Account
 

2003                                        Sh        2003                                        Sh

Jan 1 Liabilities           30,000             Jan 1 House                 1,300,000
Jan 1 Bal:c/d               2,425,000        Jan 1 KBL shares        450,000
                                                            Jan 1 12% Govt: stock            455,000
                                                            Jan 1 Cash a/c
                                                                        (Capital)                      250,000
                                    2,455,000                                                        2,455,000
June 30 Special range
                        Fund    1,300,000        Jan 1 Bal b/d                           2,425,000
June 30 12% Loan
            Stock a/c         5,000               June 30 Investment a/c
                                                                        KBL shares                 40,000

June 30 Narrow range
            Fund    580,000
June 30 Wider range
            Fund    580,000
                                    1,160,000
                                    2,465,000                                                        2,425,000

Note:
The balancing figure in this account is divided into two parts i.e. sh.580,000 each.

Balance Sheet
as at 1st July 2003
 

                                                                        Sh                    Sh
Special range: House (Property)                                             1,300,000
Narrow range property:
Sh.500,000 Govt stock                                   450,000
Cash at bank
(balancing figure)                                            130,000           580,000
Wider range property:
10,000 ordinary shares in KBL                       490,000
Cash at bank (balancing figure)                      90,000             580,000
                                                                                                2,460,000

Represented by:
Capital A/cs:
Special range fund                                                                  1,300,000
Narrow range fund                                                                 580,000
Wider range fund                                                                    580,000
                                                                                                2,460,000



Workings:-

Investment Account
K.B.L. Ordinary Shares


Nominal
Income
Capital

Nominal
Income
Capital
2003
Jan 1
Estate
Capital a/c
June 30
Estate
Capital a/c
Sh

100,000
Sh
Sh

450,000



40,000
June
30
Bal c/d
Sh

100,000
Sh
Sh

490,000

100,000

490,000

100,000

490,000
July 1
Bal:
b/d

100,000


490,000






12% Kenya Government Stock


Nominal
Income
Capital

Nominal
Income
Capital
2003
Jan 1
Estate Capital
a/c
Sh

500,000
Sh

-
Sh

455,000




2003
June 30
Estate
Capital a/c

June 30
Bal:c/d
Sh






500,000
Sh
Sh

5,000




450,000

500,000

455,000

500,000

455,000
July 1
Bal:
b/d

500,000


450,000





Note:

i)                    Special range property includes specific legacy, wider range property includes ordinary shares and narrow range property includes fixed interest property e.g. treasury bonds, fixed deposit a/c etc.
ii)                  Normally, on quoted securities we take the mid-market values e.g. 12% Govt: Stock quoted at 88-92. Take mid value 90 so 500,000 x 90/100 = sh.450,000



Example 2

The trust deed relevant to Mr. Ole Kaparo’s trust restricted the trustee to invest in authorized securities but permitted them to retain a piece of land until the tenant died. When it was to be sold and proceeds invested.

At March 31 2004, the summarized Balance Sheet of the trust was as under;-

Investments:                                                                            (Sh  000)
            Sh 10,000,000 8% Kenya Govt Stock                        10,000
            (Market value sh 9,700,000)

            Sh 10,000,000 7% Savings Stock
            (Market value sh 10,100,000)                                     10,000
           
            Freehold Land                                                            8,000

            Balance at bank                                                           400
                                                                                                28,400

            Represented by:
            Capital Fund                                                               28,400

On 1st April 2004, the trustee decided to avail themselves of the powers and to reinvest hall of the shares in wider range securities.

The transactions on capital account of the trustees upto the year ended 31st March 2005 were:-

i)                    1st April 2004, sold sh.10,000,000 8% Govt Stock for sh 9,700,000 and reinvested the whole amount in 4,000,000 sh 1 ordinary shaes of Firestone (E.A.) Ltd.
ii)                  30th June 2005, received sh 20,000,000 on the sale of freehold land.
iii)                15th July 2005, paid sh 8,000,000 for 6,000,000 sh 1 ordinary Housing Development Bond Stock.
iv)                30th July 2004, paid sh 11,000,000 for sh 11,990,000 7% Housing Development Bond Stock.
v)                  30th September 2004, paid sh 1,400,000 to take up the whole of the trustee’s entitlement to 1:8 rights issue by Firestone (E.A) Ltd.
vi)                31st December 2004, received a bonus issue of 1 for 3 ordinary shares in Portland Cement Ltd.
Assume all income was distributed as received.

Required:

(a)    Trust Capital Account for the year ended 31st March 2005.
(b)   Trust Balance Sheet as at 31st March 2005.



Answer

(a)                                            Estate Capital Account
 

2004                                        (sh 000)           2004                                        (sh 000)

April 1 8% Govt Stock           300                  March 31 Bal:b/f                     28,400
April 1 Special range fund      8,000               April 1 7% Savings stock        100
April 1 Narrow range fund     10,100
April 1 Wider range fund       10,100
                                                28,500                                                             28,500

                                                                        2004                S.R.F.  N.R.F  W.R.F.
                                                                        April 1 Bal b/f 8,000  10,100 10,100

                                                                        June 30 F.H.
                                                                                    Land    12,000 10,000 10,000
                                                                                                20,000 20,100 20,100

(b)                                            Trust Balance Sheet
                                                As at 31st March 2005
 

                                                                                                            (Sh 000)

Wider range investments:

4,500,000, Sh 1 Ordinary shares in Firestone (E.A) Ltd        11,100
8,000,000, Sh 1 Ordinary shares in Portland Cement Ltd     8,000
                                                                                                19,100

Narrow range investments:                             (Sh 000)

Sh 11,990,000 7% Housing
                        Dev. Bond stock                     11,000
Sh.10,000,000 Savings Stock                         10,100             21,100
                                                                                                40,200
Wide range fund                                                                     20,100
Narrower range fund                                                              20,100
                                                                                                40,200



Workings:

Investment Accounts
8% Govt Stock


Nominal
Income
Capital

Nominal
Income
Capital
2004
March
31
Bal:b/f
Sh
(000)

100,000
Sh
(000)

-
Sh
(000)

10,000

2004
April 1
Estate
Capital a/c
Cash a/c
Sh
(000)

-

10,000
Sh
(000)

-
Sh
(000)

300

9,700

10,000
-
10,000

10,000
-
10,000









7% Savings Stock

Nominal
Income
Capital

Nominal
Income
Capital
2004
March
31
Bal:b/f
April 1
Estate
Capital a/c
Sh

10,000
Sh
Sh

10,000

100
2004
April 1
Bal:c/d
Sh

10,000
Sh
Sh

10,100

10,000

10,100

10,000
-
10,100
April
Bal b/d
10,000

10,100






7% Housing Development Bond Stock


Nominal
Income
Capital

Nominal
Income
Capital
2004
July 30
Cash a/c
Sh

11,990
Sh
Sh

11,000

June
30
Bal c/d
Sh


Sh
Sh



Sh 1 Ordinary Shares – Firestone (E.A.) Ltd

Nominal
Income
Capital

Nominal
Income
Capital
2004
April 1
Cash a/c

Sep 30
Cash a/c
Right issue
Sh

4,000



500
Sh
Sh

9,700



1,400
2004
Sep 30
Bal c/d
Sh

4,500
Sh
Sh

11,100

4,500

11,100

4,500

11,100
Oct 1
Bal b/d
4,500

11,100





Sh 1 Ordinary Shares – Portland Cement Ltd

Nominal
Income
Capital

Nominal
Income
Capital
2004
July 15
Cash a/c

Dec 31
Bonus
Issue
Sh

6,000



2,000
Sh

-



-
Sh

8,000



-
2004
Dec 31
Bal c/d
Sh

8,000
Sh
Sh

8,000

8,000

8,000

8,000

8,000
2005
Jan 1
Bal b/d


8,000



8,000





Freehold Land Account
 

2004                                                    (sh 000)           2004                            (sh 000)
March 31 Bal b/f                                 8,000               June 30 Cash a/c         20,000

June 30 Special range fund                 12,000
                                                            20,000                                                 20,000

Cash Account


Income
Capital

Income
Capital


2004
March 31
Bal b/f

April 8% Govt stock

June 30 F.H.
Land a/c
(sh 000)
(Sh 000)



400


9,700


20,000


2004
April 1 Firestone
           Shares
July 15 Portland
Cement shares

July 30 Housing Dev:
Bond stock
Sep 30 Firestone – Right issue
(Sh 000)
(Sh 000)



9,700

8,000


11,000

1,400


30,100


30,100

Example 3

Mr. Kariuki died 10 years ago and by his will left the residue of his estate in trust for his children John and Peter in equal shares. The will directed that a child’s share should be ascertained and discharged on reaching the age of 18 years of age. The trustees were empowered to maintain the children out of income and to use their discretion in the choice of investment.

The following trial balance was extracted from the books as on 31st December 2005.

Trial Balance


DR
CR

Investments on Estate Capital Accounts:
200,000 shares of sh 100 each in BAT Ltd
300,000 share of sh 100 each in K.B.L

Investments in Accumulation Accounts:
10,000 shares of sh 100 each in BAT Ltd
10,000 shares of sh 100 each in K.B.L
Balances at Bank:
Estate Capital Account
Accumulation Account

Estate Capital Account

Accumulation Account:
                         John
                         Peter
(Sh 000)

22,000
28,000


1,100
900

2,000
500
(Sh 000)











52,000


1,500
1,000

54,500
54,500

John attained age of 18 years on 31st March 2006 on which date the middle market prices of investments were:-

            BAT Ltd                     Sh 125
            K.B.L.                         Sh 100

Transactions in the three months ended 31st March 2006 were as under:-

1st January                               Receipt of dividend of Sh 5 on each Sh 100 shares in BAT Ltd

31st January                             Maintenance    payments:        John
                                                Sh 300,000,     Peter Sh 200,000.

On 31st March 2006, the trustees revalued all the investments and discharged their liability to John by a transfer to him of:-

(a)    One-half of each of the investment’s held on capital account.
(b)   Three-fifths of each of the investments held on accumulation accounts.
(c)    Cash for the balance of the amount due to him.

Required:

Write the following accounts in the books of the trust for the three months ended 31st March 2006.

(i) Estate Capital Account
(ii) Accumulation Accounts
(iii) Distribution Account in respect tof John.

Answer:

(i)                                 Estate Capital Account
 

                                                (sh 000)                                                           (sh 000)
2006                                                                2006
Mar 31 Distribution a/c (1/2)  28,500             Jan 1 Bal b/f                            52,000
Mar 31 Bal c/d                        28,500             Mar 31 B.A.T. A/c                  3,000
Mar 31 Bal: c/d                       28,500             Mar 31 K.B.L A/c                   2,000
                                                57,000                                                             57,000

Accumulation Accounts

John
Peter

John
Peter

(Sh 000)
(Sh 000)

(Sh 000)
(Sh 000)
2006
Jan 31
Cash a/c

Mar 31
Distribution a/c

Mar 31
Bal: c/d


300



188

-
-






2,180


200



-


1,420






1,620
2006
Jan 1 Bal b/f

Jan 1
Cash a/c
Income

Jan 1 Cash a/c

Jan 1
BAT Inv: a/c

Jan 1 KBL
Inv a/c



Apr 1 Bal b/d


1,500



500


30


90


60

2,180

1,000



500


20


60


40

1,620

1,420

Distribution Account (John)
 

2006                                                    (Sh 000)          2006                                        (Sh 000)

Mar 31 BAT Ltd Inv. a/c                    12,500             Mar 31 Estate Capital a/c        28,500
Mar 31 K.B.L. Inv. a/c                       15,000             Mar 31 Accumulation a/c        1,880
Mar 31 Cash a/c (Capital)                   1,000
Mar 31 BAT Ltd Inv. a/c                    750
Mar 31 KBL Inv. a/c                          600
Mar 31 Cash a/c (Income)                   530
                                                            30,380                                                             30,380



Workings:

W-1                                                     Cash Account

Income
Capital

Income
Capital


2006
Jan 1 Bal b/f

Jan 1
Accumulation a/c

Jan 1 Accumulation a/c


(sh 000)


500


1,000



50
(Sh 000)


2,000


-



-


2006
Jan 31
Accumulation a/c

Jan 31 Distribution a/c


Jan 31
Bal: c/d
(Sh 000)



500

530



520
(Sh 000)



-

1,000



1,000

1,550
2,000

1,550
2,000
April 1
Bal b/d

520

1,000






W-2                                         B.A.T Ltd – Investment Account

Nominal
Capital

Nominal
Capital

Acc:
Cap:



Acc:
Cap:
Acc:
Cap:


2006
Jan 1
Bal: b/f

Mar 31 Accumulation a/c

Mar 31
Capital a/c

(sh)
000


1,000
(sh)
000


20,000
(sh)
000


1,100


150




22,000


-



3,000


2006
Mar
Distribution a/c
Mar 31
Bal c/d
(sh)
000



600

400
(sh)
000



10,000

10,000
(sh)
000



750

500
(sh)
000



12,500

12,500

1000
20000
1250
25000

1000
20000
1250
25000
April 1
Bal:b/d

400

10,000

500

12,500










W-3                                                     K.B.L. – Investment Account

Nominal
Capital

Nominal
Capital

Acc:
Cap:



Acc:
Cap:
Acc:
Cap:


2006
Jan 1
Bal: b/f

Mar 31 Accumulation a/c

Mar 31
Capital a/c

(sh)
000


1,000
(sh)
000


30,000
(sh)
000


900


100




28,000


-



2,000


2006
Mar
Distribution a/c
Mar 31
Bal c/d
(sh)
000



600

400
(sh)
000



15,000

15,000
(sh)
000



600

400
(sh)
000



15,000

15,000

1000
30000
1000
30000

1000
30000
1000
30000
April 1
Bal:b/d

400

15,000

400

15,000








W-4                                                     Distribution Statements______________________

                                                Book   Market To John                                   In Trust
Value   Value   Nominal          Market            Nominal          (Peter)
                        Value   Value  Value    Value
(sh)      (Sh)     (Sh)     (Sh)     (Sh)     (Sh)
(000)    (000)    (000)    (000)    (000)    (000)

Capital assets:
200,000  sh 100
Shares B.A.T.                          22,000 25,000 10,000 12,500 10,000 12,500

300,000 sh 100
Shares K.B.L                          28,000 30,000 50,000 15,000 15,000 15,000
Cash account                           2,000   2,000   -           1,000               1,000
                                                52,000 57,000             28,500             28,500

Accumulations:
Sh 100 shares
In B.A.T                                              1,100   1,250   600      750      400      500
Sh 100 shares
In K.B.L                                             900      1,000   600      600      400      400     
Cash account                           1,050   1,050   -           530      -           520
                                                3,050   3,300               1,880               1,420

Note: John’s share is calculated as under:-
            B.A.T. 3/5 x sh 1,250              =          750
            KBL    3/5 x sh 1,000              =          600