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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:
- 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.
- 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
- 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.
- He must inform himself of the state of the trust
property.
- He must protect the title of the trust property i.e
he must take all possible steps to preserve the trust property.
- He must not change for himself or another set up any
title to the trust property advance to the interest of the beneficiaries.
- The trustee must exercise reasonable care.
- The trustee must convert perishable security into
that of permanent nature.
- The trustee must be impartial if there are more
beneficiaries than one.
- The trustee must prevent waste.
- 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.
- Trustee should invest only in authorized securities.
- 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;
- An order to be issued to the trustee.
- Removal of the trustees from office by court.
- Damages for breach of trust.
- 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
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