BUSINESS AND RESEARCH SOLUTIONS: 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

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.

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.

(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.

(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 1^st 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 1^st 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 1^st 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 1^st 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 1^st 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 1^st 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 31^st March 2005 were:-

i) 1^st 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) 30^th June 2005, received sh 20,000,000 on the sale of freehold land.

iii) 15^th July 2005, paid sh 8,000,000 for 6,000,000 sh 1 ordinary Housing Development Bond Stock.

iv) 30^th July 2004, paid sh 11,000,000 for sh 11,990,000 7% Housing Development Bond Stock.

v) 30^th 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) 31^st 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 31^st March 2005.

(b) Trust Balance Sheet as at 31^st 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 31^st 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 31^st 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 31^st 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 31^st March 2006 were as under:-

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

31^st January Maintenance payments: John

Sh 300,000, Peter Sh 200,000.

On 31^st 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.

Required:

Write the following accounts in the books of the trust for the three months ended 31^st 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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Saturday, 29 June 2019

Trust Law and Workings

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