TOPIC 5: TYPES OF TRUSTS

In virtually all jurisdictions, trusts are classified into various types and the law of trust in English
law and consequently in Kenya are no exception. The classification or types of trusts sometimes
aids in understanding the purpose or object of the trust. Classifying trusts is a bit an uneasy task
and classification varies according to the classifiers. A distinctive feature of classification of
trusts is according to use or object. Hence, most names of trusts are reflective of their purposes
or objects. A first and major classification of trusts is into private, public or charitable trusts.
Private trust is one that is meant to benefit an individual or a group or people. Public or
charitable trust on the other hand is one that is structured to benefit the general public or a
section of it. However, while a charitable trust is always a public trust, not all public trusts are
charitable trusts.

Trusts are further divided into other compartments of express, constructive, implied, resulting
trusts, ministerial or instrumental trusts and discretionary trusts. Irrespective of the classification
of trusts into different classes, a distinctive difference to note in the various classifications is
between those trusts that are created by the act of the parties and those that evolved by virtue of
the operation of law. Flowing from this, trusts that are created by the act of the parties are
referred to as express trusts while those that evolved by operation of law are called implied
trusts.

5.1 Private Trusts

A Private Trust is a legal contract that holds and manages assets for relatives, family members
and friends of the Grantor (the Trust creator and owner). In legal terms, a Private Trust is a
“fiduciary relationship” that grants a beneficiary the right to money or property. Private Trusts
can survive the Grantor’s death, and may also be created through direction in a Living Will. In
the latter case, the Trust will be formed after the Grantor’s death.

A Private Trust is an estate planning vehicle that transfers control of certain assets from the
Grantor to the Trustee. The Trustee then manages the assets while ensuring that certain long-
term conditions remain in effect as set forth by the Grantor. The Trustee carries out the wishes
and instructions of the Grantor as noted within the Trust document. Trustees have the job of

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managing the assets within the Trust for a specified time period and then allocating them to the
beneficiaries according to the directions within the Trust. In many cases, the Trust continues to
be active long after the Grantor has died.

There are two primary types of Private Trusts: Living (or Revocable) and Irrevocable. A Living
Private Trust can be changed and controlled. An Irrevocable Private Trust cannot be easily
altered or modified. Once property, money or other assets are transferred to the Trust, they’re
what’s known as ‘Trust-owned’. Contrary to popular belief, assets in a Trust do not belong to the
Trustees. Of course, Trustees may receive financial or other benefits for their management
responsibilities, but that would be defined in the Trust and either paid out of the Trust or the
estate. All assets remain controlled by the specific rules of the Trust until its termination.
Termination typically occurs when assets have been fully dispersed or otherwise depleted.

Private trusts can further be classified into express, implied, constructive or resulting trusts.
Express trusts are trusts that are deliberately established by a settlor, as opposed to having been
created either through a statute or a court order. They are usually created by instruments
expressly indicating the persons, property, and purposes of the trust so that their duration and
nature are certain. Implied trusts are those that are not expressly declared, but are created by
operation or construction of law either for the purpose of carrying out the presumed intent of
parties or to rectify fraud and prevent unjust enrichment. Implied trusts are of two types:

1. Constructive trusts: Constructive trusts are often created by the law of equitable
obligations (law of equity) as a convenient means to remedy unjust enrichment,
especially in the case of fraud or wrongdoing. For instance, if Person A procures legal
title to a property from Person B by committing fraud, misrepresentation, or concealment,
Person A becomes a trustee who holds the property in trust for Person B by operation of
the law of equity.
2. Resulting trusts: Resulting trusts are declared by the law of equity to exist because of the
presumed intention of the parties that they shall exist, as implied from the act or
transaction of parties. For instance, if Party A gives money to Party B for purchase of the
property which has never been returned to Party A, the law of equity will imply that Party
B is not an absolute owner of the property and is holding the property in trust for Party A.

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Notwithstanding the classification of trusts into different classes, a distinguishing difference to
note in the various classifications is between those trusts that are created by the deliberate acts of
the parties and those that evolve by virtue of the operation of law. Flowing from this, trusts that
are created by the act of the parties are referred to as express trusts while those that evolve by
operation of law are called implied trusts.

A private trust may be created during one’s lifetime (inter vivos) or by Will. An inter vivos or
living trust is expressly created where an individual called the donor or settlor, during his life
time, makes a declaration of trust directing a person(s) called the trustee(s) to hold property or
assets in accordance with the terms and conditions contained in the trust instrument for the
benefit of the settlor’s beneficiaries. In which case, the cestui que trusts/beneficiaries become the
equitable owners of the subject of the declaration (i.e. the property or assets), while the legal
interest is vested in the trustee. It has been established that to create a valid private trust, there
must be:

1. Certainty of intention – The settlor (i.e. the person giving the property, who is also called
the donor) must manifest an intention to create a trust, either expressly or by conduct. An
expression of hope or desire is not sufficient.
2. Certainty of subject matter – The trust property must be clearly identified. The subject of
the trust may take different forms, either an interest in land, a car, money, a debt or even
a promise. Whatever form the subject of the trust takes, it must be specified with
reasonable certainty.
3. Certainty of objects - This means that the intended beneficiaries of the trust must be
known or ascertainable. If the beneficiaries cannot be identified, the trust will fail and the
subject of the trust will revert to the settlor/donor or his estate, as the case may be, except
it is a charitable trust.

Where the trust is in respect of personal property such as money, shares, vehicle, etc. no
formalities are required for its creation. But where the trust is in respect of a real property (i.e.

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land), it must be done in compliance with the statutes regulating transfer of title to land. For
example, it must be in writing and executed as a deed by the parties thereto.

A trust may be used for different purposes. For a trust inter vivos, it may be applied by a person
who desires for his asset to be managed proficiently. A trust can also be created by a person or
group of persons for the support, maintenance and education of their spouse, children,
dependents and family members during the lifetime of the donor(s) and in the event of their
demise. In addition, it can be used to transfer property or make grants to a person(s) of interest. It
can also be used as a means of financial support and life insurance for a settlor who is
incapacitated or having some disabilities or as a security during old age.

Just as it is required under the law of contract, legal competency or fitness is a fundamental
requirement in creation of a trust. In order to create a valid express trust, the settlor, be it an
individual, a corporation or a statutory body, must have the legal capacity to create it. Related to
this is the capacity of a person to hold legal or equitable interest in real property. Accordingly, an
individual or group of individuals who can hold interest in a land have the capacity to create a
trust. Whereas, where a person cannot hold interest in land, his capacity to create a trust will be
affected.

5.2 Public Trusts

A public trust is a legal arrangement where a trustee holds and manages assets for the benefit of
the general public. These trusts are usually set up by organisations or governments for a specific
purpose, such as managing a park or preserving a historical site. Public trusts are usually
established for charitable or public purposes and are subject to stricter rules and regulations.

Public express trusts are created to benefit larger numbers of people, or, at least, are created with
wider benefits in mind. The most common public trusts are charitable trusts, whose holdings are
intended to support religious organizations, to enhance education, or to relieve the effects of
poverty and other misfortunes. Such trusts are recognized for their beneficial social impact and
are given certain privileges, such as tax exemption. Other public trusts are not considered
charitable and are not so privileged. These include holdings for public groups with a common

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interest, such as a political party, a professional association, or a social or recreational
organization.

Private and public trusts are both legal arrangements, which assign someone else to hold,
manage, and later distribute your assets to other people. For Private trusts, this would be a
specified beneficiary or beneficiaries who you probably know, or are related to. For Public trusts,
these would be unspecified, unknown beneficiaries who receive the assets as a part of a
charitable scheme. The key differences between public and private trusts are:

 Control and oversight: In a private trust, the beneficiaries have a high level of control
and oversight over the trust assets, as they are the ones who will ultimately benefit from
them. In a public trust, however, the beneficiaries have less control and oversight, as the
assets are managed for the benefit of the general public.

 Transparency and accountability: Private trusts are typically more private in nature
and not subject to as much public scrutiny. In reflection of their goal to benefit wider
society, public trusts in contrast are subject to much more transparency and
accountability.

 Taxes: Private trusts are subject to different tax rules than public trusts. Private trusts are
generally subject to income tax on their earnings, while public trusts may be exempt from
certain taxes. Given that public trusts are often tied to charitable schemes, whilst private
trusts may be tied to financial gains for a specific family- the breadth of the benefits
reflects the taxation rules.

5.3 Fixed Trusts

Fixed trusts (also known as non-discretionary trusts) are trusts where the settlor specifies how the
assets are to be distributed exactly. Trustees in a fixed trust must manage the assets for financial
success, but they do not have the ability to change what the beneficiaries receive. Fixed trusts
typically give each beneficiary a set amount of money or a percentage of the trust profit on a
fixed schedule such as monthly or quarterly. This is in contrast to discretionary trusts which
allow the trustee to change the amount the beneficiaries receive based on their need or
performance of the trust. Some trusts may combine aspects of both fixed and discretionary trusts

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by setting fixed payout schedules for beneficiaries, but the trustees may have the ability to
change benefits in the case of an emergency or changing circumstances.

Fixed trusts are an established form of living trust for estate planning. They enable the settlor to
control money and assets for the benefit of the trust’s beneficiaries. Beneficiaries of a fixed trust
receive trust property on a specific schedule set forth by the settlor. The trustee of a fixed trust
has little or no discretion to distribute trust property. He or she cannot change the beneficiaries or
the benefits they are set to receive.

The most common type of fixed interest trust is a life interest trust, under the terms of which one
individual will have a right to all of the trust’s income during his or her lifetime. On this
individual’s death, the trust property will generally be payable to named capital beneficiaries.
Another type of fixed trust is one contingent upon the beneficiaries satisfying certain conditions,
such as reaching a certain age. Once the expressed condition is satisfied, the beneficiaries will
typically have an absolute interest in the capital.

The settlor may also choose multiple beneficiaries and provide a fixed benefit or percentage for
each of his or her beneficiaries. For example, the settlor may grant 70% of the trust’s benefits to
a spouse and 30% of the trust’s benefits to a child. Or the trust may be established for a
handicapped child to ensure that he or she is properly cared for if the child’s parents or guardians
die. The trustee is bound to make a distribution to the beneficiaries in this predetermined manner
as set out in the trust deed. The beneficiaries have an interest in possession under the trust,
subject to a deduction of sums paid by the trustees in the exercise of their administrative
management powers.

5.4 Discretionary Trusts

A discretionary trust is like a fixed trust for which the settlor does not set fixed beneficiaries or
trust interest amounts. The trustee of a discretionary trust has the power to decide which
beneficiaries will benefit from the trust. He or she also has the right to decide the extent of its
benefits. Although most discretionary trusts allow both types of discretion, either can be allowed
independently of the other. A well-drafted discretionary trust allows the trustee to add or exclude

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beneficiaries from the class, giving the trustee greater flexibility to address changes in
circumstances. The trust is discretionary because the trustee has the discretion to give or deny
some benefits under the trust. The beneficiaries cannot compel the trustee to use any of the trust
property for their advantage.

Depending on the terms of the trust-creating instrument, income can be generated for future
distributions to the beneficiaries or added to the body of the trust for the benefit of the
remainderman, who is entitled to the remaining balance of the estate. Unlike a fixed trust, a
discretionary trust gives the beneficiaries no hope for any residue or title of ownership to the
trust itself. The beneficiaries have no interests that can be transferred or reached by creditors
unless the trustee decides to pay or apply some of the trust property for the benefit of the
beneficiaries. At that point, the beneficiaries’ creditors can reach it unless it is protected by a
spendthrift clause. Discretionary trusts are more common than fixed trusts. Today, most family
trusts are discretionary.

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