Family trust: How to break the founder's curse in your business

Cadbury chocolate. Cadbury is celebrating 200 years in business. [iStockphoto]

Sometime in 1824, John Cadbury, started a small grocery shop in Birmingham, United Kingdom, selling cocoa and drinking chocolate.

In 1831, he bought a warehouse and started manufacturing with the help of his sons - George and Richard Cadbury.

When his health started failing, he retired from the business in 1861 leaving his sons in charge. Then, his desire was for his business to make a profit of sh167,000 (£ 1,000).

This year, Cadbury is celebrating 200 years in business and is known for making chocolate, a product that was considered a luxury and for the elites back in the early 1900s, an affordable confectionery to the masses.

From a small street shop to a global magnate, such is the desire of many small businesses when they are set up by their founders. Yet, in Kenya, four in every 10 new small businesses die in their first year of operation according to the Kenya National Bureau of Statistics (KNBS).

Averagely, some 400,000 small or medium enterprises (MSMEs) die annually, among them due to poor management by the second generation. A public example is how Tuskys chain of supermarkets went under as siblings fought over shareholding.

And many family estates have spent decades in the cold corridors of the courts contesting wills as businesses set up by their parents before their death struggle to remain afloat.

A meeting organised by Liaison Group, a financial services company, sought to deliberate this trend with trust deeds being fronted as a suitable solution.

A trust deed is a document signed by settlor (in this case owner of the assets or founder of the business) that dictates how their estate will be managed on their demise. The trust deed can also be active when they are alive.

The trust deed incorporates a family trust which will operate as a company that will be managing the estate. This legal document contains the trustee (who can be an individual or a corporate like an investment firm) and an enforcer. The enforcer, who can be the settlor when still alive, oversees how the trustee handles the investments.

Why is a family trust ideal?

“A family trust is a separate entity from the settler with its assets,” explains Munene Micheni, from Munene Micheni & Company Advocates. He says the basic way of doing things has always been Wills but people tend to dispute them due to relationship with the deceased.  

A Power of Attorney(POA) which is another alternative he explains only works when one is incapacitated.

A family trust being a separate entity allows it to hold assets. They could be physical or financial assets such as shares. A settlor may have a provision in the trust deed that only the interests and profits from their estate is shared which gives it (the estate) longevity.

“Sometimes in some of these cases they (dependents or beneficiaries) may not be fighting over your hard-earned money but pension that may be less than Sh4 million,” says Mr Micheni.

Like Mr Micheni, Mary Kisoo from MGA Law Advocates LLP agrees that wills while being a tool has so many corners.

“Most of the time, anyone disgruntled will challenge the will. But most time, all a court does when it comes to family trusts is change the trustees,” she says.

She explains that a trust can manage revenue streams such as royalties. The idea she says, is to ensure whoever creates a family trust leaves something for the next generation to give them a head start in life.

“Many of us do not have millions to buy land today but imagine if your grandparents had left you a plot in Ruiru? Isn’t that a head start?” she poses.

Most importantly, family trusts, he says, will ensure less cases in court on sharing of estates of the deceased.

James Gathage, a consultant with experience of handling family businesses notes that many enterprises have the founder’s curse and cannot survive without them or beyond their lifetime.

Sometimes it is not that the second or third generation fight for the wealth of the founder but are just not good stewards. He blames this on families not openly discussing how the estate operates.

“Unfortunately, families do not sit and talk about business: where are we? Where are we going? There are also cases of parents not trusting their children with their wealth or business models,” he says.

Mr Gathage references this as the reason why most business in the country, which start of as family enterprises, do not live past the founder.

“Multinationals are not the biggest economy in the country; SMEs are. If you do not know what you are going to do with wealth, it will cause you more trouble,” he says. “We always believe we are geniuses (in our businesses); that without me, this hotel, for example, cannot run.”

He emphasises the importance of outsourcing and roping in children to learn the ropes of the business early for them to be interested. Issues like creating family strategic plans and asking difficult questions such as: why are we working hard to create more wealth? What am I if not my business?

“Chances are you are the business and the business is you,” he says.

Moses Mathini Group Legal Counsel Liaisons Group says the importance of family trusts transcends the life of the one who sets it up. He paints the usual picture of when a breadwinner passes on and the dependents are unaware of what exactly they did for a living. `

“You may not even know the name of your father’s place of work, who to contact, where the title deeds are or bank accounts. They could be in various names or shell companies.  A family trust comes to consolidate all our finances and assets,” he explains. 

He says the advantage of having a corporate like Liaisons Group as the trustee compared to an individual is the expertise in managing the assets. He says a corporate can advise, for example, how an idle land can be converted into a commercial asset generating revenue by inviting developers.

“You can be a lawyer, but hardly will you find a lawyer who is also an investment advisor.  But within a corporate you will find an accountant, investment advisor, lawyer and all of them will not charge you separately,” he says. “A corporate trustee charges you one fee, for example, two per cent of whatever amount you put in. For us a Liaison Group we do not have a minimum account balance. We are targeting the mass market we want to grow with our clients.”

He says the family trust takes care of family governance. This could be in cases where an 18 or 21-year-old is legally required to receive a portion of the estate or whole of it. A family trust can ensure responsible management of this wealth as it can have conditions set by the settlor as the thresholds for receiving proceeds of the estate.

Family trusts come with tax advantages among them exemption of Stamp Duty on transfer of property into a registered trust and tax free payments to beneficiaries up to Sh10 million. This amount can exceed Sh10 million if it is for the purposes of housing, medical or education.

The cost of setting up a family trust is Sh10,000 and it can be registered via eCitizen. Family trusts are recognised under the Trustees (Perpetual Succession) Amendment Act that became law in 2021. Before then, trusts were only recognised if they were educational or charities. These were mostly associated with the elite and ultra-high net worth individuals.

“The idea is to target the mass market, not elites or the high net worth individuals as people have been doing in the past. It is democratisation of the space,” says Mr Mathini.