The planned auction of properties linked to former Cabinet Secretary Raphael Tuju has brought renewed attention to a question many business owners do not consider until they face succession, financial distress or a family dispute: who actually owns a company's assets?

Whether an asset belongs to an individual or a company can determine what passes to heirs, how wealth is transferred between generations and whether family assets remain protected when ownership changes.

Yet business owners often assume that owning a company means they personally own everything registered in its name.

That is not how the law works. The distinction is particularly important when a shareholder dies. Families can mistakenly assume that the company's land, buildings, bank accounts and other assets automatically become part of the deceased's estate.

According to Mary Audi and Fridah Muriithi, associates in the Commercial Department at MMTK Advocates, it is the deceased’s shares in the company, not the company's underlying assets, that generally form part of the estate,.

"Wealthy families often use companies and trusts to ensure continuity of ownership and management, protect assets and facilitate orderly succession," they say. "By separating family wealth from the founder's personal estate, these structures help shield assets from personal liabilities of the shareholder, while making them easier to manage during the owner's lifetime and after death."

Companies and trusts can also give families more control over how wealth is managed and passed on, rather than leaving everything to the default rules of succession law.

Although companies and trusts are often discussed together, they serve different purposes.

"A company is a separate legal entity that owns assets in its own right," Ms Audi and Ms Muriithi explain.

"A trust, on the other hand, is a legal arrangement in which the founder, also known as the settlor, establishes and funds the trust by transferring assets to it. The trust assets are then held and administered by the trustees for the benefit of the beneficiaries in accordance with the terms of the trust deed."

In simple terms, companies are mainly used to own and run businesses or investments. Trusts are more commonly used for succession planning, asset protection and preserving family wealth over the long term.

Families may put land, rental properties, family businesses, shares, intellectual property rights and investment portfolios into companies or trusts.

One of the biggest advantages of both structures is continuity.

"These structures allow wealth to continue being managed without interruption upon the death of the founder or shareholders," Audi and Muriithi say.

"A company continues to exist despite changes in shareholders, while a trust continues to be administered by trustees according to the trust deed."

Unlike a will, a trust starts operating during the settlor's lifetime and can continue after their death. That means businesses, investment portfolios and family property can continue to be managed without necessarily having to pass through the deceased's personal estate.

"Under the doctrine of separate legal personality, a company's assets belong to the company and not to its shareholders," the lawyers say.

"Accordingly, upon the death of a shareholder, it is generally the deceased's shares in the company, not the company's underlying assets, that form part of the deceased's estate."

A company's Articles of Association may set out how shares are transferred or transmitted after a shareholder's death, but those rules do not change who owns the company's assets. The same principle applies to trusts.

"Assets that have been validly transferred into a trust generally do not form part of the deceased founder's estate as the trustees hold them for the benefit of the beneficiaries in accordance with the trust deed," they explain. "However, any rights or interests retained by the founder or any specific provisions in the trust deed governing the founder's interest will determine what, if anything, forms part of the estate."

For families, the benefit is not only about avoiding confusion after someone dies. Properly structured companies and trusts can also reduce disputes by setting out the rules before disagreements arise.

"Companies and trusts reduce disputes by providing clear rules on ownership, management and succession before disagreements arise," they say.

"A trust deed can specify who benefits from the trust, when they benefit, in what proportions and under what conditions. Similarly, shareholder agreements and company constitutions can regulate the transfer of shares and management of the business after the death of a shareholder."

"Having these arrangements documented in advance significantly reduces uncertainty and the likelihood of litigation."

The lawyers also reject the idea that trusts and holding companies are structures only for the wealthy.

"Middle-income earners who own land, rental property, investments or a family business can also benefit from using a trust or company to facilitate succession and reduce the likelihood of family disputes."

But moving assets into a company or trust is not something families should do casually.

"Depending on the nature of the transaction, transferring assets may attract taxes such as Capital Gains Tax or Stamp Duty, although certain statutory exemptions may apply, including exemptions available for transfers into registered family trusts under the Stamp Duty Act," Audi and Muriithi say.

"It is therefore important for families to obtain legal and tax advice before transferring assets because transfers may create unintended legal or tax consequences."

So how should a family decide whether to use a company or a trust?

The answer, the lawyers say, depends on what the family is trying to achieve.

"A company is generally more suitable where the primary purpose is operating a business, raising finance or actively managing investments," they say.

"A trust is often more appropriate where the objective is preserving wealth, protecting beneficiaries and controlling how assets are distributed across generations."

The two structures can also work together.

"For example, a family trust may own the shares in a holding company that, in turn, owns the family's businesses and investment assets, especially because a family trust is under law prohibited from being a trading entity."

For business owners who have not yet started thinking about succession, the lawyers recommend dealing with the matter while the founder is still alive and able to make decisions.

"Families should prepare a valid will, maintain an up-to-date inventory of their assets, and consider whether a trust, a company or a combination of both best meets their long-term objectives," they say.

"Most importantly, they should seek professional legal and tax advice before implementing any structure, and review their succession plan periodically as family circumstances evolve."

"A well-designed succession plan not only preserves wealth but also promotes harmony by ensuring that future generations clearly understand the family's intentions," they conclude.

jngari@ke.nationmedia.com