Guide to Setting Up a Singapore Trust
Singapore is rapidly emerging as a premier jurisdiction for establishing and operating various types of trusts. Many factors are aiding this trend: (a) Singapore is home to many of the leading global financial institutions, as well as accountancy, legal and tax advisory firms; (b) the country’s polity provides for a comprehensive legislation that ensures an attractive tax regime and strong regulatory framework for trust arrangements; (c) the country’s market-friendly and stable economic policies encourage international investors to consider it as a favoured destination for a variety of investment vehicles; and (d) the booming regional wealth has generated a strong demand for its efficient management through trust structures.
What is a Trust?A trust is a legal arrangement whereby the ownership of a property is divided between two parties, such that one person is entrusted with the legal title to the property (the trustee) whilst another person (the beneficiary) retains the beneficial (or equitable) ownership of the property. The original owner of the property who creates the trust arrangement (the settlor) would enter into this arrangement in order to allow the trustee the control to manage and administer the property, whilst being assured the economic benefits from the property will accrue to the beneficiary. The settlor and the beneficiary can be the same person. Real estate, cash, investment portfolio, business shares, jewellery, art collections or other items of value such as patents copyright, etc. can be placed in trust. The common driving forces for establishing trust arrangements are described at the end of this article.
Singapore Trust Law
Singapore trust law has a strong foundation in English common law and trust principles. Originally created to solve a social problem related to land ownership during the Crusades, the concept of trusts has evolved considerably. Singapore has further enhanced the trust framework to adapt to modern requirements and meet international regulatory and compliance standards. The governing trust legislation in Singapore includes the Trust Companies Act, Business Trusts Act, Civil Law Act and the Trustees Act. The Trustees Act was modernized in 2004 to facilitate and promote wealth management in Singapore.
Below are some of the key benefits that the Singapore’s trust framework provides:
- No requirement for formal registration of Singapore trusts
- Strict confidentiality and banking secrecy laws
- Settlors are protected from forced heirship claims
- A Settlor is free to reserve to himself any or all the powers of investment or asset management functions; thereby retaining an active role in managing the investments of the trust
- Settlors can appoint another person (known as a protector) to supervise the conduct of the trustees
- No estate duty or inheritance tax
- No capital gains tax
- Income tax mitigation for foreign trusts
The types of trust most frequently used in Singapore can be broadly grouped as:
- Private family trusts: Primarily used by high net-worth individuals to plan their financial affairs, protect their assets, and provide for the transfer of their wealth to future generations.
- Statutory trusts: Trusts that are established for statutory compliance; for instance, a trust structured for insurance policy holders and their beneficiaries.
- Charitable trusts
- Collective investment trusts: Examples of such trusts are unit trusts (regulated under the Securities and Futures Act), business trusts (governed by the Business Trusts Act) and real estate investment trusts (regulated by the revised Property Fund Guidelines).
Singapore trust law permits the formation of foreign trusts, which qualifies for tax benefits, including tax exemption on a wide range of trust income as well as exemption on tax on the distributions to beneficiaries of such trusts (under Section 13G of the Singapore Income Tax Act).
The remainder of the article below provides a high-level guide on setting up a private family trust in Singapore.
Private Family Trust
A private family trust is usually designed to help a high net-worth individual preserve assets and facilitate the transfer of assets to future generations. Trusts provide continuity in the administration of assets, especially if a company (as opposed to a specific individual) is chosen as the trustee. A properly setup trust ensures protection of assets and can provide continuity of benefits to family members across generations.
Creating a Private Trust in Singapore
A trust may be created by will, by deed or by declaration, and must generally possess certainty in relation to its intention (i.e. the desire to create a trust), its subject matter (clearly identifiable trust property), and its objects (clearly identifiable beneficiaries). Trusts created by will (testamentary trusts) must comply with the formalities of the Wills Act and would take effect after the settlor’s death, whereas trusts created by declaration (inter vivos trusts) must comply with the relevant Civil Law Act depending on the type of property placed in trust. Generally, in order to create a trust, the settlor must execute a written document (the trust instrument) along with the legal transfer of the property to the trustee. In Singapore, the settlor is free to settle most types of property into the trust (e.g. shares, land, cash, valuables, private family business, etc), so long as the property is in existence, ascertainable, and capable of being owned by an individual. Once the property is transferred from the settlor to the trustee, the trustee manages the property in the best interest of the beneficiaries and according to the terms specified in the trust instrument.
A trust can be fixed (where the settlor rigidly delineates the entitlements of the beneficiaries, with no discretion available to the the trustee) or discretionary (where the trustee is granted the power to exercise discretion in making distributions to the beneficiaries). In case of a discretionary trust, usually at the time of setup up the settlor also creates a Letter of Wishes, which provides guidance to the trustee for exercising the discretionary power. A discretionary trust is usually preferred for long-term management of wealth and assets. This is because the circumstances of the settlor and beneficiaries, and other peripheral factors, may change over time, and a discretionary trust would allow the trustee the flexibility to accommodate any future requests by the settlor. These can include changes to the trust structure, the distribution amounts or the investment strategy. The Letter of Wishes is not a legally binding instrument; it provides general guidelines for the administration of the trust, and the trustees is expected to uphold these guidelines in order to be assured that they are fulfilling their fiduciary responsibilities. In most cases, the Letter of Wishes can be altered during the settlor’s life, but after the settlor’s death it will be regarded as his final wishes.
Duration and Termination
In Singapore, Trusts created on or after 15 December 2004 can continue for a maximum period of 100 years. Subject to this new statutory rule against perpetuities, the duration of a trust is otherwise determined:
- According to the provisions in the trust deed
- When all the trust assets have been distributed to the beneficiaries
- When all the beneficiaries unanimously consent to the termination
Parties to a Trust
The settlor can be any corporate entity or individual (who is at least 18 years old, of sound mind, and owns the proposed trust property).
The beneficiary can be any person or entity (i.e. a company, a charitable body or another trust). In the case of a family trust, these are usually the settlor’s family members.
The trustee may be either a corporate entity (such as an investment bank) or a person (such as a trusted individual), and the settlor may choose either a single or multiple trustees to manage and control the trust property. A third option, which is is increasingly becoming popular especially among high net-worth families, is to use a Private Trust Company (PTC) as the trustee (further elaborated below).
The settlor may also appoint a ‘protector’ for the trust, to reserve some control over the trustees. This is usually a trusted friend or a professional advisor. The protector may be given a wide variety of powers, including the power to remove and appoint trustees, settle their remuneration or add discretionary beneficiaries.
Using a Private Trust Company
As mentioned above, there is an increasing attraction for high net-worth familites to use PTCs as trustees of their family trusts. It provides the settlor with a higher level of control, discretion and confidentiality over the trust. The PTC itself is essentially a company incorporated for the sole purpose of owning and managing the settlor’s one or more trust(s). The PTC’s board of directors can consist of the settlor’s family members or trusted advisors (who can appoint a professional trust company to administer the PTC). The PTC can be owned by a purpose trust, a company limited by guarantee, non-family member directors or in some circumstances, family members.
Here are some of the main considerations when deciding the suitability of a PTC for a trust structure:
- Settlors who are seeking an active role in the management of their property may wish to reserve certain powers, such as the power to manage the investment of the trust property. It is especially so in the case of a family business that is being transferred into a trust, which may require personal and thorough knowledge of the business background and strategies. In such cases, it may be beneficial to establish a PTC, which may enable the family control without compromising the validity of the trust.
- The cost and compliance requirements in the case of PTC are not trivial; therefore, the trust property should be of substantial value or significance to justify the costs of establishing, managing and administrating the PTC.
- Families owning diversified business and vast portfolio of assets may find it difficult to efficiently manage their assets. In such cases, a PTC will ensure effective control over the assets as well as provide access to professional managers and experts in relevant asset classes to provide efficient managerial and administrative assistance.
PTCs are exempted from licensing requirements under Section 15(d) of the Trust Companies Act. This exemption is based on the fact that the PTC only provides trust services to the family trust and does not solicit business from public.
A PTC is formed by incorporating a private limited company. In a PTC, the settlor can retain control over the assets and his investments by appointing himself or his relatives to sit on the Board of Directors of the PTC. The Board may also comprise of professionals such as the family’s lawyers, accountants, etc. In addition to statutory requirements imposed on Singapore companies, a PTC is required to appoint a licensed trust company to perform due diligence as required by law. Such checks are imposed to ensure compliance with directives from the Monetary Authority of Singapore on prevention of money laundering or financing of terrorism. These directives require the PTC to verify the source of funds and perform on-going review of funds flowing in and out of the PTC.
Why Set Up a Trust?
High net-worth individuals may establish a Singapore trust for one or more of the following reasons.
- Wealth Protection
Wealth Protection is a major advantage of private trusts. Since the trustee is the legal owner of the assets, the settlor relinquishes his rights. In most cases, this ensures protection against creditors, bankruptcy, exchange controls, hostile governmental authorities and other risks such as a matrimonial asset battle in the event of a divorce.
Trusts can be established offshore (outside of Singapore) and privately, thereby ensuring confidentiality of the settlor. Furthermore, when the settlor passes away, the trust assets would not be dealt with under any probate proceedings.
- Succession Planning
Succession Planning can be managed by setting up trusts, which alleviates concerns of forced inheritance legislations, such as those imposed by Shariah Law. Trust arrangments empower the settlor to decisively appoint the beneficiaries of their assets. Also, in the event of death, lengthy probate processes can be avoided by setting up trusts during the settlor’s lifetime. In case of bankruptcy of beneficiaries, the trust assets are protected and the beneficiaries are still assured of the income under the trust.
- Tax Savings
Tax savings are an important consideration for many wealthy individuals to choose to setup trusts in low tax jurisdictions. In the case of Singapore, there is no capital gains tax, estate duty tax or withholding tax imposed on the distributions to beneficiaries. There are also various income tax exemptions available to qualifying foreign or domestic trusts, including, the tax exemption on certain types of trust income of a foreign trust as well as its distributions to beneficiaries.
Singapore continues to make itself the choice for wealthy individuals who wish to establish trust arrangements for their families. The country’s reputation as a progressive international financial centre, and its business-friendly environment, has ensured that its wealth management and trust industry will see rapid growth in the coming years.
Looking to establish a Trust in Singapore?
Hawksford are global experts in establishing trusts. They can consult and assist you with setting up a private trust in Singapore.Find out how Hawksford can help