Should you setup a Trust for your Family?

With its open economy, well-defined legal and regulatory framework, and tax neutrality, Singapore is well positioned to be the premier wealth management hub in Asia. This enviable reputation is further promoted by the country’s diligent regulatory environment. For instance, the Trustees Act was amended to facilitate and promote wealth management in Singapore through the use of trusts and trustee services.

This article provides an overview of various factors that determine the need for establishing a family trust. You may like to read our related guide on setting up trusts in Singapore to understand the definition and function of a trust, and gain an overview of related issues.

Rising Popularity of Trusts

Trusts are becoming increasingly popular because it can override inheritance tax, gift tax, etc., which would otherwise be incurred by the beneficiaries in certain jurisdiction if it is transferred through a Will. For this reason, rich patriarchs and matriarchs often choose to pass on the assets to their children and future generations through this popular vehicle. Although it involves recurring cost in the form of service fees to the trustee, it is still a cost effective and secure arrangement as it provides additional benefits such as tax savings and confidentiality.

The nationality or residency status, location and nature of family assets, profile and needs of the beneficiaries have to be evaluated before establishing a trust. The nationality or residency is of particular significance because of the tax implications.

Trusts as a wealth planning tool was primarily popular among the ultra-wealthy and high net-worth individuals, however it is gaining grounds as an alternative or supplement to Wills even among people with just substantial amount of assets. A properly set-up trust fund ensures protection of asset and provides continuity of benefits to the beneficiaries, whom are generally family members across generations. Albeit its benefits, forming a private or family trust and its ongoing administration involve overheads, therefore it is essential to evaluate the need for establishing a trust.

Asset Protection

In the case of professionals or business owners with high-risk profiles, the protection of personal assets from being attached to any litigation is a crucial concern. For business owners, if their fortunes turn amiss and they run the risk of defaulting creditors, then there is a possibility that their personal assets will be used to meet their credit obligations in the event of litigation. Likewise, professionals such as doctors and lawyers are also at risk of being sued for professional negligence, and there is a possibility that their assets will be used to settle compensation claims. Placing personal assets in trust will alienate the assets from such claims because the ownership of the assets is transferred to the trust and the settlor does not have any more legal rights over the assets. Note that the assets must have been placed in the trust for at least five years before any claims are made (in order to protect the assets from the claims) and the settlor should not be one of the beneficiaries, as this may cause the trust to be viewed as a mere nominee arrangement to defraud creditors. Thus, assets placed in trust gain immunity from any trials initiated for bankruptcy or compensation.

Business Continuance

In case of family businesses, placing the shares of the business in a trust will ensure its continuance despite any potential disputes among the family members or bankruptcy of the family members.

If the family members directly own the shares of the business, and if any one of them has debt issues and attracts legal proceedings, then the shares directly owned by the person will also be attached in the claims. This will disrupt the business, affect its competitiveness and its value, and may even result in fragmentation of ownership

Disputes within family members are not uncommon, and if circumstances go out of hand and any of the family members sell their shares, this will lead to fragmentation of ownership and dilution of power held by the family. Placing the shares of the business in a trust and apportioning profits and benefits to the family members as beneficiaries will preserve the family business for generations to come.

Reduced Tax Burden

As mentioned earlier, placing assets in the trust alienates the settlor from the assets and all earnings accruing from the assets. If your income is significantly high, and the income you generate from your assets further adds to your taxable income, and you fall under a higher personal taxation bracket, then it is prudent to transfer the income-yielding assets into a trust, where your family members with marginal tax liability are the beneficiaries. This way, you can alter the tax liability on the assets to a lower bracket and enjoy tax savings.

In Singapore, a trust’s income is taxed at a flat rate of 20%, and distributions made to the beneficiaries are then deducted from the taxable income and subjected to tax in the hands of the beneficiaries at the relevant personal tax rates. But it interesting to note that certain types of incomes, such as dividend income earned by the trust, will not be subjected to tax at the trust level; however if that income is distributed to the beneficiaries it becomes a taxable income. Proper structuring of trust is crucial considering such quirky scenarios.

Succession Planning

Trusts can provide for the flexibility of choosing the beneficiaries and also determining when the assets need to be passed on to the beneficiary. For instance, if the descendants are minors, the assets can be placed in trust and passed on at a later stage when they are legally adults or progressively when they attain prescribed milestones, such graduation, marriage or first child, etc.

Likewise, if the immediate descendent is financially well-off and is already a subject of higher tax bracket, or is a resident of jurisdiction with high estate duty, then passing the assets to them directly will increase their tax liability. In such circumstances, placing the assets in a trust and passing the benefits to grandchildren may be a prudent move.

Family Dynamics

Family systems are growing increasingly more complex as disputes and divorces are becoming more and more common. If the owner of assets anticipates ugly divorce scenarios in the family, he or she would be better off placing the assets in a trust and directly apportion to deserving beneficiaries.

Injecting the assets into a trust alienates the rights over the asset for a party susceptible to legal claims. Family members with debt burden or facing matrimonial challenges or claims for professional negligence will still be able to reap benefits from the assets without directly owning them.

If a potential successor is a spendthrift or bad at managing money, then a trust is an ideal arrangement to distribute income and benefits periodically or progressively to that member.

Take note that trusts cannot be established today and enforced tomorrow to protect against rightful claims. Therefore a foresight and prescience of the family members’ needs and progressive dynamics of relationships are essential for the timely establishment of trusts.

If the asset owner is without a family, then trust is an ideal way to manage the assets, income and investments in case he is incapacitated by sickness or age. The appointed trustees will manage the assets as directed by the settlor.

Trusts offer utmost confidentiality; therefore you can avoid conflicts within the family and make discreet provisions for certain beneficiaries.

Forced Inheritance

If you are resident of a forced heirship jurisdiction, generally where civil law and Sharia law prevail, you will not be able to act according to your testamentary wishes and the law dictates to whom and in what proportion your assets must be passed on. People affected by such forced heirship regimes generally setup an offshore trust.

Singapore trust legislation provides protection against forced heirship. Under the Trustees Act, a person who is neither a Singapore citizen nor non-Singapore domicile is excluded from forced inheritance and succession rules, provided the trust is governed under Singapore law and the trustees are resident in Singapore.

Sociopolitical and currency volatility

If you are a resident of a jurisdiction where sociopolitical upheavals are widespread, also resulting in currency devaluation, then it makes more sense to settle your assets denominated in home currency into a trust incorporated in stable jurisdiction, where the currency is less volatile. This will preserve the value of your assets. Singapore is a popular choice among foreign high net-worth individuals for its sociopolitical and economic stability and the resilience of the Singapore dollar.

Conclusion

Singapore does not have estate duty or capital gains. The locals primarily establish trusts for reasons of asset protection, succession and tax planning. Foreigners choose to establish Singapore trusts to avoid estate duty, tax planning, preservation of the assets’ value, and for reasons of privacy and confidentiality.

Amidst the growing number of high net-worth individuals, Singapore is evolving into a wealth management hub among foreigners.  The trust regime in Singapore is regulated and professional trustees must be licensed and subject to regulatory oversight. Singapore allows for the reservation of powers by settlors. As a result, a settlor can still have an active role in managing the investments. Singapore also allows for the appointment of a protector, who can supervise the activities of the trustees in certain areas. There are also anti-forced heirship provisions. Additionally, Singapore has strict client confidentiality and banking secrecy laws making it an ideal trust jurisdiction for foreigners.

If you require further consultation or assistance with setting up a private trust in Singapore, please contact us.

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