It’s not a secret that protecting your property is extremely important. Trusts were traditionally offered and reserved for the super-wealthy as part of legacy planning. Nowadays, it’s prevalent practice for anyone with assets to plan how to run their estate.
Trusts are flexible tools that serve a significant number of functions. In this article, we will go through the definition of trusts in the context of Singapore laws. We will also look at the benefits of setting up a trust for your family.
What exactly is a Trust?
You’ve probably seen the terms trust, trust fund, and trust account floating around somewhere. They all mean the same thing.
Trusts are legal instruments that allow any individual (the settlor) to put their assets in a specific arrangement. This arrangement appoints a third party (known as the trustee) to manage and administer the assets for the benefit of others (known as beneficiaries).
The assets you can include in a trust are not limited to money only. You can place stocks, businesses, and properties in a trust for the benefit of your family members, friends, and even charitable organizations. The document that contains all these details is called a Trust Deed.
The power to choose the trustee and beneficiaries is in your hands as the settlor. In most circumstances, the law does not dictate to you whom to put in the trust. Only in particular cases will the courts interfere.
Statutory laws give trustees an obligation to act on behalf of the interest of your beneficiaries. There are safeguards (such as establishing a protector) to prevent the trustee from abusing their powers, especially if the beneficiaries are minors.
According to Section 32 of the Civil Law Act (Cap. 43), trusts created on or after 15 December 2004 can continue for a maximum period of 100 years.
Types of Trusts in Singapore
There are six common types of trusts in the country, these are:
1- Trust Nomination
This type of trust allows an insurance policyholder to create a statutory trust for the policy monies favoring the beneficiaries. Only the spouse and children can be nominated as beneficiaries under a trust nomination in this type of trust.
There are two types of nominations, revocable and irrevocable nominations. A revocable nomination allows you to change the nomination details at any time. However, an irrevocable nomination has much more restrictions in place.
2- Will Trust/Testamentary Trust
A will trust is created when the testator (the person who makes the will) passes away. You would have made provisions in your will determining who the trustee is and how the assets are to be managed and distributed to the beneficiaries.
3- Living Trust
This type of trust is perhaps the most commonly known type of trust. Living trusts are created during a settlor’s lifetime and tend to be more flexible and expensive to set up. For example, you can expect to pay setup costs, annual running costs, and annual percentage of the asset value.
4- Standalone Insurance Trust
This type of trust is also set up while the settlor is living. It is funded by insurance policies that are nominated or assigned to the trust.
5- Property Trust
As the name suggests, a property trust is funded by placing properties in the trust.
6- Standby Living Trust
Simply put, a standby trust is just a living trust that is activated by a future event. Assets can be transferred into it at a future date when the defined event happens, like death or mental incapacity.
Therefore, in Singapore, the types of trust most frequently used can be broadly grouped as:
- Private family trusts; which are primarily used by wealthy individuals.
- Statutory trusts; which are established for statutory compliance. A good example is a trust structured for insurance policyholders and their beneficiaries.
- Charitable trusts.
- Collective investment trusts, such as business trusts or real estate investment trusts.
What are the benefits of a trust?
The following are some of the benefits trusts can award to you:
Protecting young or vulnerable beneficiaries
Most people use trusts to protect the interests of young or vulnerable children. This includes minors or beneficiaries who cannot handle their financial affairs, such as special needs children or financially irresponsible beneficiaries.
Trusts avoid the legal delays that beneficiaries face in gaining access to assets given to them under a will. Assets placed in a trust are not part of the deceased’s estate and can therefore avoid the lengthy probate process.
Wealth Management and Transfers
Trusts are beneficial if you want to pass your wealth from one generation to the next. You can put rules in place to determine how the assets are passed on to your children, grandchildren, and great-grandchildren. You can also set out rules on how the assets in your trust are to be invested.
Protection from creditors and during divorce proceedings
Certain types of trusts can protect your assets intended for beneficiaries from creditors. If you are involved in high-risk businesses or have a career where you may be sued, a trust protects your family assets.
In the event of a divorce, a trust protects assets intended for beneficiaries but only if the type of trust ensures that the settlor no longer has any rights over the assets transferred into the trust.
For instance, if you create an irrevocable trust in favor of a third party, it is likely that the assets in this trust will not be considered as part of the matrimonial assets. So if you give your assets to your child under a standby living trust structure, if they get divorced or married, their spouse cannot claim those assets.
You can reduce your tax liability if your income places you in a higher tax bracket for income tax. Creating a trust for your income-producing assets and adding beneficiaries with a lower income tax bracket achieves this.
The bottom line
There are numerous benefits to setting up a trust for your family. It protects your assets by offering you unique ways to determine how you want them distributed and managed long after you are gone.