Trust

Trust is a unique legal concept in the common law legal system which Singapore adopts. Essentially, trust is a legal arrangement which allows dual ownership of an asset which can yield certain desirable asset protection and estate planning outcomes.

The dual ownership of assets works like this:

A)
Peter is a caring and responsible husband, father and son to his elderly mother. He is concerned that his children and elderly mother will mismanage their inheritance if/when he dies prematurely. Hence, Peter sets up a life insurance trust by appointing a corporate trustee to legally own his life insurance policies and professionally manage these policies for the benefit of his children and elderly mother. Unfortunately, Peter dies two years later in an unexpected road accident. The trustee receives the death benefit proceeds from the life policies and distributes the money in the form of monthly income to Peter’s children and elderly mother; until the children grow up into financially responsible adults and his elderly mother arrives at the end of her life expectancy. In this situation, the trust can help to protect the assets from mismanagement by the beneficiaries.

B)
Mary is a single mother and a successful career-minded woman. She wants to ensure her baby daughter owns a property when she grows up. Hence, Mary set up a trust deed documenting that she owns the property legally, but her baby daughter will be the beneficial owner of the property when she turns 21. Unfortunately, Mary become a bankrupt due to business failure during the COVID-19 period. All her personal assets were liquidated to pay her creditors; except for the property she wanted to hand over to her baby daughter. In this situation, the trust ring-fences the property which was earmarked for her daughter.

C)
c. John is a doting grandfather who has substantial wealth. He is planning to gift some of his personal assets to his five grandchildren who are in their early 20s. He is concerned that his grandchildren, being raised in a privileged environment, do not know the value of money. Hence, John transfers $5 million to a trustee, who will manage and has the discretion to distribute the trust assets to each of his grandchildren on their birthday. John passed away not long after. While the trustee is discharging his duty, one of the beneficiaries is going through divorce. The trustee withholds the trust asset, preventing the assets from being involved in the divorce proceedings. In this situation, the trust protects John’s financial legacy from the beneficiaries’ risks of divorce.

This dual asset ownership arrangement is guarded by very strong statutory laws and established legal principles to ensure its workability. First, the Trustee Act 1967 governs the behaviour of a trustee, who can be an individual or corporate entity. In Singapore, a breach of this Act will result the trustee facing civil and, sometimes, criminal charges. Second, a trustee owes a fiduciary duty to the beneficiary - this means that the trustee needs to ensure, at all times, he discharges his duty of loyalty and duty of care   to the best interest for his beneficiary. Failure to do so could result in legal action against the trustee in favour of the beneficiary. Third, for corporate trustees, the Trust Companies Act 2005 adds additional statutory responsibility on them.

 

Trust in Action

The following diagram shows how a settlor (client) transfers an asset (property) to a trustee, who will be compelled by the trust deed and trust laws to manage the asset for the benefit of the beneficiaries.

trust-in-operation

 

The effects of this structure produce certain outcomes, which become strengths in estate planning.

 

Outcome #1 – Avoidance of Probate and Confidentiality

Assuming the settlor dies, the trust asset will be out of the settlor’s probate, because the legal ownership has been transferred to the trustee. This means that the trust assets will not be frozen by the probate and estate settlement process, and the trust asset can be a good source of liquidity for the deceased settlor’s family members to continue living.

And because the trust asset does not form the settlor’s estate, it is not required to be in the estate’s schedule of assets. Hence, the information is confidential.In trust lingo, we say: A trust is a private instrument which is confidential to whoever that is not a party to the trust.

 

Outcome #2 – Protection against Settlor’s Creditors

This outcome underlines an important asset protection situation in Singapore. If the settlor states clearly that the asset transferred into the trust is irrevocable, and if the transfer is completed for more than three years, then the trust assets will be out of the settlor’s creditors’ reach. In trust lingo, we say: Assets in an irrevocable trust are ring-fenced from the settlor’s creditors..

 

Outcome #3 – Staggered Distribution of Trust Assets to a Beneficiary

When the trust assets are in the legal ownership of the trustee, the assets’ management is guided by the trust deed and the settlor’s letter of wishes. Therefore, this makes it legally possible to stagger the distribution of the trust assets to a beneficiary. For example, the settlor transfers $1 million into a trust, and leaves instructions to the trustee to distribute $100,000 per year from the trust asset to a beneficiary for the next 10 years. This is important, because the beneficiary could be a minor or the beneficiary may lack financial discipline and not responsible enough to handle large amounts of money. Sometimes, it could also be planned such that the trustee is given the discretionary power to withhold the distribution if the beneficiary goes into bankruptcy, divorce, or litigation situations. In the absence of this function, the settlor’s asset could have been spent unwisely by the beneficiary or depleted by bankruptcy, divorce, or litigation risks of the beneficiary. In trust lingo, we say: The trust can stagger the asset distribution to the beneficiary.

 

Outcome #4 – Directing the Trust Assets to the Right Person

This outcome is also a by-product of a trust deed’s operation. The settlor can instruct the trustee to hold, manage and distribute the trust assets to a targeted beneficiary. This is especially important to preserve family harmony. For example, in the case where the settlor’s elderly parents and the settlor’s spouse are not in a cordial relationship, the settlor could direct some of his personal assets to the elderly parents via a trust. Another example would be a settlor who is in a second marriage and also concerned about his children from his first marriage. Therefore, he can use the trust structure to direct some of his assets to the children from his first marriage in a confidential way, without upsetting his current family. In trust lingo, we say: The trust can direct the trust assets to the right person.

These four generic outcomes make trust an extremely flexible and effective estate planning tool. It can be set up while the settlor is alive (i.e., an inter vivo or living trust), or set up as a clause inside a will (i.e., a testamentary trust). The powers accorded to the trustee can be discretionary, limiting or fixed. The trust assets can be invested to preserve the assets’ purchasing power in the long term across various generations of the family. And after the trust has performed its function, it can be closed down, and the residual trust assets returned to the targeted beneficiary or even a named future beneficiary. A trust protector can be appointed to provide oversight responsibility on the trustee.

 

Principal Considerations for Trust Structuring and Planning

All forms of planning involve cost. Therefore, one should only embark on a trust structure unless the structure can produce a unique and specific outcome which other structures cannot produce. These specific outcomes are:

  1. Liquidity at death or mental incapacity of the settlor
  2. Asset protection for the settlor and beneficiary
  3. Stagger distribution of beneficiary’s inheritance
  4. Directing settlor’s assets to a targeted beneficiary
  5. Holding of asset for minor beneficiary or mentally incapacitated donor
  6. Preserving family assets for subsequent generations
  7. Confidentiality of assets

The following are principal considerations for structuring a trust:

A. 
Family Structure Analysis – This is a good starting point, as you are defined not by the assets you have, but how you use the assets to discharge your duty or express your love to your family. By looking at your family structure, identify any family member(s) who might be (accidentally) excluded from your estate because of intestacy laws or an outdated will. Especially if you are in the following family structure situations:

  1. You are alone
  2. You are in a blended family
  3. You are in a non-traditional relationship
  4. You are a single parent (divorced or widowed)
  5. You have stepfamily members (parent or children)
  6. You have an adventurous relationship outside of family
  7. You have a challenging relationship with your family members

By looking at your family structure, ask yourself is there anyone in the family you wish to set aside or segregate a fund for him or her.

B. 
Financial Analysis – Financial analysis consists of two parts. First, the assets and liabilities analysis. Second, the income and expenses analysis. This is not just a number counting exercise. Behind every asset and income are aspirational emotions; behind every liability and expense are anxiety and stresses.

Consider these carefully:

  1. Market values of assets
  2. Ownership structure of assets
  3. Institutions holding these assets
  4. Outstanding principal of liabilities
  5. Liable parties to the liabilities
  6. Income patterns
  7. Certainty of income
  8. Expense patterns
  9. Certainty of expenses

When you look at your assets-liabilities and income-expenses situation, ask yourself these questions:

  • Is there any asset you wish to set aside or segregate for a purpose or person (relate this to your family structure analysis)?
  • Is there any asset you wish to ring-fence against liabilities’ risk?
  • Is there any asset you are currently holding or wish to hold in trust for someone else?
  • Is there any liquidity generating asset you wish to segregate from your potential probate?

C. 
Giving Intention Analysis – Having run through the family structure and financial analysis, you will now have a good basis to visualise your giving intention to impact others and make peace with yourself. And this giving intention will form the purpose statement of your trust deed.

 

Structuring a Trust

With all the considerations properly thought through, you can now sit down with a trust professional to execute the trust structure.

Structuring-Trust

Conclusion

In conclusion, this is the story of how trust works and its vital relevance in the estate planning domain. Trust, when properly executed, will empower your assets to impact others in positive ways; and in so doing, you can reach a state of peace with yourself.

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