trusts 101 (2014 aug)

Trusts 101

Savoir LLC Advocates & Solicitors | Fiduciaries

Tax , Trusts & Transactions

August 2014

Introduction •  The aim of Trusts 101 is to provide an easy

and quick introduction to trusts. A simple guide such as this cannot do justice to its varied nuances and complexities. This is, therefore, not intended to be comprehen-sive nor to provide a nuts-and-bolts guide on how to set up a trust.

•  This guide is organised into simple parts. The number preceding the title on each page indicates the respective part. In summary, the parts are broadly organised as such:

–  Part 1 deals with the “what”;

–  Part 2 addresses the “how”; and

–  Part 3 looks at specific practical applications.

•  Before we begin, let us add that it is paramount that you seek both legal and tax advice when you establish a trust. This is necessary so that an appropriate structure can be tailored to fit your specific circumstances. This is crucial. Beware anyone offering an “off-the-shelf ” package or has no thorough understanding of your needs.

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1.1 What is a Trust? •  A trust is a legal structure recognised and enforceable in common law countries such as the

United Kingdom, Singapore, Hong Kong and New Zealand.

•  A trust is created when:

–  A person (called the “Settlor”) owning assets transfers ownership of these assets into the care of a Trustee;

–  The Trustee is under a legal obligation to hold and use these assets for the benefit of other parties (called the “Beneficiaries”); and

–  The Beneficiaries have the right to enforce the Trustee’s obligations to them.


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1.1 What is a Trust? 1. The Settlor transfers assets to

Trustee

Trustee

Se)lor

2. Trustee owes ongoing obligations to Beneficiaries

Trustee

Beneficiary

Obligations Rights

Owns assets

Enjoys assets

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1.2 Legal Obligations •  Before the Settlor transfers the assets to the

Trustee, it is usual practice for both parties to enter into a binding Trust Deed. The Trust Deed sets out important terms, such as:

–  The obligations of the Trustee;

–  The assets that comprise the trust; and

–  Who the Beneficiaries will be.

•  It should be noted that a Settlor can name himself as a Beneficiary under a trust.

•  Many countries, including Singapore, that have trusts as part of their legal system have enacted legislation that sets out the duties of trustees.

•  The Trustee is under a legal obligation to administer the trust honestly and in good faith.

•  Although the Trustee has legal ownership of the trust assets, it cannot treat these assets as its own. It can only use them in strict accordance with the terms of the Trust Deed and the law.

•  The Trustee must also furnish regular accounts, usually at least annually.


1.3 Beneficial Interest •  While the creation of a trust passes on the legal ownership of the trust assets to the Trustee,

the Beneficiaries enjoy a beneficial interest in these assets.

•  This means that:

–  The law recognises the Beneficiaries right to enjoy the benefit arising from these assets. For instance, if the trust assets comprise shares in a public listed company, the Trustee would be accountable to the Beneficiaries for all dividends declared and the sale proceeds upon the sale of the shares;

–  The Beneficiaries have a legal right to enforce the terms of the Trust Deed against the Trustee; and

–  If a Trustee is found to be in breach of trust, it could be liable to compensate the trust for any loss suffered.


1.4 Beneficial Enjoyment


•  Even if there is transfer of legal ownership to the Trustee, the trust can be structured so that the status quo of how the Beneficiaries enjoy the assets remain largely unchanged.

•  Example:

Mr S has $5 million of cash, which he presently uses for his own benefit, as well as for his wife and two sons. Mr S subsequently sets up a trust and names himself, his wife and only son as Beneficiaries. He then transfers the $5 million to the Trustee. Although the Trustee is now the legal owner of the $5 million, it is under an obligation under the terms of the Trust Deed to use the money for the Beneficiaries’ needs. This means that although the $5 million is now held in trust, Mr S and his family continue to enjoy the benefit of the money.

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1.4 Beneficial Enjoyment Before setting up trust:

Mr S owns assets directly

Mr S & family

Enjoy the benefit of the $5 million

Mr S

Directly controls $5 million and uses it for the benefit of himself, his wife & only son

After setting up trust: Trustee owns assets

Mr S & family

Enjoy the benefit of the $5 million

Trustee Uses $5 million according to the terms of the Trust Deed for the benefit of Mr S, his wife & only son

Mr S

Transfers $5 million to Trustee


1.4 Beneficial Enjoyment


•  As the earlier diagram shows, the practical effect is that even after the trust is set up, the $5 million can still be enjoyed by Mr S and his family.

•  The main difference is that the money is now held by a Trustee instead.

•  This critical step of a Settlor transferring assets to a Trustee to hold on trust is fundamental in allowing the Settlor flexibility and versatility in preserving and managing personal wealth, as we shall later see.

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2.1 Secure Flexibility •  The trust is secure yet provides flexibility.

A bespoke solution that addresses all your needs can be crafted by a competent professional.

•  You are at liberty to decide important matters, such as:

–  What the trust assets include;

–  Who the Beneficiaries will be, and whether you will be one of the Beneficiaries;

–  How the trust assets will be distributed to each Beneficiary;

–  How the trust assets will be invested;

–  The powers of the Trustee; and

–  Whether the Trustee will be subject to the supervision of a Protector.


2.1 Secure Flexibility •  More and more Settlors are beginning to

realise the importance of a Protector. For added peace of mind, do consider appointing one.

•  The Protector’s key role and duty is to supervise the Trustee, ensuring that it administers the trust in strict accordance with the terms of the Trust Deed.

•  Protectors are often given powers to, where necessary, e.g. veto a Trustee’s decisions, vary the terms of the trust and to (in a very worst case scenario, which rarely happens) remove an errant Trustee. These powers are enshrined in the Trust Deed.

•  It is, therefore, crucial that a competent and qualified Protector be appointed. Preferably, it should be an individual who understands how to supervise a Trustee and is skilled to enforce the rights of Beneficiaries.



2.1 Secure Flexibility

Trustee

Beneficiary

Obligations Rights

Owns assets

Enjoys assets

•  Protectors, like Trustees, are under a fiduciary duty to always act:

–  In accordance with the terms of the Trust Deed; and

–  In the best interest of the Beneficiaries.

•  The practical effect is that a Protector is able to ensure that your wishes are carried out.

Protector

Oversight

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2.2 Secure Versatility •  You can use the trust for a variety of purposes.

•  When structured properly, it allows you to:

–  Protect your assets;

–  Provide for family and loved ones during your lifetime and beyond; and

–  Limit your tax exposure.


2.2 Secure Versatility

Uses of trusts

Protect assets from creditors & matrimonial

claims

Shield assets from poli<cal uncertainty

Confiden<ally & freely distribute wealth

Safeguard legacy from spendthriA

heirs

Tax planning & efficiency


3.1 Asset Protection •  Let us consider asset protection, typically the most important concern among Settlors.

•  Once a Settlor transfers assets into a Trust, these assets no longer form part of the Settlor’s estate. They are instead legally held in the name of the Settlor.

•  Assuming that the trust is properly constituted and creditor protection limitation periods no longer apply, the trust assets are safe from seizure by a creditor.

•  The Settlor would have effectively preserved a portion of his wealth by putting it out of reach of a potential creditor.


3.1 Asset Protection

•  As the diagram illustrates, the trust assets are safely insulated behind the trust structure.

•  In such a case, a Trustee cannot transfer any trust asset to any creditor. If a Trustee does so, it would be in breach of trust.

•  It should be noted that a trust cannot be used to defraud legitimate creditors. For example in Singapore, a court could invalidate a trust if the Settlor is made bankrupt within five years of setting up his trust. Hence, trusts should be established early to eliminate any claim from any future creditors.


Trust Assets

Trust structure

Creditor cannot seize

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3.2 Tax Benefits & Legacy Planning •  Another common objective of Settlors is to

legally minimise tax exposure. For instance, this is relevant as some countries that impose tax when a deceased person’s property is transferred to his heirs.

•  In certain circumstances, a trust can be used to efficiently pass on such property with minimal or no tax.

•  A Settlor can also use the trust to effectively ensure a lasting legacy is passed on to future generations.

•  Example: Mr S lives in Country Z. He intends to buy a house in Country Z, which will be registered in his name. He intends that on his demise this house will be transferred to his wife, and subsequently on her death to his only son. His intent is to keep the house in the family for future generations. However, Country Z would impose death duty / transfer tax each time the house is transferred upon Mr S’ and his wife’s death. A solution would be for Mr S to set up a trust. The trust would then buy and own the house, permitting Mr S and his family to live in it.


•  As can be seen, the trust’s ownership of the house is continuous and because there are no transfers, death duty / transfer tax is avoided.

•  Also crucially, Mr S’ wish that the house be kept in the family for generations can be achieved. The trust structure prevents the wife, on Mr S’ death, or the son from selling the house. Mr S’ intent is respected.

Trust

Used by Mr S & family

Used by wife & son

Used by son

(& family)

Used by subsequent genera<ons


3.2 Tax Benefits & Legacy Planning

Continuous ownership of house

Summary •  The trust is secure, flexible and versatile.

•  A Settlor may use the trust to protect his assets, to provide a lasting legacy for loved ones and to limit tax exposure.

•  When structured correctly, the status quo of how a Settlor’s assets are used and enjoyed remains largely unchanged.

•  Legal safeguards ensure that a Trustee administers a trust honestly and in good faith.

•  A Protector can supervise the Trustee and ensure that the Settlor’s wishes are carried out.

•  A trust should be established early to ensure that a creditor cannot set it aside in a claim.


Contact Us

Benjamin Szeto LLB, MSc

Advocate & Solicitor | Barrister-at-Law

[email protected] | +65 6345 7766

20 Collyer Quay #23-01 Singapore 049319 | www.SavoirLLC.com

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trusts 101 (2014 aug)

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