Why your Kids may need a Trust Fund. Protecting them from Uncertainty

Setting up a Trust Fund for your Kids. Protecting them from Uncertainty

Why your Kids may need a Trust Fund. Protecting them from Uncertainty

The Asian century is well and truly underway. And as the world’s wealthiest continent, Asia is set to continue its dominance for generations to come. This rise to prominence has been accompanied by a new breed of Asian millionaires – self-made and often with global aspirations.

For these high-net-worth individuals (HNWIs), providing for their families is a top priority. It’s a part of the culture and something that’s instilled from a young age. But with great wealth comes great responsibility – and sometimes, great uncertainty.

So how do we set up our children for success in this rapidly changing world?

Trust Basics

A trust is a legal arrangement in which one person (the trustee) holds the property on behalf of another person (the beneficiary). The trustee has a legal duty to manage the trust property for the benefit of the beneficiary.

There are many different types of trusts, but they all have one thing in common: they allow you to separate the control and ownership of assets. This can be useful for various reasons, including asset protection, estate planning, and tax minimization.

Singapore Trust Law

Under Singapore trust law, a trust is created when the settlor (the person who sets up the trust) transfers property to the trustee for the benefit of the beneficiary. Therefore, the settlor must have the intention to create a trust, and this intention must be clear from the terms of the trust instrument (e.g., the trust deed).

The trustee has a legal duty to manage the trust property for the benefit of the beneficiaries. This includes a duty to invest the property prudently and distribute it in accordance with the terms of the trust.

For instance, if the trust deed says that the trustee must distribute the income of the trust to the beneficiaries, then the trustee must do so. The trustee also has a duty to keep proper accounts of the trust property and to give information about the trust property to the beneficiaries upon request.

Alternatively, as per the Will of the settlor, the trustee may have discretion as to how to distribute the trust property among the beneficiaries. In this case, the trustee must exercise their discretion in good faith and per the terms of the trust. The role of a trustee is, therefore, a very important one, and it should not be taken on lightly. Therefore, if you are thinking of setting up a trust, you must choose your trustees carefully.

The Duration As Per The Law

In Singapore, a trust can be either “inter vivos” (meaning it is created during the settlor’s lifetime) or “will-based” (meaning it is created under the settlor’s will and only takes effect upon the settlor’s death).

An inter vivos trust can have either a fixed or discretionary term. A fixed-term trust ends when the specified period expires. In contrast, a discretionary trust continues indefinitely until the trustee terminates it. Will-based trusts are automatically terminated upon the settlor’s death unless the will specifically provides otherwise.

A 100-year trust is the longest duration that a trust can have in Singapore. This is because the law presumes that trust of longer than 100 years is invalid. However, it is possible to override this presumption if the settlor expressly states in the trust deed that he/she intends for the trust to continue for more than 100 years.

Setting Up The Trust

There are a few things you need to do to set up a trust:

  • Appoint a trustee
  • Transfer property to the trustee
  • Draft a trust deed
  • Register the trust with the Singapore Government

Appointing A Trustee – The first step is to appoint a trustee. This can be an individual or a corporate entity. The settlor can also be the trustee, but this is not advisable as it may create a potential conflict of interest.

It’s important to choose someone who is honest and reliable and who has the necessary skill set to manage the trust property effectively. For example, if the trust property consists of shares in a listed company, it would be beneficial to appoint a trustee who has experience in financial markets.

Transferring Property To The Trustee – The next step is to transfer the property (e.g., shares, cash, property) to the trustee. This can be done by executing a deed of Transfer, which both the settlor and the trustee must sign.

Drafting A Trust Deed – A trust deed is a legal document that sets out the terms of the trust. It includes information such as the name of the settlor, the name of the trustee, the nature of the trust property, and the rights and duties of the trustee.

The trust deed must be prepared by a lawyer and must be registered with the Singapore Government.

Registering The Trust – The trust must be registered with the Accounting and Corporate Regulatory Authority (ACRA). This can be done online, and ACRA will issue a Certificate of Registration once the registration is complete.

Why You Might Need A Trust Fund For Your Kids

In a nutshell, there are four main reasons why you might need a trust fund for your kids:

Wealth Protection

If you have significant wealth, setting up a trust can be a good way to protect your assets from creditors and litigants. This is because the trust property is held by the trustee on behalf of the beneficiaries and is, therefore, not directly owned by the settlor. In addition, your children will also be protected from any financial difficulties that they might encounter in their own lives, as the trust property will not form part of their personal assets.

Confidentiality

Another benefit of setting up a trust is that it can help to keep your financial affairs confidential. This is because the terms of the trust are not publicly disclosed, unlike other ownership structures such as companies and partnerships. This can be particularly important for high-net-worth individuals who want to avoid publicity surrounding their wealth.

Succession Planning

A trust can also be used for succession planning purposes. This is because the trustee can be appointed to manage the trust property on behalf of the beneficiaries after the settlor’s death. This can help to ensure that your assets are distributed according to your wishes and can provide continuity for your family in the event of your death.

Asian culture also dictates that children should not be seen to be receiving an inheritance from their parents while they are alive. This is because it is considered a bad form to do so and may cause jealousy and conflict within the family. Setting up a trust can help to circumvent this problem, as the trust property can be transferred to the beneficiaries after the settlor’s death without them having to go through the public probate process.

Tax Efficiency

The last reason why you might need a trust fund for your kids is for tax efficiency purposes. This is because the trust property can be distributed to the beneficiaries tax-efficiently, which can help minimize the amount of tax your family has to pay.

For example, suppose the trust property consists of shares in a company. In that case, the trustee can distribute the dividends to the beneficiaries to minimize the amount of tax they have to pay. This can be done by using strategies such as dividend reinvestment plans and share buy-backs.

Summary

In conclusion, there are several reasons why you need a trust fund for your kids. These include wealth protection, confidentiality, succession planning, and tax efficiency. Suppose you are thinking of setting up a trust fund for your children. In that case, it is important to seek professional advice to ensure that the trust is set up correctly and that it meets your specific needs.

Connect with our partners

If you’re looking for independent asset managers to advise on setting up your trust fund, send us an inquiry at [email protected] or use the contact form below:


Share Article:
Singapore Finance
Singapore Finance

Singapore Finance is an editorial dedicated to navigating Singapore’s financial system, connecting you to Singapore’s professional services.