Setting up a Trust in Singapore

Setting up a Trust in Singapore

Trusts in Singapore are governed by the Trustees Act (Cap 337), and a lot of the basic tenets come from English trust law. In Singapore, the Trustees Act has developed to encourage trust use when managing wealth. Anyone wanting to manage and protect their assets will be well-advised to use the regulated legal framework of a trust as a safety net.

Many of the super-rich have used trusts for tens if not hundreds of years, to hold and pass on family wealth, without having to go through long probate procedures. But nowadays, ordinary people and families have come to see trusts as useful, powerful tools for managing their assets.

What is a trust? Should you set one up?

Think of a trust as a legal arrangement in which one person (known as the settlor) moves property to another person (called the trustee), who then holds that property for the benefited of certain specified beneficiaries.

You can also think of a trust as a fiduciary arrangement where the assets of beneficiaries are managed by an appointed trustee. That trustee, (who holds beneficial ownership of the assets) has a statutory obligation and a fiduciary duty to act in the beneficiaries’ best interests at all times.

A settlor may name a ‘protector’ to supervise and protect the trust, and prevent any abuses of power by a trustee.

Whether or not you should set up a trust depends on your situation and aims. There are several types of trusts all with their own particular benefits, which we’ll look at later in this article.

Why trusts are created

Financial management

Families use trusts to manage wealth. A settlor can state how the assets should be invested. The trustee will oversee the assets and then share them out amongst the beneficiaries as decreed by the trust terms.

Tax efficiency

Individuals who have large taxable incomes in a high tax bracket often place their assets in trusts. The earnings from those assets then accrue in the trust, and the beneficiaries have the tax liability.

Of course, trusts and the distributions given to beneficiaries also attract tax, but with a trust you can spread this tax burden so it is tax effective for everyone concerned.

Asset protection

Trusts can protect assets against any lawsuits or creditors that may face the settlor. A settlor transfers assets to the trust, and then legal ownership is given to the trust.

This is a real benefit to business owners or other high-risk people who need asset protection. If a settlor should become bankrupt, then no creditors can get to their personal assets. Likewise, protection is given to professionals who may be sued for professional negligence. Creditors cannot settle their claims or pay compensation with trust assets. Protection is also given in case of any matrimonial property disputes.

Remember that to gain protection from claims, assets must have been held in the trust for a certain period.

Succession planning

If a settlor dies, there is no lengthy probate procedure to go through for trust assets. Trust law in Singapore can also protect against forced inheritance regimes.

It is up to the settlor who gets the assets and when, after their death. If a settlor’s descendants are minors, the trust will keep hold of the assets until the children are older and they can be distributed as per the settlor’s wishes. This helps protect the interests of young children, or people who lack capacity to manage their own affairs.

It may be beneficial, for example, for the descendant to hold the assets in a trust for grandchildren’s benefit. This might happen if receiving the benefit would mean a beneficiary is pushed into a higher tax bracket, or their country of residence has high estate duties. In these scenarios, leaving assets in a trust is for future generations is advisable.

If you think you would benefit from a trust, first understand the different types of trust that exist.

The Different Kinds of Trust

Testamentary Trusts

A trust formed in a settlor’s will is called a testamentary trust. When they die, the trust will take ownership of the assets as specified in the will. While the settlor is still alive, no trust can exist – it only comes into being upon the settlor’s death. Why might this type of trust be useful? Because a settlor may have young children, or dependants with special needs who can’t manage their inheritance, and so the trust holds assets for them.

Inter Vivos Trusts

This is a trust which is created while the settlor is alive, and it’s also known as a Living Trust. A Letter of Wishes is used by the settlor to indicate their wishes for management and distribution of benefits, and they can revise that letter in future if needed.

This type of trust is particularly useful for tax savings, and protection of assets, especially if the settlor becomes incapacitated in the future.

The following are varieties of Inter Vivos trusts:

  • Asset protection trusts which protect the assets of a settlor from creditor claims and business losses.
  • Investment trusts, solely designed for the purposes of investments.
  • Private family trusts, which allow a family to manage their wealth, and protect their assets from forced inheritance legislation or probate proceedings.

Standby Trusts

This type of trust is a mix of Inter Vivos and Testamentary trusts, combining the benefits of both. A trust is created, but no assets (or very few) are placed in it whilst the settlor is living. But beneficiaries can be named, and trustees remain on standby and the trust is dormant until a specific event occurs.

Beneficiaries can be assigned insurance policies by the settlor, and CPF nominations can be made. Provisions in the event of incapacity can also be made.

When the specific event named in the trust happens, the assets can be moved to the trust via a power of attorney. Otherwise, the assets will be transferred when the settlor dies.

This arrangement has the benefit of a low set-up fee without fees incurred in transfer of assets. There are also minimal annual costs whilst the trust is dormant.

What powers do trustees hold over the trust assets?

Many people find themselves asking this question when they need to use a trust. In Singapore, the powers of a trustee are well-regulated.

Trustee Powers

The terms of the trust instrument give trustees their powers. There is then further regulation of the operation of trusts and the behaviour of trustees that comes from the trustees Act, and common law principles.

There is a minimum standard of conduct that trustees must satisfy, and they must fulfil their statutory duty to show reasonable care and skill in exercising their powers and duties.

Forms of trust and trustee powers

What powers the trustee has can also be determined by the type of trust. It may be fixed, discretionary, revocable or irrevocable, and each type will affect the trustee’s powers. You should consider the following before setting up a trust:

Fixed trusts

In a fixed trust, the settlor decides how much is given to whom, and when. No discretion is given to the trustee. They simply administer the assets in accordance with the terms of the trust.

Discretionary trusts

Contrary to a fixed trust, in a discretionary trust the trustee has sole discretion. It is for them to use their discretion and decide what percentage of the assets must be distributed, when, and to whom.

In the case of a divorce where matrimonial property is in dispute, this type of trust is useful. The beneficiaries are protected from creditors, and it allows for adaptations to changes in the beneficiaries’ circumstances.

When managing the dynamics of family life, discretionary trusts are valuable tools. For example, where a family member has poor money-management skills, or is likely to be the subject of a legal claim, or is in dispute with another family member, the trustees can use their discretion to help navigate through these changing circumstances. In addition, trusts also provide confidentiality.

Revocable trusts

In a revocable trust, a settlor can terminate the trust. They may also change the trust’s terms, meaning the settlor keeps some control over the assets in the trust.

On the other hand, with a revocable trust the door is opened for spouses or creditors to claim against trust assets, in a divorce or a bankruptcy, if the court decides that the settlor still has control of the assets.

Irrevocable trusts

In this form of trust, a settlor doesn’t retain any legal rights or control over trust assets. They can’t change or revoke the trust’s terms either. The assets no longer form part of the settlor’s estate.

Assets which have been in the trust for a minimum of five years are protected against divorce and creditor claims.

How do you create a trust?

Trust instruments, such as contracts, wills or trust deeds, create trusts. When a trust is created it can have major ramifications for both the settlor and the beneficiaries. It’s best to seek legal advice if you are thinking of creating a trust.

To set up a trust, certain basic requirements need to be met:

  • The settlor must have mental and legal capacity to create a trust
  • The settlor must have a certain intention to create a trust
  • It must be clear what the purpose or object of the trust is
  • Specific assets must be named as trust assets
  • All laws and legislation governing trusts must be complied with

A trust is created when assets are moved to the trust, or when a settlor declares themselves a trustee by way of a declaration of trust, and will hold assets on behalf of the beneficiaries.

Trusts have clear benefits for protecting assets and managing wealth. Whether you should create one depends entirely on your own family, financial and business circumstances.

Singapore is a country with good regulation of trusts. This gives peace of mind to individuals and families that assets are held in capable hands, well-protected by both statutory framework and common law. Settlors in Singapore are also allowed to retain some power over trust assets and help in managing investments, should they wish to do this.

It is always worthwhile asking an experienced trust lawyer to explain the best trust options and structure for your situation.

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Lim Chong Boon

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