Many of our clients ask us what they can do to protect their hard-earned money when they pass it on to their children, and their son or daughter later goes through a messy divorce. We all want to protect our children’s inheritance and certainly don’t want it to fall into the hands of an adversary through some legal process.
We also don’t want to rely on expensive trust companies or banks to manage our wealth and assets. Most clients prefer to manage their hard-earned wealth themselves.
At PKWA Law, we can help you to keep control of your assets and protect your children’s inheritance from lawsuits and divorce settlements. Testamentary trusts offer a straightforward family-centred solution, and not just for the super-wealthy. Ordinary citizens and families now use testamentary trusts as a useful and powerful tool to manage and protect their assets after their death.
In Singapore, trusts are governed by the Trustees Act 9 (Cap 337), and many principles are adopted from English law. The Trustees Act was specifically modified in 2004 to promote wealth management in Singapore.
What is a testamentary trust?
A testamentary trust is a type of trust created through a person’s will, and it only comes into effect upon their death. Unlike other trusts, such as a living trust, the testator maintains full control over their assets while still alive.
The testator can change the terms of the trust, change the beneficiaries, or revise their will entirely before their death. When making the will, the testator specifies who the trustee will be and how the assets will be managed after their death.
If the testator wishes to keep it in the family, the trustee can be a spouse or a trusted family member. It ensures that things remain simple and personal.
A testamentary trust is useful not only to protect your children’s inheritance from divorce or other lawsuits, but also to provide for young children (and protect them against a future marriage of the surviving spouse). It can look after dependents with special needs or any beneficiary who needs help managing large amounts of money.
Once the trust comes into operation after the testator’s death, it is irrevocable. The trust now owns the assets. The testator’s appointed trustee will now control and administer the assets for the benefit of the beneficiaries as specified by the testator’s will. Selecting the right trustee is critical.
You should discuss the role of the trustee with a lawyer who has experience in testamentary trusts to ensure that you are 100% familiar with the role and responsibilities of the trustee who will administer the assets, and ultimately protect your children’s inheritance.
What are the advantages of a testamentary trust?
Retention of control
One of the main attractions or advantages of a testamentary trust is retaining control. The testator maintains 100% control over their assets during their lifetime and appoints a trustee of their choice to manage the assets after their death. It is a way to protect your assets and loved ones, even when you are no longer there to do so yourself.
Flexibility in distribution
During their lifetime, the testator can change how they want their assets distributed and to whom. The testator can leave specific instructions on how and when the assets should be distributed to beneficiaries after the testator’s death. You can customise your wishes based on the individual circumstances of your beneficiaries.
Protection of assets
By creating testamentary trusts, parents can shield the inheritance from potential risks such as lawsuits, bankruptcy, or divorce settlements. As a parent, your chosen trustee will administer your wealth and distribution to your children according to your wishes as set out in the trust.
Simplicity and family involvement
Testamentary trusts can be kept within the family, with a spouse or family member serving as the trustee, ensuring a personal touch, and reducing expenses associated with hiring a professional trustee.
How can a testamentary trust shield your child’s inheritance from future lawsuits?
By establishing a testamentary trust and placing the assets in the trust, the assets become trust assets after your death, meaning they are separate from your child’s personal assets. The testamentary trust will safeguard those assets against potential lawsuits targeting your child’s assets.
If there is a lawsuit, the trust acts as a protective barrier, preserving the inherited assets for the intended beneficiaries. The trust assets are shielded from creditors or legal claims.
How can a testamentary trust preserve your child’s inheritance during a divorce?
Divorces can become messy and complex. As we know, marital assets are subject to division between the spouses. Lawyers and the court often determine the division if it is a contentious divorce.
In Singapore, the courts can order the division of matrimonial assets under section 112 of the Women’s Charter. The first step is to determine what assets are matrimonial assets.
Matrimonial assets are defined in Section 112(10) of the Women’s Charter and can include assets acquired during or before the marriage. Assets acquired before the marriage becomes matrimonial assets if used or enjoyed by one or both spouses, or their children while they lived together, or if it was substantially improved during the marriage by either or both.
When the courts consider division, they will look at the following:
- The contributions (direct financial, or indirect) made by each party towards the matrimonial assets
- The needs of the children of the marriage
- The extent of the contributions made by each party to the welfare of the family
- Any agreements between parties on the division of assets
As a parent, you want to know that your child and their inheritance will be protected. You don’t want your hard-earned money that you passed on to your child divided in your child’s divorce. If there are grandchildren, you also want to ensure they can benefit from your hard-earned wealth.
Establishing a testamentary trust can protect your child and future generations in a divorce.
A testamentary trust can provide instructions or include provisions that safeguard the inheritance from being considered matrimonial property, helping to preserve family wealth for future generations. The assets remain trust assets, not personal assets.
By incorporating a testamentary trust, parents can ensure their children’s inheritance remains separate property and is not subject to division during divorce proceedings. Giving you peace of mind that your children and grandchildren will still benefit from their inheritance.
Doesn’t the Women’s Charter exclude inheritance in any way?
Section 112 of the Women’s Charter states that inheritance will not form part of the matrimonial property and should be protected from division. However, it is far more complicated in real life.
The Singapore Court of Appeal ruled earlier this year in CLB v CLC [2023] SGCA 10 that a man who tried to exclude an inheritance of S$3.8 million from the matrimonial property pool must share it with his former wife. Before the marriage, they drew up a prenuptial agreement, specifically excluding inheritance from the matrimonial property pool. Subsequently, the husband received the inheritance.
During the marriage, some of the money was kept in a joint account; the husband also included the money in messages referring to “our net wealth”.
The court held, ‘A spouse who has a proprietary interest in a non-matrimonial asset naturally has the right to deal with that asset in any way the spouse wishes, including by bringing it into the matrimonial pool.’
In the circumstances of the case, the court found the husband intended that the assets belonged to the family. Therefore, the assets lost their character as an inheritance that falls outside of the matrimonial property.
The case illustrates how easily inheritance money can be co-mingled with other matrimonial assets to the extent the court can hold that the inheritance no longer falls outside the matrimonial assets.
Suppose your child, at any stage of the marriage, acts in a way that could be interpreted as having the intention to include the inheritance in the matrimonial pool. In that case, it can be subject to division at the breakdown of the marriage.
However, if the assets are protected in a testamentary trust, they cannot be co-mingled into the matrimonial pool. It doesn’t belong to your child – it remains a trust asset managed to benefit your child.
Setting up a testamentary trust in Singapore
A testamentary trust has significant consequences for your beneficiaries. You must do it properly.
If your intention is to protect your children’s inheritance against future lawsuits or divorce, it is critical to ensure the trust will provide the protection that you intended. You must comply with all the requirements for a valid will and all the laws governing trusts in Singapore.
The basic requirements for setting up a trust include the following:
- The testator must have the mental and legal capacity to draw up a will and create a trust
- It must be certain that the testator intends to create a testamentary trust
- The purpose of the trust must be clear
- The assets that should fall into the trust must be specifically identified
- The beneficiaries must be clearly identified
In a testamentary trust, the will creating the trust must also comply with all the formalities of the Wills Act.
The basic requirements for making a will in Singapore are:
- The will must be in writing
- The testator must be 21 years old
- The testator must sign at the foot of the will
- The testator’s signature must be witnessed by at least two witnesses, who must also sign in the testator’s presence
- The witnesses may not be beneficiaries of the will or spouses of beneficiaries.
To ensure your testamentary trust complies with all the laws governing wills and trusts, you should seek legal advice from a lawyer with experience in this area of law.
A lawyer who understands the legal complexities of divorce, division of property, and testamentary trusts, will be able to guide you through the process and advise the best way to protect your children’s inheritance from any future lawsuits or divorce.
