Trusts in Singapore

The super-wealthy has been using trusts to hold and pass on family wealth for decades, if not centuries. These days, trusts still offer many advantages for people seeking to protect their wealth and pass on assets without lengthy probate procedures. It can also provide an effective tax solution and protect assets from creditors.

Many families and individuals, not just the super-wealthy, now see trusts as an increasingly powerful wealth and asset management tool.

In Singapore, trusts are governed by the Trustees Act (Cap 337), and many of the principles are based on English trust law. Over the years, the Trustees Act has been amended to promote the use of trusts for wealth management in Singapore. Today, trusts are an increasingly popular tool available for anyone to protect and manage assets within the safety net of a well-defined and regulated legal framework.

So, what is a trust, and should you consider setting up a trust?

A trust is best described as a legal arrangement whereby one person (the settlor) transfers property to another person (the trustee). The trustee then holds the property for the benefit of specified trust beneficiaries. The settlor can determine which assets are included in the trust and how they should be distributed to the beneficiaries.

It can also be described as a fiduciary agreement where the appointed trustee administers and manages the assets for the beneficiaries. The trustee has a fiduciary duty and statutory obligation to act in the best interests of the beneficiaries. The beneficiaries have beneficial ownership of the assets.

The settlor can appoint a “protector” to oversee the trustee and protect the trust, making sure the trustee does not abuse their power.

There are different types of trusts, each with its own benefits. Whether you should set up a trust and what type of trust will depend on your aim and individual circumstances.

Why create a trust?

Asset protection

When the settlor transfers assets to the trust, legal ownership of those assets rests with the trust. These assets are thus protected against any creditors or lawsuits against the settlor.

This form of asset preservation is one of the primary benefits of trusts for high-risk individuals or business owners. Personal assets are protected against business risks. If the settlor becomes bankrupt, the trust assets are protected against creditors. The same applies to professionals at risk of being sued for professional negligence. Trust assets cannot be used to settle creditor or compensation claims. Trust assets will also be protected in any matrimonial property disputes.

Take note that assets must be in the trust for a minimum period before being protected from claims.

Financial management

Trusts can be used to manage a family’s wealth. The settlor can specify how the assets should be invested. The trustee will manage the assets and distribute them to the beneficiaries according to the terms and conditions of the trust.

Tax efficiency

If you fall in a high tax bracket and the income you generate from certain assets increases your taxable income, you may want to consider placing those assets in a trust. Earnings from those assets will then fall in the trust, and the tax liability will fall on the beneficiaries.

Trusts and distributions to beneficiaries are also taxed, but the trust and distributions can be structured to spread the tax burden in a way that is tax effective for all parties.

Succession planning

The trust assets will not be subject to lengthy probate proceedings when the settlor passes away. Singapore trust laws also protect against forced inheritance regimes under certain circumstances.

The settlor can specify when and to whom assets must be distributed after the settlor’s death. If the settlor’s descendants are minors, the assets can remain in the trust and be distributed later as specified by the settlor. In this way, the interests of young children or children who are not capable of managing their own affairs can be protected.

In some circumstances, it could be beneficial for the descendent to keep the assets in the trust for the benefit of grandchildren. For example, if receiving the benefit would place the beneficiary in a higher tax bracket, or they live in a country with high estate duties, leaving the asset in the trust for the next generation might be prudent.

If you think setting up a trust suits your circumstances, you need to consider the different types of trusts.

Types of trusts

The legal consequences of creating a trust and what you will achieve by creating a trust depend on the type of trust.

There are many different types of trusts, and an experienced trust lawyer will advise you on the best option for your circumstances.

A few types of trusts include:

Inter Vivos Trusts

This trust is created in the settlor’s lifetime. It is also called a Living Trust. The assets are placed in the trust during the settlor’s life. The settlor can state their wishes for managing and distributing benefits in a Letter of Wishes. The settlor can also revise the Letter of Wishes in the future.

Inter Vivos trusts are used for tax savings and protecting assets and can be very useful if the settlor becomes incapacitated in future.

Examples of Inter Vivos trusts include:

  • Private family trusts to manage the family’s wealth, protect assets from probate proceedings and forced inheritance legislation;
  • Investment trusts created solely for investment purposes; and
  • Asset protection trusts to protect the settlor’s assets from business losses and creditor claims.

Testamentary Trusts

A testamentary trust is formed in the settlor’s will. Upon the settlor’s death, the assets will pass into the trust as specified in the will. There is no trust whilst the settlor is still alive. It only comes into effect when the settlor dies. This type of trust is useful when the settlor has young children, dependents with special needs, or beneficiaries who cannot manage their inheritance.

A standby trust

A standby trust is a mix of a Testamentary and an Inter Vivos trust with the benefits of both. The trust is formed, but no, or very few, assets are placed in the trust whilst the settlor is still alive. Beneficiaries can be named. The trust is dormant until a specific event occurs. The trustee is on standby until the event occurs.

The settlor can assign insurance policies to beneficiaries. CPF nominations can be included, and provisions can be made for mental incapacity.

If the specified event occurs, the assets can be transferred to the trust via a power of attorney. Alternatively, assets will be transferred upon the death of the settlor.

The set-up fee is low, without the fees to transfer the assets. The annual costs are minimal, while the trust remains dormant.

What exactly are the powers of the trustee over trust assets?

This is a question that many people are concerned about when transferring their assets into a trust. Fortunately, the trustees’ powers are well regulated in Singapore.

Powers of trustees

Trustees get their powers from the terms of the trust instrument. The Trustees Act and common law principles further regulate the operation of trusts and the powers and responsibilities of trustees.

The trustee must adhere to specific minimum standards of conduct. Trustees have a statutory duty to exercise reasonable care and skills to exercise their duties and powers.

Forms of trusts and trustee powers

The specific form of the trust further determines the trustees’ powers. Whether the trust is fixed or discretionary, revocable, or irrevocable, significantly impacts the trustee’s powers. Before you set up a trust, you should consider the following:

Discretionary trusts

In a discretionary trust, the trustee has complete discretion. When and what percentage of the assets must be distributed to whom in the pool of beneficiaries is the trustee’s sole discretion.

This type of trust can be handy to protect family assets from matrimonial property disputes in divorce. It can protect beneficiaries against creditors, and it provides the possibility to adapt to changes in beneficiaries’ circumstances.

Discretionary trusts can be valuable tools in managing family dynamics. Where a family member is bad at managing money, or at high risk of legal claims, or there are constant disputes amongst family members, the trustee can use their discretion to manage through the dynamics. Trusts also offer confidentiality.

Fixed trusts

Contrary to discretionary trusts, the settlor determines who gets how much and when under a fixed trust. The trustee has no discretion. Trustees merely administer the assets according to the terms and conditions of the trust.

Revocable trusts

The settlor can terminate a revocable trust. The settlor can also change the terms of the trust. This makes it possible for the settlor to retain some control over the assets.

However, revocable trusts may open the door for creditors or spouses to claim against trust assets in the event of bankruptcy or divorce. The court may decide that the settlor still controls the assets.

Irrevocable trusts

Under an irrevocable trust, the settlor retains no legal rights or control over the assets placed in the trust. He cannot revoke or change the terms of the trust. The assets are no longer part of the settlor’s estate.

If the assets have been in the trust for at least five years, it is protected against creditor and divorce claims.

How do you create a trust?

Trusts are created through trust instruments, for example, a contract, a will, or a trust deed. Creating a trust can have significant consequences for the settlor and the beneficiaries. Anyone considering setting up a trust should seek expert legal advice.

There are specific basic requirements for setting up a trust.

  • The settlor must have the legal and mental capacity to create a trust.
  • There must be:
  • Certainty of the settlor’s intention to create a trust;
  • Clarity on the object or purpose of the trust;
  • Specific assets identified as trust assets; and
  • Compliance with all laws and legislation governing trusts.

A trust comes into being when the assets are transferred to the trust or when the settlor declares himself a trustee via a declaration of trust, now holding the assets for the beneficiaries.

Whether you should create a trust depends on your financial, family, and business circumstances. Trusts have undeniable benefits for wealth management and asset protection.

In Singapore, trusts are well regulated. Individuals and families can create trusts and have peace of mind that their assets are in capable hands and protected by a well-established common law and statutory framework. In addition, Singapore allows settlors to retain some power over the assets and play a role in managing investments if they wish to do so.

An experienced trust lawyer can advise you on the best trust option and structure for your circumstances.

Setting up a Trust

From $3,990

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Pan Wai Liong

Conveyancing & Corporate

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