A trust is a legal agreement where a party (Settlor) transfers properties or assets to individuals or an organization (Trustee) to hold and manage on behalf of another party or the settlor himself (Beneficiary). Trusts are generally set-up by settlor to protect their assets from creditors, to ensure their assets are distributed according to their wishes and to avoid or reduce paying taxes, this is because the ownership of assets in the trust are no longer legally owned by the settlor, but by the trustee on behalf of the designated beneficiary.
The Difference between Trust & Wills
Both Trust and Wills serve to manage the distribution of assets. However, there are a number of differences in how each of them operates and it is important to understand how they work as they are essential tools in estate planning.
A trust is primarily used as a protector of assets placed in the trust. It is designed to control how the asset is distributed to the beneficiary; it could be given in a lump sum or spread out over many years. The interests of the beneficiary are looked after in a trust as it is not easily contested or challenge by other hairs of the deceased. The trust need not necessary activate only upon the death of the settlor, it can start anytime as designated by the settlor.
A will deals specifically with the distribution of all assets under the name of the deceased, except those placed in a trust. Distribution of the assets is according to the proportion as spelt out in the will for each inheritor named. A will is also simpler to arrange, cost less to set-up and it is easier to make changes to its content.
Purpose of setting up a trust
A will makes an immediate distribution of your estate upon your demise. However, if you have vulnerable beneficiaries, it might be wise to consider a delayed distribution under a trust. Vulnerable beneficiaries may include seniors, immature youths, financially un-savvy spouses or people with addictive habits like gambling, drug or alcohol abuse. A trust helps safeguard the interests of your beneficiaries who might not be equipped to handle large sums of inheritance monies. Your appointed trustee will be able to hold and manage your estate professionally and ensure that the welfare of your beneficiaries is taken care of.
Managing Assets – The beneficiary could be a minor or have special needs and would need a trustee to manage the fund until they come of age or until they die, as they might not have the ability to handle money when they are young.
Controlling Distribution – Controlling the distribution of the funds, would ensure that the beneficiary will not squander away their inheritance.
Preserving wealth over multi-generations - By limiting the access to the funds, it helps to shield assets from division upon divorce, as well as shielding assets should your children divorce. This helps preserve the wealth for future generations.
Protecting Against Creditors – Creditors cannot lay claim to the assets placed in a trust. This is particularly useful for beneficiaries who are in a business or profession with a higher risk of getting sued or being declared bankrupt.
Protecting Against Unforeseen Circumstances – Life is unpredictable. But setting aside assets in a trust will help to prepare for the unexpected. In a situation where the beneficiary becomes incapacitated, having trustee access the beneficiary’s money when they are in ICU or a long-term care facility to pay the bills will help, or in the event of a divorce, assets in the trust will be shielded from the separation process.
Avoiding Disputes – During the probate process, wills can be contested by hairs who feel that they were treated unfairly. However, with a well-crafted trust, it will be difficult to challenge against the wishes of the settlor as laid out in the trust.
Leaving Behind a Legacy – Setting up a charity fund to be used for the community and charitable causes will leave behind a lasting legacy for future generations.
Difference between an Individual and a Corporate Trustee
The Trustee of a trust fund can either be an individual, a group of individuals or an organization. There are advantages and disadvantages for each type of trustee arrangement.
Individual or a group of individuals’ trustee is a simpler way of setting up a trust without the administrative and financial hassle of a corporate trustee. However, there are certain things to take note of with this set-up, such as the responsibilities and ability of the individual or group of individuals to act as your trustee.
A corporate trustee is a company set-up primarily to manage trust funds. Both the company and the trust are separated legal entities. This is
That individual may be yourself during your lifetime, your spouse, a child or other relative, a friend of the family, or a professional advisor, such as your attorney or accountant.
A corporate trustee is a company set-up primarily to manage trust funds.
Both the company and the trust are separated legal entities.
Less expensive, save on set-up cost and management fee
Likely to have personal knowledge, especially if it is a family member or close friend
A clear separation of personal and trust assets and they are held in different legal entities. A corporate trust has limited liability.
There is continuity in the on-going administration of a trust.
A corporate trust handles the legal and administrative affairs and takes the burden away from the family.
A corporate trust is also able to manage the investment and planning decisions, as directed by the client's appointed financial advisor.
A corporate trustee is continuously regulated and audited. They have policies and procedures and committee structures to ensure compliance with processes.
The individual trustee will be liable for any debts and legal issues with the trust.
It may be difficult to distinguish between personal and trust assets.
There is a possibility of a conflict of interest. Individual trustees frequently find it difficult to remain unbiased and neutral and often has to make tough calls or handle enormous personal pressures.
Individual trustees seldom have the time and required expertise necessary to properly administer a trust.
If an individual trustee dies, the trust's assets will need to be transferred to another trustee and this process is complex and results in significant administrative issues.
There are set-up costs and management fees.
Who is it for?
Anyone who needs a trust, in particular:
Families of multi-generational wealth
Families with vulnerable beneficiaries
Revocable & Irrevocable Trust
There are two kinds of trust, a revocable and an irrevocable trust. A revocable trust or living trusts are trusts where the terms and conditions can be changed by the settlor at any time. The settlor can add or remove beneficiaries, alter the way the assets are managed within the fund, and modify the terms any way the settlor desires. However, as the settlor still has control over the assets, creditors can claim against the trust and the assets are taxable.
An irrevocable trust, on the other hand, is no longer legally owned by the settlor. Therefore, creditors have no legal right to claim against the trust and as the terms cannot be changed by the settlor or anyone else. The trust funds terms will be enforced as laid out in the agreement between the settlor and trustee.
Considerations to set up a trust
- There is a general misconception that Trust Funds are for the ultra-rich, that isn’t true. Even those with modest assets will be able to set-up a trust, as the assets in a trust need not be just money alone. It could be property, shares, insurance or any other valuable assets.
- Setting up a trust will take time and would require a commitment to see through the whole process to the end.
- There are fees involve in setting up a trust fund, the amount for the set-up, annual maintenance and any other legal or professional fees that may be incurred. Depending on the complexity, it can amount to a few thousands of dollars.
- Having an idea of the assets available and a clear understanding of the reasons for setting up the trust will help in crafting out the letter of wishes that will lay out the terms and conditions for a trust fund.
- There are many different trust companies and each company may specialise in different areas. For example, the Special Needs Trust Company (SNTC) does only trust funds for persons with special needs. Click here to see all of the private trust companies registered in Singapore.
- For families who still want to have an individual involved in the administration of their trust, they could consider having a family member and the corporate trustee as a co-trustees.
Despite the cost and amount of work needed to set-up a trust, it is important to implement have a comprehensive estate plan, as having a trust fund would be an essential tool to ensure the right beneficiaries will get the correct inheritance at the desired time.