A financial tool you can TRUST

May 18, 2008

A financial tool you can TRUST

The usefulness of trusts has not diminished with the recent abolition of estate duty. Lorna Tan looks at why people set up trusts and presents some interesting real-life trusts

DESPITE the scrapping of estate duty in February, trusts - once a financial tool used by families to minimise death duties on the estates of family members who had died - have not lost their shine.

In fact, they are still the chosen instrument for those with certain purposes to fulfil, such as succession planning or wealth protection.

Trusts are legal arrangements that allow you to give away your assets, such as shares or property, to named beneficiaries. A trustee, typically an institution, will administer these assets.

Before its abolition, estate duty was imposed on the estate of a person who had died if his assets exceeded certain limits - more than $9 million for residential properties and more than $600,000 for movable assets.

Why people set up trusts

· Guarding against spendthrift heirs

Trusts are still the best way to guard against the dissipation of a family fortune by spendthrift or quarrelling heirs.

Rather than making outright bequests, you can use a trust to provide your heirs with a regular income while preserving the capital for future generations, said Ms Claire Tham, a partner at Hin Tat Augustine & Partners.

After all, studies have generally shown that the old saying about family wealth disappearing in three generations is true.

· Fending off unfavourable divorce settlements

Closely linked to the issue discussed above is the distrust some might feel towards a son-in-law or daughter-in-law.

The desire not to have this 'interloper' make off with the family's riches is strong motivation for many entrepreneurs to structure their wealth in such a way that divorce settlements do not result in a transfer of wealth to the interloper, added Ms Tham.

· Warding off creditors

Individuals who are in business might want to ring-fence the assets they have set aside for loved ones so potential creditors cannot touch these assets.

However, an individual who transfers his assets less than five years before he becomes bankrupt could find that they are not actually protected from creditors, said law firm Characterist LLC.

Some might want to ensure that certain persons do not benefit from their estates, for instance, the black sheep who might blow away the family fortune, said OCBC Trustee director Raymond Chee.

· Philanthropy

Instead of making a one-time gift to a charity, you can use a trust as a platform for sustainable philanthropic activities.

In most cases, the underlying assets are invested to generate a regular stream of income that is then used to fund charitable purposes. This creates a legacy that will survive long after the individual dies, said Mr Chee.

· Maintaining confidentiality

Publicity-averse individuals might find it comforting that their trustees are obliged under Singapore law to keep their affairs secret, highlighted Ms Tham.

This gives trusts an added advantage over wills. One of the drawbacks of a will is that the executors have to obtain probate, which means that the contents of the will enter the public domain. Trusts, in contrast, can be kept confidential.

In Singapore, the trustee has a duty to keep confidential the details of the trust. This duty arises both under common law and under the Trust Companies Act.

How much trusts cost

Fees are charged on a case-by-case basis, with the two main components being the set-up fee and the annual fee.

According to Mr Luke Peng, the chief executive of SG Trust (Asia), fees vary depending on the complexity of the trust structure, the volume of activity carried out and the size of the assets held.

For instance, for a simple trust that holds US$5 million (S$6.9 million) in assets with minimal transactions, SG Trust's set-up fee starts at US$5,000. The annual fee is based on 0.2 per cent of the assets held, with the minimum fee being US$5,000 to US$7,500.

British and Malayan Trustees (BMT) recently launched a trust aimed at the mass affluent market. This can be started with as little as $50,000 for a set-up fee of $3,000 to $5,000 and an annual fee that might be as low as $1,000.

According to its brochure, the BMT Provident Trust caters to individuals who might decide to transfer some of their assets into a trust at a later date.

This is because the time might not be right yet for them to make key decisions about the disposal of their assets.

For trusts with lower initial amounts, the investments will usually be conservative in nature, and could include fixed-term deposits, money market instruments, capital-protected funds and unit trusts.

lorna@sph.com.sg


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Reasons for setting up trusts

Here are some real-life trusts provided by lawyers and trust firms.

Cases from Characterist:

Money safe from creditors

Businessman Leslie Tong (not his real name) set up a trust immediately after receiving a large inheritance of $4 million from his father.

He is married to a housewife and has young children. He allotted the entire inheritance he received to the trust for the benefit of his spouse and children.

By doing so, he knows that if his business fails, his inheritance will not be lost as it will be safe from creditors.

He can then have the peace of mind to be aggressive in his business deals, knowing that his inheritance will be passed on to the next generation.

As he considers himself to be savvy about investments, he appointed himself as the trustee during his lifetime, and a corporate trustee in the event of his death.

Maintaining grave

A traditional Chinese man, Mr Wee Hock Leng (not his real name), wanted certain ceremonial traditions to be observed after his death, and to ensure that his children would maintain his grave.

He set up a trust to put aside $200,000 for the children to carry out the requisite traditional rites and to maintain his grave for 20 years.

He directed that after 20 years, any remaining monies could be distributed to designated beneficiaries.

Protecting stamp collection

Mr Michael Lim, an ardent stamp collector, has a 12-year-old grandson who shared his hobby.

His collection was of substantial value and he did not want anyone to sell the stamps for money.

So he set up a trust for a trustee to take possession of the stamps, with directions for the trustee to hand over the stamps to his grandson when he turns 25.



Cases from SG Trust (Asia):

Providing for disabled child

Mrs Patricia Tan (not her real name) has several children, one of whom is mentally disabled. She was concerned that upon her death, her disabled child would not be properly taken care of by his siblings, so she set up a trust to provide for his needs.

Cash not squandered

A successful entrepreneur with many children, Mr Benjamin Tay (not his real name) had accumulated much wealth.

Unfortunately his children were spendthrift and lazy, choosing to live off his wealth rather than supporting themselves.

Mr Tay decided to set up a trust, allowing his children to receive only lump sum distributions on a regular basis. Only his grandchildren could benefit from the trust assets.

Cases from Amolat & Partners:



Setting marriage conditions

A rich Indian woman, Madam Supiah Jayakumar (not her real name), set up a trust of her bungalow and directed that her youngest son - then leading quite a wild love life - should get a share only if he married a woman of the Indian race and of the Hindu religion.

The trust was set up five years ago and back then, the property was worth about $3 million.

Helping good causes

Mr Philip Khoo (not his real name) set up a trust of $500,000 to provide for an orphanage in Vietnam. He directed that the trustees should help the orphanage in providing shelter and food.

One of his trustees was a monk involved with the orphanage and another trustee was an accountant, an old friend of his.



Case from Goodwins Law Corp:

Not affected by divorce rules

The United States and Canada are countries with high tax jurisdictions. Mr Bill Andrews (not his real name) has an only daughter who is 24 years old and married to an American.

He would have liked to give her a huge sum of money, but was afraid of the liberal division rules on divorce in the US.

He decided to put the money into a trust that would not be affected by matrimonial division rules on divorce. This is because the trust would own the money and not his daughter.



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