Singapore is ideally positioned to become the leading wealth management hub in Asia thanks to its open economy, clear legal and regulatory framework, and tax neutrality. The attentive regulatory environment in the nation further enhances its enviable reputation. For instance, the Trustees Act was changed to make trusts and trustee services more accessible and to promote asset management in Singapore.

This article gives a general overview of the numerous aspects that influence whether a family trust is necessary.

Increasing Acceptance of Trusts

Because they can prevent beneficiaries in some jurisdictions from incurring inheritance tax, gift tax, etc. if assets are passed through a Will, trusts are growing in popularity. Rich patriarchs and matriarchs frequently use this well-liked method to transfer their riches to their offspring and subsequent generations.

Although there are ongoing costs in the form of service fees to the trustee, the arrangement is nevertheless economical and secure because it offers further advantages including tax savings and anonymity.

Before creating a trust, it is important to consider the beneficiaries’ profiles and needs as well as their nationality or place of residence, the location and type of family assets, and their demands. The tax repercussions make the nationality or place of residence particularly important.

Although trusts were first popular as a wealth planning tool among the extremely rich and high net worth individuals, they are now gaining popularity as a replacement for or addition to wills even among those with just sizable amounts of assets.

A trust fund that has been set up properly guarantees asset protection and continuity of benefits for the beneficiaries, who are typically extended family members. It is crucial to assess the need for creating a trust because, despite its advantages, creating a private or family trust and maintaining it come with costs.

Protection of Assets

The protection of personal assets from being connected to any litigation is a critical concern for professionals or business owners with high-risk profiles.

For business owners, there is a chance that their personal assets will be utilized to satisfy their credit commitments in the case of litigation if their fortunes turn sour and they run the risk of defaulting creditors. Similarly, experts like doctors and lawyers run the risk of being sued for professional malpractice, and it’s possible that the assets they own will be used to meet settlement claims. Because the ownership of the assets is passed to the trust and the settlor no longer has any legal rights over the assets, placing personal assets in trust will alienate the assets from such claims.

It should be noted that the settlor shouldn’t be one of the beneficiaries as this could cause the trust to be viewed as merely a nominee arrangement to defraud creditors.

Additionally, the assets must have been placed in the trust for at least five years before any claims are made (in order to protect the assets from the claims). As a result, property held in trust is shielded from lawsuits filed for bankruptcy or compensation.

Business Continuance

In the event of family enterprises, putting the company’s shares in a trust will secure its survival despite any potential disputes between family members or family members’ bankruptcy.

If family members directly own the company’s stock and any of them faces legal action due to debt problems, the shares they directly possess will also be connected to the claims. This will cause the company to be disrupted, impact its value and competitiveness, and may lead to ownership fragmentation.

Family disputes are normal, and if things get out of hand and one or more family members decide to sell their shares, this will divide ownership and lessen the family’s power. The family firm will be preserved for future generations by putting the company’s shares in a trust and designating family members as beneficiaries for profits and benefits.

Decreased Tax Burden

As was previously noted, transferring assets into a trust distances the settlor from the assets and the income derived from them.

Transferring the income-producing assets into a trust with beneficiaries who will pay marginal tax rates is advisable if your income is much greater than average, the income you receive from your assets increases your taxable income, and you are in a higher personal tax bracket. In this manner, you can minimize your asset’s tax burden and save money on taxes.

A trust’s income is taxed in Singapore at a flat rate of 20%, and distributions given to beneficiaries are subtracted from that income before being subject to tax under the beneficiaries’ individual tax brackets.

However, it’s interesting to note that some profits, including dividend income produced by the trust, won’t be taxed at the trust level but will instead become taxable if given to the beneficiaries. Trust must be properly structured in light of such peculiar circumstances.

Succession Planning

With the help of trusts, you may choose the beneficiaries and decide when the assets should be transferred to the beneficiary with flexibility. For instance, if the descendants are minors, the assets can be put in trust and transferred to them once they are of legal age or gradually when they reach predetermined milestones like graduating from college, getting married, having their first kid, etc.

Additionally, giving assets to an immediate descendent directly will increase their tax liability if they are financially successful, already fall under a higher tax category, or reside in a state with a high estate tax. In certain situations, it can be wise to put the assets in a trust and convey the benefits to the grandchildren.

Family Dynamics

As disagreements and divorces become more frequent, family systems are becoming more and more complex. The owner of the assets would be better off putting the assets in a trust and dividing them up among suitable beneficiaries if they foresee acrimonious divorce situations in the family.

Assets are alienated for a party vulnerable to legal claims when they are placed in a trust. Even though they don’t directly own the assets, family members who are burdened by debt, are going through a divorce, or are being sued for professional malpractice will nonetheless be able to benefit from them.

A trust is the best option for distributing income and benefits to a member on a periodic or progressive basis if the possible successor is wasteful or has poor money management skills.

Be aware that trusts cannot be created today and put into effect tomorrow to fend off legitimate claims. Therefore, the timely creation of trusts depends on having foresight into the requirements of family members and insight into the evolving dynamics of relationships.

The best option to handle the assets, income, and investments in the event that the asset owner becomes incapable due to illness or old age is through a trust if he has no family. The settlor will provide the chosen trustees instructions on how to administer the assets.

Because trusts provide the highest level of confidentiality, you can avoid family disputes and covertly provide for certain beneficiaries.

Forced Inheritance

You won’t be allowed to carry out your testamentary preferences if you live in a forced heirship jurisdiction, which is typically where civil law and Sharia law coexist. The legislation will instead specify who and how much of your assets must be distributed. People who are subject to compulsory heirship regimes typically create an offshore trust.

The law in Singapore on trusts protects against forced heirship. If the trust is controlled by Singaporean law and the trustees are Singapore residents, a person who neither has Singaporean citizenship nor a Singapore domicile is exempt from the forced inheritance and succession provisions under the Trustees Act.

Currency and socio-political instability

It makes more sense to transfer your assets denominated in home currency into a trust established in a stable jurisdiction where the currency is less volatile if you live in a region where geopolitical upheavals are common and frequently lead to currency devaluation. Your assets’ value will be preserved as a result. Due to its socio-political and economic stability and the resiliency of the Singapore dollar, Singapore is a favourite among foreigners with high net worth.

Conclusion

Singapore does not have capital gains taxes or estate duties. The main reasons why residents create trusts are asset protection, succession planning, and tax planning. Foreigners sometimes create Singapore trusts to avoid estate taxes, plan their taxes, preserve the value of their assets, and maintain their privacy and confidentiality.

Singapore is developing into a hub for wealth management among foreigners as the number of high net-worth individuals rises. Singapore’s trust framework is regulated, and professional trustees are required to hold a license and be subject to regulatory scrutiny. Singapore permits settlors to reserve authority. As a result, a settlor can continue to manage the investments directly.

Singapore also permits the appointment of a protector, who can keep an eye on the trustees’ actions in particular areas. There are also clauses that prohibit forced heirship. Singapore is a great trust jurisdiction for foreigners because of its strong regulations governing client confidentiality and financial secrecy.