Clients often come to us for legacy and estate planning as part of their comprehensive wealth plan. Sometimes, they come after speaking with other professional advisers and have been introduced to the use of trust.
I thought it will be interesting to first understand what a trust is through knowing the evolution of the law of equity. This law has its origin in the 14th century in England. While the English’s common law is consistent, it can be too rigid because judgements are made based on precedence. Since the king was considered the source of justice, a person could submit a petition to the king and have his case heard if he felt he was unfairly judged. The king then had an unfettered, unrestricted discretionary judicial power to resolve disputes without being bound, by the doctrine of precedent to follow decisions in the previous cases. Subsequently, the king delegated this power to the most important of his ministers, the Chancellor as he obviously does not have the time to hear every single case. The Chancellor then, sitting in the Court of Chancery could then decide on the judgement of these cases based on what he thought was fair or equitable. This then led to the development of a parallel system: the common law, administered in the king’s law courts and the law of equity in the Court of Chancery. Trust originated in the 15th century and is a creation based on the law of equity.
Let’s unpack this further with an example. If John owns a property and had to go away for a long time. Not knowing when he will be back or whether he will make it back at all, he decided to appoint his best friend Jack to take charge of the property while he is away. He therefore transfers his legal ownership of the property to Jack, but the transfer was done for the benefit of John’s wife and children who were still staying in the property at that time. So, while Jack has the authority that legal ownership brings, only John’s wife and children can live in that property and enjoy any income that it may produce. If Jack misappropriates the property for his own use and kicks John’s family out, as far as the common law is concerned, there is nothing John’s family can do as the legal ownership has been transferred to Jack. But with equity, John’s family can now go to the Chancellor to seek justice and the Chancery Court is likely to take Jack to task.
So, a trust is simply the relationship that exists between the legal owner of the assets (the trustee) and the equitable owner (the beneficiary). In the legal textbook “Law Relating to Trusts and Trustees” by David Hayton (1995), the author defines a trust as an “equitable obligation, binding a person (who is called a trustee) to deal with property over which he has control (which is called the trust property), for the benefit of persons (who are called the beneficiaries) …any one of whom may enforce the obligation.” This dichotomy between legal and equitable ownership brought about unique features of a trust that allow many wealthy families to plan for their legacy and estate.
- The assets are separated from the trustee’s own property and upon death, own estate
- The legal title to the trust assets is in the name of the trustee
- The trustee has the obligation to be accountable to the beneficiaries to manage, employ or dispose of the trust assets in accordance with the terms of the trust deed
In this regard, many of our clients come to us for 4 main purposes:
Investment planning and portfolio management – Some of our clients manage their own investments but are concerned that on their demise, their family members do not know how to and/or have no interest in investing the assets. They would then set up a trust (either in their lifetime or upon their deaths) appointing a corporate trustee to hold and deal with the assets and us as the investment manager for the assets to provide financial security for their family and following generations.
Tax savings – Individuals may have to pay tax on their earnings and capital in their lifetime and on their deaths, their families may have to pay estate or inheritance tax. For companies, tax is typically imposed on their profits. Whether earnings, capital or profits are taxable will depend on many factors such as whether individuals or companies are tax-resident of that jurisdiction or whether individuals are citizens. As some of our clients own assets/businesses and/or earn income from several jurisdictions, or they may have intended beneficiaries who are residents or citizens of foreign countries, they would then explore tax-saving opportunities available in low or nil-tax jurisdictions such as Singapore or other offshore jurisdictions using trusts and certain corporate structures.
Reduction of risks – When clients come to us, some of the risks they would like to mitigate include claims from the creditors, or “alleged” creditors, spousal claims on divorce or seizure and expropriation by governments arising, for example from political instability in the client’s country of domicile or from revenue authorities and claims arising under forced heirship laws. Because of the separation between legal and equitable ownership, clients would explore using a trust for asset protection purpose.
Estate planning – While wills are the most used legal instrument for the purpose of distribution in estate planning, some of our clients would prefer using a trust as it offers a lot more flexibility and confidentiality. In the event of our clients’ unfortunate demise, the trustees are to keep information and documents confidential from those who are not a party to the trust. In addition, without having to go through the probate process, trust assets can be distributed faster. Some of our clients also like to set up trusts that give discretion to the trustees on how assets or income should be distributed but provide guidance via a letter of wishes. This gives a lot more flexibility in our clients’ legacy and estate planning.
Over the years, we have noticed that when clients first come to us, they often equate legacy and estate planning with either buying Universal Life Policies (ULPs) or setting up a trust. But that is really putting the cart before the horse. Like ULPs, trust deeds are just “products”. Legacy and estate planning is about developing a strategy to define, reflect on, and express what wealth really means to a family so that not only financial wealth, but also family’s core values are passed on to future generations. For business owners, financial wealth could even include passing on the business and therefore business exit and succession planning is important. Trust is just one of the many ways your wealth adviser can use to create your legacy and estate plan. So, before you set up a trust, first have a deep conversation with your trusted adviser. It may not just save you some money, but also the impact of your planning can better reflect your intentions.
The writer, Christopher Tan, is Chief Executive Officer of Providend, Singapore’s first fee-only wealth advisory firm and author of the book “Money Wisdom: Simple Truths for Financial Wellness“.
The edited version of this article has been published in The Business Times on 18th July 2022.
For more related resources, check out:
1. My Reflection on the True Value of Estate & Legacy Planning
2. The Importance of End-of-Life Planning
3. Demystifying Universal Life Policies (I)
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