Mention trusts and one inadvertently thinks of the extremely wealthy, using trusts as a tool to pass on their wealth and live in the lap of luxury without lifting a finger. There’s more to trusts than that however. To help you better understand what a trust is, here are some commonly asked questions and their answers.
by Chang Hui Chew
1. What is a trust?
A trust is made up of a variety of assets, including real estate, which is meant to provide benefits, such as money, to either a person, or an organisation, such as a charity. The most common motivation behind creating a trust fund is to give the beneficiary a source of financial support, with a degree of oversight.
2. Who are the parties in a trust?
In general, there are three parties involved in a trust– the settlor, the trustees, and the beneficiary. The settlor is the individual who created the trust, and is most often the party who owns the assets in the first place. The trustee, often a lawyer, is entrusted with the legal title to the property, and administers the trust. There’s also the beneficiary, who is the person who is the recipient of the proceeds from the trust.
3. Why do people set up a trust?
Trusts are an important part of estate and financial planning, especially for the extremely wealthy. One of the main purposes of a trust is to protect an asset from being wrestled out of one’s control, such as through forced heirship laws (where inheritance is determined by the state instead of one’s will), during bankruptcy, or divorce settlements.
4. How does a trust protect assets?
When a trust is set up, the assets pass from the settlor to the trustees. If the trust is an irrevocable trust, the settlor cannot reclaim his or her assets. Because the assets are not held by the settlor, they cannot be touched by the beneficiaries, or their creditors. At the same time, trusts can also be established offshore and privately, and do not form part of the estate, or are subject to probate proceedings after the settler’s passing.
5. How does a trust protect the beneficiaries?
A trust protects a beneficiary by making sure that they are insulated from careless or unwise financial decisions, or to ensure care for offspring with physical or mental disabilities. For instance, if parents are worried about the care of their child after their passing because of his or her disabilities, they can settle their property into a trust, and direct the benefits towards his or her care and needs.
6. How does a trust actually work?
The trustee has an obligation to administer, manage and invest the assets for the beneficiaries. Part of the proceeds will pay off the trustees’ fees, while the rest will go towards the beneficiary. For real estate, the proceeds are often based on the rental income reaped from the asset. As part of the process of creating the trust fund, a schedule of benefit disbursement should also be created.
7. What kind of trusts are there?
There are a number of trust types and to fully understand them all, one should consult a legal professional. However, the most common types are: a revocable trust, where the trust can be canceled or terminated by the settlor; an irrevocable trust, where the settlor hands over the assets to the trust to be managed for the benefit of the beneficiaries, without being able to reclaim the assets; and a charitable trust, which benefits a charity or a charitable purpose, instead of a specific individual.
8. What kind of properties can go into a trust?
In general, all types of properties can be settled into a trust, as long as the title deed is held by the settlor. This means that properties which are currently mortgaged cannot be placed into the trust, until it is fully paid off and the title deed redeemed from the bank.
9. Can I use trusts to avoid paying taxes?
Some forms of trusts allow the beneficiaries to be able to get some form of tax relief, such as through charitable trusts. However, those hoping to use trusts to avoid paying Additional Buyer’s Stamp Duty (ABSD) will be disappointed. For such matters, the Inland Revenue Authority of Singapore looks at the ultimate beneficiary of the trust. If the ultimate beneficiary already owns more than one property, ABSD will apply.
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