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Why trusts, why now
THE first trust in history is said to date back to the 12th century crusades in England, when landowners left to fight and conveyed ownership of their land to others to manage in their absence.
Present day trusts have since evolved to take a different form, but ultimately serve the same function - authorising a trustee to hold, manage and protect one's assets for the settlor's beneficiaries. Asia's wealth creators may not have felt the urgency to focus on this in the past, but recent developments may well change things.
PLAN EARLIER, NOT LATER
As Gini coefficients (a measure of income or wealth distribution in a society) across the globe continue to rise, perpetuated by a myriad of factors such as the lack of jobs and retirement savings - populist sentiments are intensifying, evidenced by the social unrest that emerged in different parts of the world last year, and the growing number of populist politicians in governments worldwide. With the rise of the populist movement comes greater possibility that we are moving into a world with tightening regulatory regimes, higher wealth taxes and estate duties.
In today's era of increasing bifurcation, where a stark divide lies between those that are fast or slow to adapt to the new world order, it is important to be well prepared for this future.
Chinese philosopher Laozi once said, "A journey of a thousand miles begins with a single step". For families who have yet to give wealth planning much thought, we'd advise you to start having the basic conversations to kickstart this - and proper planning tools such as discretionary trusts, which are effective vehicles that may help not only with tax deferral and tax minimisation benefits, but also in robust management of your family's wealth.
GROWING APPRECIATION FOR TRUSTS AMONG UHNWS
Against this backdrop, a mindset to drive positive social change has emerged among the Ultra High Net Worth community and we're seeing growing appreciation for well-structured, comprehensive trust planning that aligns with this vision. Many are eschewing the use of "plain vanilla" trusts for single bank accounts and instead, using trusts in conjunction with other tools such as family offices for a more holistic approach.
They're also leveraging the focus on tax transparency to deep-dive into enhancing the governance mechanism for their entire wealth spectrum, since the process of trust planning already warrants a thorough stock-take of the family's circumstances, dynamics and aspirations. Given the scale of assets and often-complex family structures, planning requires in-depth conversations with multiple stakeholders across generations and can take several months to a year to complete.
A condensed process could go like this: the advisor may first meet the CFO & COO for clarity on the family's balance sheet and current operational and governance challenges; then the CIO, to understand portfolio allocation and risk exposures; then the principal and other stakeholders for conversations around subtler issues such as aspirations, legacy succession or philanthropy.
Among those who have set up trusts, we've observed a preference for private trust companies (PTC) - structures where trustees are not bank-owned, or third-party trustees where the assets concerned are complex bespoke assets outside the remit of private bank portfolio assets. PTCs are separate legal entities set up for the purpose of administering the family trust which holds the complex family assets; its board of directors usually comprises family members and maybe one or two appointed external professionals who serve as objective observers or mediators if the need arises. In Singapore, PTCs need to be supported by a licensed trust company that is experienced in carrying out trust administration and anti-money laundering services.
We're seeing significant interest in philanthropy trusts. Compared to their predecessors, younger generations in Asian family dynasties tend to be more socially-conscious. As their voice becomes louder in the family, more are pushing for positive change.
Philanthropy trusts provide a flexible way for the family and generations after to give back to society, as they simply require the settlor to identify a particular cause to support. This allows future generations to assess and decide, at that point in time, which charities or social enterprises serving this cause are most deserving and how best to support them. This can take any form the family deems fit, be it through investments, sandbox programmes where family members work alongside the beneficiary, or family volunteerism days.
Taking DBS Private Bank as an example, we work closely with DBS Foundation (dedicated to championing social entrepreneurship in the region) to identify social enterprises that serve our client's cause, and connect them through partnership and funding opportunities to support these social enterprises in furthering their missions.
There has also been a rise in trusts being established in conjunction with family offices to hold private equity investments. In the new world order where traditional incumbents are under threat of disruption by smaller, technologically-advanced players, wealthy families are choosing to dip their toes in the latter. As portfolios diversify beyond traditional assets to include private equity, it's even more difficult to navigate without a trust; it's also not uncommon for families to invest sporadically or own numerous investments - a trust maintains a clean inventory of their assets, and the trustees have an ongoing professional responsibility to update them on tax changes impacting these investments and consequential implications for their assets.
Trusts are no longer seen as a planning tool solely for one's demise. These days, clients are engaging advisors to do systematic planning for situations where they or a family member may become incapacitated. This entails conversations around considerations such as planning for in-house caregivers, and specifying limits to which trust funds can be deployed to take care of a permanently incapacitated beneficiary.
WHY SINGAPORE GETS OUR VOTE
Among Singapore's numerous qualities, what stands out most to us is the government's awareness of changing wealth management trends, and openness to considering feedback to align with these. For instance, under Singapore trust law, trusts are valid for a maximum of 100 years (100-year perpetuity period) - this has been an industry concern as it may not address the needs of families that are structuring for perpetual philanthropic giving, or require multi-generational succession solutions in the context of a complex family office and trust structure. We understand that the relevant authorities are considering legislative enhancements in this area to better cater to families' evolving needs.
The Monetary Authority of Singapore (MAS) and the Economic Development Board (EDB) have also been very supportive of Singapore's drive towards being the preferred succession planning hub through attractive frameworks. These include MAS' rollout of section 13X under the Singapore Income Tax Act, which provides significant tax incentives for families looking to set up single family offices in Singapore. EDB's Global Investor Programme, which previously accorded permanent residence status only to eligible established investors looking to drive business and investment growth from Singapore, recently expanded to allow three new types of applicants: next-gen business owners, founders of fast-growth companies and family office principals.
These, along with the country's stable political and economic environment, strong base of professionals and prime location, are all coming together to build a robust, conducive ecosystem for long-term planning.
TIPS FOR INVESTORS
To conclude, here are three things to bear in mind when starting a conversation with your advisor around trust planning:
- Look beyond obvious tax benefits and exposures - many people resort to trusts solely for tax planning, when they actually offer a wide range of benefits including long-term legacy structuring, succession planning and ringfencing of assets, among many others.
- Trust planning must be done holistically, especially for UHNWs - it cannot be done in isolation. It requires working with the family, internal and external stakeholders, and best-of-breed professionals to implement a robust solution that will address the family's needs.
- Be aware of evolving taxes and regulations in jurisdictions where you own assets - these differ across jurisdictions, and it is imperative that global investors are in the know. But this isn't easy, so it can be helpful to have a trust company manage these assets on your behalf.
- The writer is regional head of Wealth Planning, Family Office and Insurance Solutions, DBS Private Bank