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Keeping it in the family
MORE rich families in Asia are turning to trust services offered by banks to ensure a smooth transfer of wealth from one generation to another and help with succession planning.
A trust is a legal structure that holds and manages part or all of a wealthy individual's assets, from operating companies and shares to property and artworks.
The individual, known as the settlor, transfers the legal ownership of his or her assets to the trustee, who holds and manages the assets for the benefit of the beneficiaries - which is usually made up of family members. The settlor can appoint an individual or a company to act as the trustee.
"Using such structures have become more popular in the region as family wealth becomes more complex, with assets usually held across multiple jurisdictions," said Mark Farrell, head of OCBC Trustee.
A trust establishes rules about how a patriarch's money is to be used and distributed to his children. This helps to ensure that wealth is preserved for subsequent generations and to avoid disputes among family members upon the patriarch's passing.
"Certain children have made bad life decisions, whether it is addiction to gambling or drink. Using a trust, parents can determine when their children start receiving money depending on how they are developing," said Mr Farrell.
For instance, parents who wish to buy a property for their offspring allow the child to live in the house but ensure that ownership remains with the trust.
This also protects against the risk of divorce among their children, as the trust structure can help keep the property outside of the marital asset pool.
The trust can also determine how assets are split when the patriarch has families from two different spouses upon his passing. "The aim is to preserve harmony within the family."
However, the rules are not set in stone, and instructions can be changed as family situations change. "Some trusts are established when the child is only 10 years old. The parents may want to change instructions as they see the child mature and who they marry," said Mr Farrell. "The trust is a like a living will, it is very flexible."
He noted that more clients are using insurance products in conjunction with their trusts. A policy will pay out upon the patriarch's death and can be used to provide immediate cash payments to cover taxes or loan repayments. This is important if the settlor's assets are mostly illiquid.
Different types of trusts
A trust can be fixed where the settlor strictly defines what the beneficiaries are entitled to, with no discretion available to the trustee. They can also be discretionary where the trustee is granted the power to exercise discretion in making distributions to the beneficiaries. In case of a discretionary trust, the settlor also usually creates a Letter of Wishes that provides guidance to the trustee for exercising the discretionary power.
"A discretionary trust is usually preferred for long-term management of wealth and assets. This is because the circumstances of the settlor and beneficiaries, and other peripheral factors, may change over time, and a discretionary trust would allow the trustee the flexibility to accommodate any future requests by the settlor," according to corporate services firm Hawksford Singapore in its guide to setting up trusts in Singapore.
These can include changes to the trust structure, the distribution amounts or the investment strategy. The Letter of Wishes is not a legally binding instrument but provides general guidelines for the administration of the trust. The trustees are expected to follow these guidelines.
Tax savings are an important consideration when setting up a trust. As such, many wealthy individuals choose to set up trusts in low tax jurisdictions, including the British Virgin Islands, the Bahamas, the Cayman Islands, Guernsey, and Singapore. Singapore, for instance, has no capital gains tax, estate duty tax or withholding tax imposed on the distributions to beneficiaries.
"Singapore is a popular location for trusts. It is a well-run and stable country and the regulatory regime is very robust," said Mr Farrell.
Determining who will administer the trust is an important decision. Trustees should possess professional legal knowledge and financial expertise, as a trust may require detailed record keeping and coordination with lawyers, accountants and other advisers.
An increasing number of high net worth families are also using an entity known as a private trust company (PTC) as trustee of their family trusts. The PTC itself is essentially a company incorporated for the sole purpose of owning and managing the trust, and its board of directors can consist of the settlor's family members or trusted advisers.
According to Hawksford, "a PTC provides the settlor with a higher level of control, discretion and confidentiality over the trust".