How a trust helps in wealth and legacy planning

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 would be interesting to first understand what a trust is through knowledge of the evolution of the law of equity. This law has its origins in 14th century England.

While England’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 did not have the time to hear every single case. The Chancellor, sitting in the Court of Chancery, could then decide on cases based on what he thought was fair or equitable.

This then led to the development of a parallel system: common law, administered in the king’s law courts, and the law of equity in the Court of Chancery. The trust is a creation based on the law of equity and originated in the 15th century.

Let’s unpack this further with an example.

John owns a property, but had to go away for a long time. Not knowing when he would be back, or whether he would make it back at all, he decided to appoint his best friend Jack to take charge of the property while he was away. He therefore transferred 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.

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 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 1995 legal textbook Law Relating to Trusts and Trustees by David Hayton, 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 the unique features of a trust that allow many wealthy families to plan for their legacy and estate. These features are:

• The assets are separated from the trustee’s own property and upon death, the trustee’s own estate;
• The legal title to the trust assets is in the name of the trustee; and
• The trustee is obliged 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 four 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 would not know how to invest, and/or would have no interest in investing, the assets. They would then set up a trust, either in their lifetime or upon their death, appointing a corporate trustee to hold and deal with the assets. We would also be appointed as the investment manager, to ensure that assets provide financial security for the clients’ family and following generations.

Tax savings. Individuals may have to pay tax on their earnings and capital in their lifetime; 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 residents of that jurisdiction or whether individuals are citizens.

Some of our clients may own assets and businesses, earn income from several jurisdictions, or have intended beneficiaries who are residents or citizens of foreign countries. Such clients would then explore tax-saving opportunities in low or nil-tax jurisdictions, such as Singapore or other offshore jurisdictions, using trusts and certain corporate structures.

Risk reduction. When clients come to us, the risks they would like to mitigate include claims from creditors, or "alleged" creditors; spousal claims on divorce; 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.

Estate Planning. While wills are the most frequently used legal instrument for the purpose of distribution in estate planning, some of our clients prefer using a trust as it offers a lot more flexibility and confidentiality.

In the event of our clients’ demise, the trustees are to keep information and documents confidential from those who are not party to the trust. In addition, without having to go through the probate process, trust assets can be distributed more quickly.

Some clients also like to set up trusts that give discretion to the trustees on how assets or income should be distributed, providing 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. This is so that the family’s core values, and not just financial wealth, can be passed on to future generations.

For business owners, financial wealth could include passing on the business, so business exit and succession planning is important. A 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 a trusted adviser.

Doing so may not just save you some money, but also allow your planning to better reflect your intentions.

The writer is CEO of Providend, Singapore's first and probably sole fee-only comprehensive wealth advisory firm