Trusts 101 (2014 aug)

Trusts 101
Savoir LLC
Advocates & Solicitors | Fiduciaries
Tax , Trusts & Transactions
August 2014

Introduction
•  The aim of Trusts 101 is to provide an easy
and quick introduction to trusts. A simple
guide such as this cannot do justice to its
varied nuances and complexities. This is,
therefore, not intended to be comprehen-
sive nor to provide a nuts-and-bolts guide
on how to set up a trust.
•  This guide is organised into simple parts.
The number preceding the title on each
page indicates the respective part. In
summary, the parts are broadly organised
as such:
–  Part 1 deals with the “what”;
–  Part 2 addresses the “how”; and
–  Part 3 looks at specific practical
applications.
•  Before we begin, let us add that it is
paramount that you seek both legal and
tax advice when you establish a trust. This
is necessary so that an appropriate
structure can be tailored to fit your specific
circumstances. This is crucial. Beware
anyone offering an “off-the-shelf ” package
or has no thorough understanding of your
needs.
Copyright Savoir LLC (UEN 201334172Z) | 20 Collyer Quay #23-01 Singapore 049319 | www.SavoirLLC.com
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1.1 What is a Trust?
•  A trust is a legal structure recognised and enforceable in common law countries such as the
United Kingdom, Singapore, Hong Kong and New Zealand.
•  A trust is created when:

–  A person (called the “Settlor”) owning assets transfers ownership of these assets into
the care of a Trustee;
–  The Trustee is under a legal obligation to hold and use these assets for the benefit of
other parties (called the “Beneficiaries”); and
–  The Beneficiaries have the right to enforce the Trustee’s obligations to them.
3

1.1 What is a Trust?
1. The Settlor transfers assets to
Trustee
Trustee

Se)lor

2. Trustee owes ongoing obligations to
Beneﬁciaries
Trustee

Beneﬁciary

Obligations
Rights
Owns assets
Enjoys assets
4

1.2 Legal Obligations
•  Before the Settlor transfers the assets to the
Trustee, it is usual practice for both parties
to enter into a binding Trust Deed. The
Trust Deed sets out important terms, such
as:
–  The obligations of the Trustee;
–  The assets that comprise the trust; and
–  Who the Beneﬁciaries will be.
•  It should be noted that a Settlor can
name himself as a Beneﬁciary under
a trust.
•  Many countries, including Singapore, that
have trusts as part of their legal system
have enacted legislation that sets out the
duties of trustees.
•  The Trustee is under a legal obligation to
administer the trust honestly and in
good faith.
•  Although the Trustee has legal ownership
of the trust assets, it cannot treat these
assets as its own. It can only use them in
strict accordance with the terms of the
Trust Deed and the law.
•  The Trustee must also furnish regular
accounts, usually at least annually.
5

1.3 Beneficial Interest
•  While the creation of a trust passes on the legal ownership of the trust assets to the Trustee,
the Beneficiaries enjoy a beneficial interest in these assets.
•  This means that:
–  The law recognises the Beneficiaries right to enjoy the benefit arising from these assets.
For instance, if the trust assets comprise shares in a public listed company, the Trustee
would be accountable to the Beneficiaries for all dividends declared and the sale proceeds
upon the sale of the shares;
–  The Beneficiaries have a legal right to enforce the terms of the Trust Deed against the
Trustee; and
–  If a Trustee is found to be in breach of trust, it could be liable to compensate the trust
for any loss suffered.
6

1.4 Beneficial Enjoyment
•  Even if there is transfer of legal ownership to the Trustee, the trust can be structured so that
the status quo of how the Beneficiaries enjoy the assets remain largely unchanged.

•  Example:
Mr S has $5 million of cash, which he presently uses for his own benefit, as well as for his wife
and two sons. Mr S subsequently sets up a trust and names himself, his wife and only son as
Beneficiaries. He then transfers the $5 million to the Trustee.

Although the Trustee is now the legal owner of the $5 million, it is under an obligation under
the terms of the Trust Deed to use the money for the Beneficiaries’ needs. This means that
although the $5 million is now held in trust, Mr S and his family continue to enjoy the
benefit of the money.
7

Before setting up trust:
Mr S owns assets directly
Mr
S
&
family

Enjoy
the
benefit
of
the
$5
million

Mr
S

Directly
controls
$5
million
and
uses
it
for
the
benefit

of
himself,
his
wife
&
only
son

After setting up trust:
Trustee owns assets
Mr
S
&
family

Enjoy
the
benefit
of
the
$5
million

Trustee

Uses
$5
million
according
to
the
terms
of
the
Trust

Deed
for
the
benefit
of
Mr
S,
his
wife
&
only
son

Mr
S

Transfers
$5
million
to
Trustee

8

•  As the earlier diagram shows, the practical effect is that even after the trust is set up, the $5
million can still be enjoyed by Mr S and his family.
•  The main difference is that the money is now held by a Trustee instead.
•  This critical step of a Settlor transferring assets to a Trustee to hold on trust is fundamental in
allowing the Settlor ﬂexibility and versatility in preserving and managing personal wealth,
as we shall later see.
9

2.1 Secure Flexibility
•  The trust is secure yet provides flexibility.
A bespoke solution that addresses all
your needs can be crafted by a competent
professional.
•  You are at liberty to decide important
matters, such as:
–  What the trust assets include;
–  Who the Beneficiaries will be, and
whether you will be one of the
Beneficiaries;
–  How the trust assets will be
distributed to each Beneficiary;

–  How the trust assets will be invested;
–  The powers of the Trustee; and
–  Whether the Trustee will be subject to
the supervision of a Protector.
10

•  More and more Settlors are beginning to
realise the importance of a Protector.
For added peace of mind, do consider
appointing one.
•  The Protector’s key role and duty is to
supervise the Trustee, ensuring that it
administers the trust in strict accordance
with the terms of the Trust Deed.

•  Protectors are often given powers to, where
necessary, e.g. veto a Trustee’s decisions,
vary the terms of the trust and to (in a very
worst case scenario, which rarely happens)
remove an errant Trustee. These powers
are enshrined in the Trust Deed.
•  It is, therefore, crucial that a competent
and qualiﬁed Protector be appointed.
Preferably, it should be an individual who
understands how to supervise a Trustee
and is skilled to enforce the rights of
Beneﬁciaries.
11

Trustee

Beneficiary

Obligations
Rights
Owns assets
Enjoys assets
•  Protectors, like Trustees, are under a
fiduciary duty to always act:
–  In accordance with the terms of the
Trust Deed; and
–  In the best interest of the Beneficiaries.
•  The practical effect is that a Protector is
able to ensure that your wishes are
carried out.
Protector

Oversight
12

2.2 Secure Versatility
•  You can use the trust for a variety of purposes.
•  When structured properly, it allows you to:
–  Protect your assets;
–  Provide for family and loved ones during your lifetime and beyond; and
–  Limit your tax exposure.

13

2.2 Secure Versatility
Uses
of

trusts

Protect

assets
from

creditors
&

matrimonial

claims

Shield
assets

from
poli<cal

uncertainty

Conﬁden<ally

&
freely

distribute

wealth

Safeguard

legacy
from

spendthriA

heirs

Tax
planning

&
eﬃciency

14

3.1 Asset Protection
•  Let us consider asset protection, typically the most important concern among Settlors.
•  Once a Settlor transfers assets into a Trust, these assets no longer form part of the Settlor’s
estate. They are instead legally held in the name of the Settlor.
•  Assuming that the trust is properly constituted and creditor protection limitation periods no
longer apply, the trust assets are safe from seizure by a creditor.
•  The Settlor would have effectively preserved a portion of his wealth by putting it out of
reach of a potential creditor.
15

3.1 Asset Protection
•  As the diagram illustrates, the trust assets
are safely insulated behind the trust
structure.
•  In such a case, a Trustee cannot transfer
any trust asset to any creditor. If a Trustee
does so, it would be in breach of trust.
•  It should be noted that a trust cannot be
used to defraud legitimate creditors. For
example in Singapore, a court could
invalidate a trust if the Settlor is made
bankrupt within ﬁve years of setting up his
trust. Hence, trusts should be
established early to eliminate any claim
from any future creditors.

Trust

Assets

Trust
structure

Creditor
cannot seize
16

3.2 Tax Beneﬁts & Legacy Planning
•  Another common objective of Settlors is to
legally minimise tax exposure. For
instance, this is relevant as some countries
that impose tax when a deceased person’s
property is transferred to his heirs.
•  In certain circumstances, a trust can be
used to efﬁciently pass on such property
with minimal or no tax.
•  A Settlor can also use the trust to
effectively ensure a lasting legacy is
passed on to future generations.
•  Example:
Mr S lives in Country Z. He intends to
buy a house in Country Z, which will be
registered in his name. He intends that on
his demise this house will be transferred to
his wife, and subsequently on her death to
his only son. His intent is to keep the
house in the family for future generations.
However, Country Z would impose death
duty / transfer tax each time the house is
transferred upon Mr S’ and his wife’s
death.

A solution would be for Mr S to set up a
trust. The trust would then buy and own
the house, permitting Mr S and his family
to live in it.
17

•  As can be seen, the trust’s ownership of
the house is continuous and because there
are no transfers, death duty / transfer tax
is avoided.
•  Also crucially, Mr S’ wish that the house be
kept in the family for generations can be
achieved. The trust structure prevents the
wife, on Mr S’ death, or the son from
selling the house. Mr S’ intent is
respected.

Trust

Used
by

Mr
S
&

family

Used
by

wife
&

son

Used
by

son

(&
family)

Used
by

subsequent

genera<ons

18

3.2 Tax Beneﬁts & Legacy Planning

Continuous ownership of house

Summary
•  The trust is secure, ﬂexible and versatile.
•  A Settlor may use the trust to protect his assets, to provide a lasting legacy for loved ones
and to limit tax exposure.
•  When structured correctly, the status quo of how a Settlor’s assets are used and enjoyed
remains largely unchanged.
•  Legal safeguards ensure that a Trustee administers a trust honestly and in good faith.
•  A Protector can supervise the Trustee and ensure that the Settlor’s wishes are carried
out.
•  A trust should be established early to ensure that a creditor cannot set it aside in a claim.
19

Contact Us
Benjamin Szeto LLB, MSc
Advocate & Solicitor | Barrister-at-Law
Ben@SavoirLLC.com | +65 6345 7766
20 Collyer Quay #23-01 Singapore 049319 | www.SavoirLLC.com
20

Trusts 101 (2014 aug)

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