Considering trusts as part of legacy planning

By Lorna Tan

If you’ve only got a minute:

• Trusts can be useful legacy-planning tools especially if you have vulnerable beneficiaries.
• The standby trust is a flexible tool for those who may decide to transfer some of their significant assets into the trust only at a future date. But it has pitfalls too.
• Families with special-needs members and who cannot afford private trust firms and banks, can approach the Special Needs Trust Company.

Trusts have long been an investment instrument for the well-heeled, but many people are realising that they can be useful and relevant legacy-planning tools.

While wills are essential, trusts are also important because of our growing wealth - based on the potential value of our estate upon death - and the vulnerable beneficiaries (children who are young adults, senior citizens like parents, and persons with special needs).

With growing affluence, there are increasingly more Singaporeans with S$1 million or more in wealth at their deaths. These would include many working Singaporean adults when you take into account their savings, homes and insurance proceeds.

I believe that if they were given a choice of giving S$1 million to vulnerable beneficiaries in a lump sum, all of them would likely say no.

There are also people who will find trusts a useful tool to ensure that their wealth is kept within direct family members such as spouses, children and grandchildren, but leaving out children's spouses and their in-laws. People in high-risk business with exposure to potential creditors can also set up a trust to shield part of their assets.

In the past, trusts were generally pitched at rich clients and offered by private banks, but now independent trust firms are offering such services on the back of the population's growing wealth.

Standby Trust

There are several trusts and a trust specialist will be able to advise on which type is suitable for an individual’s legacy planning needs. One of them is the standby trust which is a legal arrangement that allows an individual to place his or her assets like shares, money and property, such that an appointed person or trustee can manage and administer them for the benefit of others (beneficiaries).

Legacy-planning specialists recommend the standby trust as an affordable and flexible tool for those who may decide to transfer some of their significant assets into the trust only at a future date.

A standby trust offers more confidentiality than a trust set up from within a will (known as a testamentary trust) and amendments to the Letter of wishes can be made at little cost. When the trust is on standby mode, the annual costs are typically nominal, starting from S$250, and include reviews of your Letter of wishes.

For some families with special-needs members and who cannot afford private trust firms and banks, they can approach the Special Needs Trust Company (SNTC). SNTC is a non-profit trust firm here offering affordable trust services to such families.

For instance, the one-time set-up fee of S$1,500 for a trust works out to just S$150, after taking into account the 90% subsidy.

Here are five scenarios on how a trust can be relevant.

1. Maintenance of young children

Ms Mabel Toh (not her real name), 38, is a widow earning S$4,500 a month. She has two children aged seven and 11. A trust specialist advised her to make a will that sets up a trust (testamentary trust) upon her death.

Ms Toh was advised to set up a trust to distribute her money over a period of time upon her death because her estate would have over S$1 million from her insurance plans and other assets, and she has two young beneficiaries.

Ms Toh has the option of stating a fixed amount be given to her children monthly. However, she preferred for the trustees to decide how much money the children would require depending on their life stage, until they become adults.

2. Shielding assets from division upon your divorce

Ms Diana Tan (not her real name), 40, feels insecure with her husband's frequent business travels. She worries if her marriage ends in divorce, she could at most get a portion of the matrimonial assets but their only child, aged 14, would get nothing.

Ms Tan was advised to arrange for her husband to buy a property on an irrevocable trust set up in the child's name. This means the assets set aside in the trust for the child will never be subject to division in a divorce. This protection cannot be secured by a will, which can be revoked any time.

3. Shielding assets should your children divorce

A standby trust can be useful for those who want to give assets to a child with the assurance that the gift will not become a divisible matrimonial asset if the child eventually marries and then divorces.

Mr and Mrs Tony Koh (not their real names) wanted to help their children set up homes in their lifetime but did not want their savings to benefit unintended third parties. They set up a portfolio of assets on trust so the children can benefit from the income. The trust can be set up so that these assets will never be part of the children's matrimonial assets. For instance, the trust documents may state the assets are meant only for the parents' children and grandchildren, but not in-laws.

4. Avoiding potential claims against beneficiaries

Mrs Candy Kim (not her real name) and her husband had two children. Mrs Kim worked as a senior manager in the finance sector while her husband runs his own business.

Mrs Kim’s investments were worth more than S$1.5 million and she also owned three apartments in her name. The couple made their wills naming each other as the main beneficiary of their respective estates.

She was recently advised to create a standby trust for her family members. She made a new will that gifted her residuary estate to the standby trust. Her husband and two children were the beneficiaries.

She subsequently died. At the point of her death, Mr Kim was an undischarged bankrupt as his business had failed. Fortunately, her estate "poured over" to the standby trust under the terms of her latest will, which prevailed over the previous one.

If she had not set up the standby trust and not made a new will, it would have meant that under her earlier will, the substantial part of her estate would have been bequeathed to her husband. Under the bankruptcy law, that would have left Mrs Kim's estate exposed to his creditors to satisfy his debts.

5. Lending money to a beneficiary for buying a property

Parents can set up a trust to assist their children to acquire residential properties for themselves but under certain conditions to be observed by the trustees.

A standby trust can be set up with a loan (with interest or interest-free) from the trust funds. The loan will be required to be secured upon pre-determined terms and conditions such as on the security of the property.

By doing so, the trustees will have a charge over the property, which effectively means that if the beneficiary decides to sell it at some stage, the proceeds will go towards redeeming the trust charge first.

One requirement is that the amount of the loan cannot exceed two-thirds of the value of the property. The beneficiary either pays the balance or obtains a bank loan. When the beneficiary is at a certain age, say 35, the trustees could have the power to determine if the loan needs to be paid back.

This sort of estate planning means the parents' inheritance to their children gives them a head start in their lives but is controlled until such time when the young beneficiary becomes of age and is financially more mature.

Pitfalls of Standby Trusts

A Standby Trust comes with some pitfalls too. To find out if it is suitable for your needs, it is prudent to have a discussion with a professional estate planner practitioner. DBS Bank does not provide standby trust services. Here are some disadvantages of a Standby Trust.

1. False sense of security

A standby trust is often unfunded until a triggering event (e.g. upon demise). This means assets remain unprotected until activation. If the client believes the trust offers immediate asset protection, this misunderstanding could lead to vulnerability, especially in cases of unexpected lawsuits or creditor claims.

2. Potential for loss of control

While the settlor (the person creating the trust) retains control during their lifetime, the terms of the trust dictate how assets are managed and distributed after their death or incapacity. This could mean that beneficiaries may not receive assets in the way the settlor intended, or that the trust's assets might not be managed effectively.

3. Delays in execution

Standby trusts rely on external events to "activate" (e.g., upon demise). These activation steps can cause delays during critical moments, like when immediate financial management is required for estate management.

4. Probate exposure

Any assets not transferred into the standby trust during the client’s lifetime could be subject to probate, defeating one of the key purposes of a trust. Without a fully funded trust, clients lose the opportunity to bypass probate completely.

5. Cost without immediate benefit

Clients incur costs to establish and maintain a dormant standby trust, yet it may remain unused for years—or possibly forever—if activation criteria are never met. These expenses might outweigh the benefits for many clients.

6. Complexity of funding at activation

Transferring assets to the standby trust upon activation can be complex and time-sensitive, especially for illiquid assets like real estate. If instructions are unclear, this could create disputes or delays in funding the trust.

7. Tax implications

Standby trusts can trigger tax liabilities, particularly if not structured correctly. These may include capital gains taxes, inheritance taxes, or estate taxes, varying widely depending on the client’s jurisdiction.

8. Administrative Burden

Standby trusts require regular updates to ensure they align with other estate planning tools (e.g., wills, powers of attorney). Failing to keep everything synchronized can lead to conflicting instructions and disputes among beneficiaries.

9. Trustee Mismanagement

As the trustee typically steps in only after activation, they may lack familiarity with the trust’s terms or the specific assets to be funded. This unfamiliarity could lead to delays in taking control of the assets, resulting in administrative inefficiencies or potential errors during time-sensitive situations.

Common Legacy Planning tools

Besides trusts, there are other legacy planning tools. Here is a summary of the 5 common tools in Singapore.

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Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.