Types of trusts
If you don’t have time to read through the whole article, you can check out our short version below:
A trust allows a person (Settlor) to pass his or her assets to another person or organisation (Trustee) to manage them for the benefit of a group of persons (beneficiaries).
Common types of trusts include testamentary or “Will” trusts, intervivos trusts, and standby trusts.
Revocable trusts allow the settlor to terminate or change the terms of the trust, while irrevocable trusts cannot be terminated or altered as long as the arrangement is in place. Meanwhile, in a fixed trust, the settlor decides how much and under what terms each beneficiary will receive, while in a discretionary trust, the trustee has full discretion over financial distributions.
Set-up costs of trusts vary, depending on the complexity of the arrangements and the choice of law firms. They can range from a few thousand dollars to S$20,000 or more.
A trust allows a person (Settlor) to pass his or her assets to another person or organisation (Trustee) to manage them for the benefit of a group of persons known as beneficiaries. Let’s look at the common types of trusts.
This is a trust that is formed in a Will to take effect only after the settlor’s death.
The trust is not an entity in his lifetime.
When the settlor passes away, assets flow into the testamentary trust through the Will and is subject to the terms as well as duration of the Grant of Probate process.
Do note that in the event the settlor loses his or her mental capacity (due to medical conditions including dementia or a coma), the distribution instructions of the trust cannot be carried out.
Compared to other types of trusts, the testamentary trust requires the lowest set-up fee. There is an annual fee only after the trust is activated after the probate process.
This type of trust is created in a person’s lifetime and is a legal entity at the start. Assets are placed in the trust during his or her lifetime, and it also allows Central Provident Fund (CPF) nominations and assignment of insurance plans.
An intervivos trust allows the trustee to look after the settlor’s dependants during the settlor’s mental incapacity and upon death. Distribution of assets and/or income to the beneficiaries can be stated in the Letter of Wishes, a document that can be revised anytime by the settlor.
Such trusts are usually used for tax effectiveness and to protect assets from creditors.
Besides annual trust administration fees immediately payable after the trust is created, such trusts generally require higher set-up costs, stamp duties and charges.
This is a hybrid of the testamentary and intervivos trusts. A standby trust is popular as it offers the advantages of the testamentary and intervivos trusts.
Like the testamentary trust, no or little assets are placed in the standby trust during the settlor’s lifetime. The trust also has the advantage of including the provision for mental incapacity and allowing for CPF nominations and assignment of insurance policies. This is done without the fees associated with assets transfer and ongoing administration.
The set-up fee of standby trusts is lower than that of intervivos trusts. Annual fees are nominal as long as the trust is dormant.
Features of Trusts
If a trust is revocable, the settlor can terminate or change the terms of the trust. As such, the settlor still has some control over the future of the trust. However, this means it may not provide protection against creditors or from claims from a former spouse in a divorce. Because the trust arrangement can be unwound by the settlor, a court may deem that the settlor still has control over the assets and may demand that the settlor terminates the trust to repay creditors.
On the other hand, an irrevocable trust, as the name suggests, cannot be terminated or altered once the settlor has signed off on the arrangement and transferred the assets into the trust. And since the settlor has no legal rights over the assets, creditors cannot take the assets in settlement of claims against the settlor. Simply put, the assets do not belong to the settlor anymore.
In Singapore, to protect the assets from creditors, an irrevocable trust must have been set up for more than five years before a bankruptcy.
A fixed trust is an arrangement under which the settlor determines at the beginning how much and under what terms each of the trust’s beneficiaries shall receive from the trust. The trustee in this case has no discretion and merely administers the assets according to the terms of the trust.
On the contrary, the trustee of a discretionary trust has full discretion over how much, when and how financial distributions are made from the trust to each beneficiary.
It is sometimes preferred over a fixed trust because the discretion the trustee has may be used to protect family assets in certain legal situations.
Setting a trust is a complex legal area and that right of discretion may be challenged in certain situations. Do consult a lawyer on the circumstances under which there may or may not be protection from creditors and other claims.
The costs vary widely depending on the complexity of the arrangements and the choice of law firms. The costs of establishing a trust can range from a few thousand dollars to S$20,000 or more. In addition, there may be annual maintenance fees.
Besides professional trust firms and banks, the government has set up the non-profit Special Needs Trust Company to provide affordable trust services to special needs people with mental and/or physical conditions. Its fees are 90% to 100% subsidised by the Ministry of Social and Family Development.
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