Understanding trusts

Understanding Trust

NAV TL;DR

If you don’t have time to read through the whole article, you can check out our short version below:

A trust is a legal arrangement that allows you (known as the “settlor”) to place your assets such that an appointed “trustee” can administer and manage them for your beneficiaries.

Most commonly, trusts are used to protect the interests of young or vulnerable children who may not be able to handle their own financial affairs.

Trusts can also be used as a way to pass wealth through generations, and help protect your assets from creditors or in the event of divorce proceedings.

A trust is a legal arrangement that allows an individual like you (known as the settlor) to place your assets such that an appointed trustee can administer and manage them for the benefit of others (your beneficiaries). Your assets may include cash, stocks, property, and family businesses, and your beneficiaries may include family members, friends, or charitable organisations.

There are different types of trusts. For example, you can specify how much and how your assets should be distributed to your beneficiaries. You can also determine the specific instruments for your trustee to manage and distribute your assets and income (such as investment gains).

Your trustee has a statutory obligation to act in your beneficiaries’ best interests. You may also appoint a “protector” to safeguard the trust and prevent the trustee from abusing his/her powers.

What are the main purposes of trusts?

Whether you need a trust depends on your personal circumstances. The following are some reasons people use trusts for legacy planning purposes:

Understanding Trust

Most commonly, trusts are used to protect the interests of young or vulnerable children. And that may be children who are minors, or beneficiaries who, for whatever reason, are not capable of handling their own financial affairs. These include special needs children, children too young to get substantial inheritances, or beneficiaries who are spendthrifts.

In addition, trusts also avoid the legal delays that beneficiaries face in gaining access to assets bequeathed under a will. Before assets can be distributed to the beneficiaries stated in your will, the Executor has to apply to the Court for a Grant of Probate.

Understanding Trust

Trusts can also be used to pass wealth from one generation to the next. Rules can be written for the trust to determine how the assets are passed on, not just your children, but also your grandchildren and great-grandchildren.

You may also set out rules on how the assets in your trust are to be invested.

Understanding Trust

Some types of trusts can protect assets intended for beneficiaries from creditors – and hence, can be used by people in high-risk businesses or professions (where they may be sued for negligence) to protect family assets.

Similarly, it protects assets intended for beneficiaries in the event of divorce legal proceedings. For example, if you set up a trust for your child, the assets in that trust will not be subject to division in the event that you and your spouse undergo a divorce. This ensures that your child will receive the assets.

But typically, this only applies to trust structures under which the settlor no longer has any rights over the assets transferred into the trust.

For instance, a standby trust can be useful if you want to gift assets to your child, while ensuring that the assets will not become a divisible matrimonial asset if he/she eventually marries and divorces. This means that your ex-son- or daughter-in-law will not be able to claim those assets.

Understanding Trust

Trusts may also be useful for legitimate tax planning purposes. For instance, you may channel income or profits from your assets to family members in lower income tax brackets, so that the income/profits are subjected to lower tax rates. A trust can also be used to protect assets from capital gains or death taxes that may apply in other jurisdictions.

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