A Brief Introduction to Trust Law in Singapore
What is a trust?
A trust is a fiduciary arrangement where a trustee holds assets (real estate, stocks, bonds, funds, etc) on behalf of another beneficiary. While the trustee holds the legal title of the assets, the beneficiary has the equitable title of the same. Having a legal title means that the trustee has ownership of the assets in law.
This usually entails the trustee’s name is registered on the certificate, or on the Registry. In contrast, having an equitable title means that while the beneficiary does not have legal ownership, he still has a stake in the assets alongside other rights. In Singapore, Trust law is governed by the Trustees Act (Cap 337).
For example, many ex-pats and high-net-worth individuals set up trust funds as investment portals managed by wealth and asset managers for their children. In this instance, the individuals creating the trust are called settlors, the managers are trustees while the children are beneficial owners.
Why should I create a trust?
Providing for your family
In Singapore, individuals cannot hold real estate until they turn 21 years old. However, you may wish to provide for your minor child by purchasing and holding the property on trust for your child. Besides purchasing real estate, you could also set up a ‘spendthrift trust’ with specific instructions that the money should be used specially for your children’s education or medical needs.
To further ensure that the property goes to your child upon death, you can also create a testamentary trust. Testamentary trusts and Wills often go hand-in-hand as a means for the testator to identify his assets, divide the assets and transfer them to his spouse, children or relatives after death. Speak to our Wills and Estate lawyers who can help set your mind at ease and discuss the ways in which you can provide for your loved ones.
Protecting your wealth in the event of a divorce
Wealth protection is a major advantage of creating trust. When the settlor creates a trust, he will have to relinquish his legal rights in the assets and the legal owner is now the trustee. Hence, creating a trust can help you direct some assets out of the ‘pool of matrimonial assets’ that are subject to division in the event of a divorce. This ensures that your assets and wealth are protected against your spouse.
If you create a trust for a third-party beneficial, it is likely that the court will not consider the trust assets to be matrimonial assets for the purposes of division. However, it is important to note that if the trust was done with the intention to deprive your spouse of the assets, he/she can apply to the court to contest the validity of the trust. Furthermore, if you have created a trust for which you are the beneficiary, the court may also consider them part of the matrimonial assets.
Protect your wealth from creditors or bankruptcy
Creating an irrevocable trust for a third-party beneficiary can help you put the assets out of reach of your creditors, or authorities like the Official Assignee in the event of a bankruptcy. This is because when an irrevocable trust is created, you cannot change your mind and attempt to ‘reclaim’ the title for the assets. Since the assets no longer belong to you, your creditors cannot lay their hands on them.
While it is possible for you to separately contract with the third-party beneficiary with respect to the assets, the Court may void the trust if it was a ‘sham’ created to intentionally defraud your creditors.
Investing and growing your money
You could entrust the trust created to a brokerage firm or an investment advisor who could invest your money for you. You can also set up investment criteria such as retaining all the dividends, interest or rental income in the trust.
In Singapore, income earned or received is chargeable to tax. If your income places you in the higher tax bracket, a trust can help reduce your tax liability. Since any income derived will be subject to a final tax at your income tax rate, by putting away your income into the trust, the income will be assessed at the beneficiary’s lower income tax rate instead.