What is a Trust?
A trust is a legal arrangement between you (the settlor) and a trustee. Trustee refers to an individual or organization which holds and administers properties or assets through a trust, for the benefits of other persons.
When you set up a trust, your appointed trustee takes ownership of your assets and manages them in the best interest of your beneficiaries. Beneficiaries are people who are legally entitled to the income/capital of a trust by virtue of a will or trust deed.
You can decide the terms of the trust including who your beneficiaries are, and how much power you wish to retain over your trust.
As assets placed in a trust are not part of a deceased’s estate,probate is not required, and disputes over the assets can be avoided.
Why set up a trust?
You may consider setting up a trust if you want to:
· Control and protect your family assets. You may also want the money held in trust to be invested.
· Buy a property for your child. Specify the age to have it transferred when your child grows up.
· Provide for a child who is a minor, or has special needs.
· Provide for an adult child who is careless with money.
· Protect your money in the event of a divorce.
· Protect your assets from creditors.
Types of trusts
Setting up a trust during your lifetime
A living trust is set up during a settlor's lifetime, where the assets are transferred to the trust. Examples are inter vivos, discretionary or revocable trusts. It is done by executing a trust deed together with the transfer of assets to the trustee.
The settlor can revoke or terminate the trust at any time.
A testamentary trust is made using a Will and takes effect after the settlor's death. This is useful where you have:
· Young children
· Dependants with special needs
· Beneficiaries who may inherit a large sum of money but are unable to manage it
Once this trust is in place, it is irrevocable.
Trust income may arise from assets held in trust by trustees of private trusts created by way of Trust Deeds/Settlements.
a. Rental income from property
b. Interest Income from bank/finance company (including deposits with POSB)
c. Share of profit from a partnership*
d. Profit from a sole-proprietorship business*
e. Income distributions from Unit Trusts / Real Estate Investment Trusts (REITS)
g. Foreign-sourced income remitted into Singapore
h. Other gains or profits of an income nature
*Tax at trustee level is final.
Income Tax Treatment of Trusts
The statutory income of a trustee is subject to income tax. Section 35(11) of the ITA provides that the income of a trust is the statutory income of the trustee and is chargeable to tax on the trustee.
Income derived by trusts will be taxed either at the trustee level or in the hands of the beneficiaries if they are resident in Singapore and entitled to the trust income. However, income derived from a trade or business carried on by the trustee is subject to a final tax at the trustee level.
Whether or not a beneficiary is entitled to the trust income is a question of fact. One would have to examine the trust deed to determine if the beneficiaries of the trust are indeed entitled to the trust income. However, where the trust income is distributed to the beneficiaries within the same year in which the trust income is derived, the Comptroller will treat the beneficiaries as being entitled to income distributed.
Tax on Resident Beneficiaries
Resident beneficiaries are required to declare the income from assets held under a private trust/settlement when filing their Income Tax Return. Resident beneficiaries refers to beneficiaries of a trust that are resident in Singapore.
The following tax treatment will apply to resident beneficiaries who are entitled to the trust income by virtue of the trust deed:
(a) The Comptroller will accord the tax transparency treatment under section 43(2). No tax will be imposed at the trustee level and the beneficiaries are subject to tax on their entitlement to the share of trust income at their personal income tax rates .
(b) The beneficiaries will be accorded the concessions, tax exemptions and foreign tax credits as if they had received the trust income directly (sections 13T, 43X and 50B). In other words, distributions received by such beneficiaries are deemed to have retained the nature of the underlying trust income for the purpose of claiming the concessions, exemptions and foreign tax credits by the beneficiaries.
Foreign tax credit refers to a credit for the foreign tax paid on foreign income that is allowed as an offset against Singapore tax payable on the same income. The credit to be granted is the lower of the foreign tax paid and Singapore tax payable. Foreign tax credits are granted only to Singapore tax residents.
Resident beneficiaries are required to declare their share of income in their Individual Income Tax Returns under 'Others' as a trust income. Generally, capital receipts (such as sale proceeds from properties/shares, insurance monies) are not taxable. Please do not declare such receipts.
Tax on Non-Resident Beneficiaries
Where there are non-resident beneficiaries of Singapore, tax on non-resident beneficiaries' share of entitlement or distribution of income is assessed and paid at the trustee level. The trustee is required to pay tax on their shares of entitlement at the prevailing trustee rate for that year of assessment.
When distributing income to beneficiaries who are non-residents of Singapore, please retain the estimated tax payable on their share of income before making distributions to them.
The tax treatment applicable to resident beneficiaries shall not apply to the following:
(a) Income derived from a trade or business carried on by the trustee (sections 43(2A)(c) and 35(16)(c));
(b) Trust income to which the beneficiaries are not entitled; and
(c) Trust income to which non-resident beneficiaries are entitled.
The trust income in (a), (b) and (c) above is subject to a final tax at the trustee level.
Distributions made out of such income are capital in nature and therefore will not be subject to any further tax in the hands of the beneficiaries.
The statutory income of a trustee is subject to income tax at 17% flat rate.
Trustee of a private trust or settlement (including non-residents) should submit Form T to the Comptroller of Income Tax by 15 Apr.
The combined effect of tax treatments set out in the preceding paragraphs means that there will not be a case where tax is imposed on trust income, once at the trustee level and again at the beneficiaries levels.
Where the trust income is subject to a final tax at the trustee level, the trustee is regarded as a body of persons for tax purposes notwithstanding that the trustee may have legal personality in its own right i.e. it is a company or an individual etc. The tax rate to be levied on a trustee is the prevailing corporate tax rate, however, the trustee is not entitled to the partial tax exemption provided under section 43(6)(b) of the ITA.
Estate income in 2018 $6,000
Less amount assessed on resident $4,000*
beneficiaries (2/3 of $6,000)
Chargeable income $2,000
Tax on trustee: $2,000 at 17% $340.00
The resident beneficiaries will be assessed on their share of entitlement ($4,000*) at their personal tax rates in YA 2019. Those who receive less than their share of entitlement will still be assessed on the full share as they are legally entitled to the income.
If you have any enquiries or need clarification on Trust, please contact Bestar.