What is a Trust, and Why Set Up One?
Updated: Mar 1
What exactly is a trust?
A trust is a legal arrangement that allows an individual like you (known as the settlor) to place your assets (often but not necessarily a sum of money) such that an appointed trustee can administer and manage them for the benefit of others (your beneficiaries). Trustee refers to an individual or organization which holds and administers properties or assets through a trust, for the benefits of other persons.
How does a trust work?
When setting up a trust, the settlor gives your trustee rights to hold assets and the 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.
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). You can decide the terms of the trust including who your beneficiaries are, and how much power you wish to retain over your trust.
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.
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.
Pros and cons of setting up a trust
The use of the trust provides a number of advantages:
- Flexibility in assigning beneficial interest to beneficiaries
- Distribution is not limited by sufficient profits
- Protecting the interests of young or vulnerable beneficiaries
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 an adult child who is careless with money.
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.
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.
- Wealth Management and Transfers
Trusts can also be used to pass wealth from one generation to the next. The assets do not form part of the estate of an individual when he passes away. This can have a number of succession planning benefits. 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.
- Protection of assets from creditors
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.
Structured correctly, the assets in the trust are not considered to be owned by a settlor and so are much more difficult for a creditor or other adverse party to claim.
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.
On the other hand, if a trust is revocable, it may not provide protection against creditors or from claims from a former spouse in a divorce. 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.
In Singapore, to protect the assets from creditors, an irrevocable trust must have been set up for more than five years before a bankruptcy.
Protection of money in the event of a divorce
Similarly, some types of trusts can protect assets intended for beneficiaries in the event of divorce legal proceedings.
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 give 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.
- Beneficiaries not personally liable for trust’s debts and losses incurred by trustee or other beneficiaries
- Tax Planning
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.
• Not a separate legal entity
• Property can only be owned in the trustee’s name
• Generally no access to tax treaty benefits
• Setting up of trusts is not straightforward and need to be properly advised
• Some local jurisdictions do not recognise trusts [or may have forced heirship rules that may adversely affect a trust arrangement]
Types of trusts
Intervivos Trust (Living Trust)
A living trust is created during a settlor's lifetime and is a legal entity at the start. Assets are transferred to the trust during his or her lifetime, and it also allows Central Provident Fund (CPF) nominations and assignment of insurance plans. 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.
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.
The settlor can revoke or terminate the trust at any time.
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.
Testamentary Trust (Will Trust)
A testamentary trust is made using a Will and takes effect only after the settlor's death. The trust is not an entity in his lifetime.
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.
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.
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 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.
A legal document that creates a trust may take the form of a trust deed or declaration of trust.
The trust document appoints the trustees and states the terms of the trust, including who the beneficiaries are and the trust property that will be subject to the trust.
The trust document usually takes the form of a trust deed. If the trust deed is created by the trustees (which may happen if the trustee is also the settlor, or if the settlor does not wish his name to appear on the trust deed), it is called a declaration of trust.
Stamping of Declaration of Trust/ Trust Deed
You have to pay stamp duty for documents relating to Declaration of Trust / Trust Deed.
The Declaration of Trust will be required to be stamped at a fixed duty of $10 under the Stamp Duties Act.
1. Document that you are paying stamp duty on
2. Particulars of the contractual parties
Trust income may arise from assets held in trust by trustees of private trusts created by way of Trust Deeds / Settlements.
Examples of Trust Income
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.
What are the costs of setting up a Trust?
Trusts in Singapore are generally administered by professional trustees with either an institutional trustee or a private trust company being appointed as trustee.
The costs vary widely depending on the complexity of the arrangements. 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.
Ready to start?
Singapore is a well-regarded jurisdiction for the establishment and administration of trusts. If you have any enquiries or need clarification on Trust, please contact us.