The many benefits of a trust
The basic concept of a trust is simple - it's a legal arrangement where someone referred to as the settlor, donor or grantor transfers legal title of their assets to an individual or institution, known as a trustee.
The trustee then holds and administers these assets under the terms specified in the trust deed by the person setting up the trust for their own benefit, the benefit of others, or both. They are all known as beneficiaries.
These are formal legal instruments. 'Trust law imposes a rigorous fiduciary duty upon the trustee,' says Michael Troth, Asia-Pacific head for Citi Trust. 'It requires them to act in the best interests of the beneficiaries, to never use the trust funds for self-benefit and to invest the trust funds prudently. By law, beneficiaries have certain rights under a trust and can petition a court to enforce the trust deed.'
There are two types of trust: revocable or irrevocable. Revocable trusts allow the settlor to retain broad powers, including the right to amend or terminate a trust, change beneficiaries and direct withdrawals. Irrevocable trusts may allow you to eliminate, or defer certain taxes, or give you greater asset protection from potential risks, in exchange for less control over the assets.
There are several reasons for using a trust as an effective wealth-management tool. They are used most commonly for estate planning and to protect assets during a person's lifetime and after death. Trusts may also enjoy favourable tax treatment, which can minimise tax payments. Privacy is another important benefit.
Trusts are especially useful in inheritance planning. In a trust agreement, you specify who receives the assets, when and under what circumstances. 'Importantly, assets in a trust generally are not subject to forced heirship laws that dictate who receives your assets and in what proportion,' Troth says.
A clear inheritance plan outlined in a trust can also help heirs avoid family disputes and reduces the risk of legal conflicts as a result of divorce or remarriage. And, unlike a will, beneficiaries of a trust can receive their inheritance without legal delays or probate or the attendant publicity, or other succession procedures.
One of the biggest pluses of a trust is wealth protection. 'Trusts offer the peace of mind of knowing that your assets are protected. By holding your assets in trust, as opposed to holding them directly, you can safeguard your assets in many ways,' Troth says.
These include protection if you become disabled or incapacitated, when a trustee will manage and distribute your assets according to your needs and your instructions.
They also provide protection from legal challenges. 'Personal assets legitimately placed in a trust can be legally protected from challenges from personal creditors, taxes, business partners or discontented family members.'
Trusts are also useful vehicles for reducing tax liability. Assets owned outside someone's home country may be subject to a range of local and foreign taxes - income tax, wealth tax, capital gains tax, estate tax and gift-transfer tax. The favourable tax treatment enjoyed by a trust may minimise these taxes.
Privacy is another benefit. Trusts offer greater financial privacy because trust agreements are not publicly recorded and trustees hold the legal title to the trust assets. Beneficiaries can receive their inheritance without disclosure. 'The added level of privacy provided by a trust may be particularly important when personal security risks pose a threat to wealthy individuals and their families.'
The benefits of professional management are many. In addition, a trust can provide for the long-term care of minor or disabled children or other family members who are unable to manage wealth. 'It can also guard against the loss or squandering of assets by heirs who might fall under the undesirable influences of others,' Troth says.