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.