Estate Planning: What Is a Trust Fund and Why Set One Up?

The function of a Trust is to help distribute your estate after certain situations

Your estate includes everything you own – bank accounts, pensions, property, health care wishes, pets, insurance policies*, investments, etc. Your estate net value considers both your assets and liabilities, plus fees and expenses, and the type of property owned (if applicable).
An estate plan involves planning for how you would like your estate distributed after you pass away. It is important to plan for the time when you are no longer able to care for your loved ones, no matter what your age or net worth.
There are multiple ways to transfer your estate, including a will, trust, probate and lasting power of attorney.

Trusts

Trusts are an alternative way to give out your estate. Trust funds enable you to be in charge of your estate’s use after certain situations, such as death. The common assumption is that you only set up a trust if you are wealthy, but this is false. A trust fund is for everyone. You can choose from a variety of types to best suit your needs.

How Does a Trust Work?

The trust's creator is a settlor – which is an individual accompanied by their lawyer. The settlor can create the trust when they are alive (living trust) or deceased (will trust/testamentary trust). The settlor decides how their assets are passed on to the trustees. The trustees have legal ownership to hold onto the assets before releasing them to the trust beneficiaries.

Why Set up a Trust?

8 reasons why it is important to set up a trust

To protect your assets. Trusts allow you to have absolute control over who, how and when your estate is handed out to and made use of.
To provide care for a loved one once you have passed away if they are physically or mentally disabled or a minor. A trust prevents placing legal and financial duties on your loved ones.
To invest your funds. You can do so by purchasing a share of an existing investment trust.
To purchase a property for your child.
To reduce your tax liability, as the assets under a trust are no longer under your ownership, therefore not taxable. We’ll cover the tax situation as a beneficiary of a trust later.
To protect your assets in the event of a divorce.
Protection of assets from creditors in the event you declare bankruptcy.
To avoid probate. An often lengthy legal process of giving out an estate according to the terms of a will.

Those wanting to establish a trust for a disabled dependent, or the special needs community, should approach the Special Needs Trust Company (SNTC). The Singapore government heavily subsidises their fees.

Differences Between a Will and a Trust

The main difference between the two is the carrying out of a will upon the death of the person, whereas a trust is usually effective immediately after signing. Also, a trust gives control over when beneficiaries receive their allocation of the estate for putting an estate to the best use.

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Types of Trust

All trusts will fall under at least one of these categories:

Living (Or Inter Vivos) Or Testamentary (Or Will) Trusts

Under a living trust, the settlor can use their assets while alive before handing them down to a beneficiary (via a trustee) upon death. This type of trust will protect your assets from creditors if you go bankrupt. A living fund offers a lot of control and flexibility compared to other trusts, however, do tend to cost more. On the contrary, testamentary wills show how an individual’s assets are distributed (specified in their will) upon the settlor's death. This type is advised if you do not wish your beneficiaries to receive everything at once, as you can state how often the estate is distributed.

Revocable or Irrevocable Trusts

I.e. whether you can change the details of the trust when circumstances change during your lifetime. Most trusts are revocable.

Discretionary or Fixed Trusts

A discretionary trust allows the trustee to deviate from the details of the trust, which can be beneficial as the future is always uncertain. For this reason, fixed trusts are unpopular. Under both types, there remains a fiduciary duty to act on behalf of the beneficiary's interests.

Funded or Unfunded (or standby)

A trust is funded or unfunded (or standby) by the trustor during their lifetime. This means that an unfunded trust contains nothing more than an agreement, plus potentially a minimum amount; however, it is fundable upon a trustor’s death.

Insurance Trust

As part of the process of putting an estate plan together, you’ll have identified the things in life that mean the most to you. This process may have you wondering, does my insurance coverage protect the things in life that mean the most to me?

An insurance trust is an irrevocable trust that has insurance policies established as an asset. Once the trust holds an insurance policy, usually life insurance, it is no longer owned by the insured individual. Instead, the trustee manages it (i.e. the trust company). By setting up this type of trust, the assets become exempt from your taxable estate.

Potential Consequences of Failing to Set up a Trust

An unlikely scenario, but possible. Failure to have a guardian or trustee appointed to manage the distribution of your assets will lead to your estate being distributed under Singapore’s Intestate Succession Act.

Disadvantages of Setting up a Trust

Setting up a trust is worthwhile but not cheap. Fees vary between different trust types. In general, living trusts are cheaper than standby, and the cheapest type of trust is a testamentary one.

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Tax Situation as a Beneficiary

As a beneficiary, the income earned from any income-producing asset of a trust is taxed at your personal income tax rate.

For more details on tax matters and calculating your estate/trust income tax returns, visit the IRAS website.

How to Set up a Trust?

The options vary, depending on your needs. For the full service, including trust writing and start-to-finish implementation, consider independent trust companies.

Consider approaching a financial advisor for smaller needs!

TRUST FUNDS. COMPLETED. ✅

Sources

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