Trusts are well known for being set up by the wealthy. However, the benefits of setting up a trust can be applicable to those who do not belong to the ultra rich category as well. Primarily, the trust fund would enable you to control how your money should be utilised or distributed after you have passed on.
That said, we look at the benefits against the cost of setting up a trust and consider whether this would be worth doing so.
What Is A Trust Fund?
A trust fund is set up such that the assets of the trustor or settlor (person who sets up the trust), are entrusted to the trustee, the person who holds the legal title of the trust to ensure that the assets would be passed on to the beneficiary (the person the trustor wants the assets to go to eventually).
Why Should A Trust Be Set Up In The First Place?
Here are some of the the main reasons people would want to set up a trust fund in the first place.
# 1 Greater control of distribution of assets
In the event that you pass on, you can dictate (beyond the grave) how, when and to whom these assets should be distributed to. For example, instead of leaving a lump sum of your money to your children who may not be in a position to spend it responsibly, a trust could dictate that a certain amount be given to them when they have reach certain age.
# 2 Asset protection
Trusts can be immuned to claims such as lawsuits, bankruptcies and divorces ensuring that the beneficiary (the person that the money is meant for) still receives the money from the trust that is intended for them.
# 3 Tax benefits
When a trust is set up, the ownership of your assets in the trust is separated from the assets that you are holding on to now. This means that only the assets that are under your ownership now would be taxable.
# 4 Avoiding probate
Probate is a process that allows one to challenge the validity of a will which can be costly and an obstacle for the beneficiaries to receive the assets. It can easily eat up 2-4% of the value of your assets due to legal costs.
Also Read: Are Unit Trusts Safe?
What Could Happen If I Don’t Set Up A Trust?
An unlikely but not impossible scenario would be the death of both you and your spouse. However, because most people would not anticipate such an event happening, most people would not think of setting up a trust.
If a guardian or a trustee is not appointed to manage the distribution of your assets, the Public Trustee would determine the distribution of the assets according to the Interstate Succession Act. Below is a list of assets that can be distributed by the Public Trustee.
Source: The Public Trustee’s Office
Source: Singapore Legal Advice
The table above shows the possible scenarios of how your assets can be distributed Moreover, the money left behind would be invested by the government in financial instruments like fixed deposits and bonds until the children have reached the age of maturity at 21 years old.
From this scenario, the government would determine how your assets are distributed but if you did have a will or a trust set up, these assets could have been distributed according to your terms instead.
Alternatives To A Trust
Setting up a trust can be costly but there are always alternatives to ensuring that your funds can be passed onto your dependants .
A will is one of the closest alternatives to a trust that allows you to dictate specific instructions on who your assets should go to after your passing. Anyone can draft a will however, because not all of us are well versed in drafting one, the average fees of creating will can range between $200 to $500 depending on the complexity of the will. This can be considerably cheaper than setting up a trust.
Despite these relatively low costs, your assets can be subjected to taxes and the terms of the will could be contested by family members who are not agreeable with the distribution of the assets, in a process called probate. Probate is done to prove the legitimacy of the will in court that it is really the last testament of the person who created the will. However, the legal fees involved can be substantial and the money could have been utilised by the beneficiaries instead.
There are even Shariah compliant wills for Muslims for those who would want the wills to be drafted in accordance to Shariah law. Firms such as Barakah Capital Planners offer such services in Singapore.
Will vs Trust
One of the major differences between a will and a trust is that a will comes into effect after the passing of the person who has initiated the setting up of the will as opposed to a trust that comes into effect right after its creation.
Secondly, having a trust also enables you to control when your loved ones should receive those funds well after you have passed on to ensure that they spend your funds responsibly and in a way that you have intended. However, because these additional benefits of setting up a trust comes with a cost, it is up to you to decide whether the greater degree of control that you have over your funds is worth the costs.
Alternatively sorting out your assets before you pass on could save you on the legal costs of setting up a trust or drafting a will as well.
Have a specific insurance question that you wish to ask? DollarsAndSense is teaming up with fundMyLife to help get your insurance questions answered – for free. You can get personalised answers from a pool of handpicked, professional advisors. You can find out more about advisors on fundMyLife.
Bonds and Fixed Income