If you have been following our earlier blog posts, the discussions on estate planning tools have been focused on Wills. There is another estate planning tool that is also popular, namely Trusts. Basically, a Trust is a legal structure that contains a set of instructions that includes exactly how and when the assets of a person are passed onto his beneficiaries.
There are three key roles within a Trust. Firstly, the settlor establishes and puts assets such as shares, money and property into a Trust. Next, the trustee is the person who controls and oversees the Trust. Thirdly, the beneficiary of the Trust comprises the people or organisation indicated to benefit from the arrangement. For example, beneficiaries may receive money or shares from a Trust according to its terms. The distribution of assets can be set up in such a way as to give the trustee discretion over how and when benefits are given to the beneficiaries.
Today, there are many trust structures available and estate planners will typically provide guidance on the types of Trusts that best fit a person’s needs or demands. These include private family trusts which facilitate the transfer of assets to future declarations. These Trusts can come in the form of a Will, a Deed or a Declaration.
Another common Trust structure are Revocable Trusts. Such Trusts can be cancelled or terminated by the settlor. The settlor can also vary the terms of such Trusts. In contrast, Irrevocable Trusts are used when the settlor gives Trust assets to the trustee for the benefit of his loved ones, and is not permitted to change the terms of the Trust. Meanwhile, in Discretionary Trusts, the trustee has full discretion to determine how and when distributions are made and to whom among potential beneficiaries. In other words, the asset distribution is not fixed from the outset.
Reasons for Setting Up a Trust
The underlying mechanism of a Trust is that it facilitates the transfer of assets from a person to a trustee for the eventual distribution of the person’s assets to loved ones according to his wishes. In other words, the trustee becomes the legal owner of the assets that are entrusted to him, but it is the beneficiaries who will eventually get to enjoy the assets in the Trust.
A Trust gives a person control over the assets that he has placed in it. For example, a person remarries but wants some assets to go to his children from his first marriage after his death. The person wants to look after his second wife but also wants his assets to benefit his children. A Trust can be set up to take care of his second wife for the rest of her life, after which the assets are passed onto his children from his first marriage.
Trusts can also help to mitigate the potential squandering of assets by beneficiaries. For example, instead of an outright or lump-sum distribution of assets to a deceased person’s children, the terms of the Trust can be set to distribute assets at key moments in a beneficiary’s life such as when he turns 21 years of age or he finishes university or when he gets married. This is a useful tool which could help beneficiaries manage their transition through key life stages more effectively.
Finally, contrary to popular belief, setting up a Trust is not only for the ultra-wealthy. Anyone with a considerable amount of assets might want to consider using a Trust in the distribution of those assets. While they may incur additional fees in creating a Trust and appointing a trustee, this is partly offset by not having to pay for costs associated with any probate process that a Will entails when a person dies.
In the next blog post, we will dive deeper into the differences between Wills and Trusts.