privatetrust

How to Use a Private Trust to Protect Your Loved Ones and Asset

In this issue’s topic, we will be talking about Private Trust. We will learn about what is the difference between Will and Trust; if you have a Will, do you still need to set up a Trust? We will also share about the steps on setting up a Trust and the fees involved if you’re interested. For the past topic, I shared on Will and now I would like to share more on Trust.


What is the difference between Will and Trust?

Will is mainly for distribution while a Trust is mainly for preservation on assets and wealth. Imagine that you’ve spent your lifetime to grow a tree of wealth and the tree is starting to grow fruits and you are starting to enjoy some fruits from the tree. For example you may accumulate some assets and properties, so currently you are receiving some interest or rental income.

Let’s say you use a will as a tool to distribute will away your fruit tree, Will is a distribution tool, so when you will away your assets, it’s like giving the ownership to someone else, you cannot stop this person from taking some fruits from the tree every year and then decided that it’s too slow and chop the tree and take off the fruits. Because you already given the ownership to your beneficiaries. But Trust is for preservation. Once you setup a Trust, your intention is that you want to preserve the capital (your tree) and at the same time your beneficiaries can still enjoy the fruits. Trust is more for long term as compared to Will.


Why people choose to setup Trust?

Some of them worry because they have minor children. In most of the cases I’ve done for Will, the husband will give 100% to his wife and the wife will also will away 100% for her husband. This is very common situation. The second scenario to think of is what if both husband and wife pass away in a same accident and living minor children behind? It’s a main worry because the children haven’t reach 18 years old and they are not financially capable to handle the assets. There is where the Trust can help in this scenario.

Next scenario is the husband and wife marry and they have children. The wife may have accumulated some assets and when the wife passes away, she may pass all her assets to her husband in the Will. But the wife may worry because the husband may re-marry. The assets she accumulated now already pass to her husband and he may share it with another women. This is not the wife’s intention. She may want the assets that she passed to her husband to be given to the children rather than shared with the third party. This is another worry for ladies.

Next worry is for men. Most of them are the bread-winners and some of their wife is home-makers and housewives who are not financially savvy. If a husband will away let’s say 100% for his wife, she may not capable to handle such huge sum of assets. She may get corned or cheated if she not really knows how to handle it.

Next worry is you give a huge amount for the children in your Will. When they are aged 18, they receive this amount and they may buy something luxury like a sport car to enjoy themselves. There is no control over how the child will use the money especially he/she is very spendthrift and doesn’t appreciate the value of money. These are some of the worries that people will think about.


“Is there a better way to handle my assets rather than will away 100% to my beneficiaries?”

Maybe you want to will away a certain portion and a certain portion, you want to preserve. There is where a Trust comes in. Let me share with you some of the terms and people that is involved in a Trust. For the people who setup the Trust, we call them “settlor” who is the owner of the Trust. “Beneficiaries” is the persons whom you want them to benefit from the assets, such as your loved one, your spouse, your children or even you parents and siblings. “Trust Asset” is the assets inside the Trust. “Trustee Company”, in this case for example is Rockwills Trustee, who is the party who handle and manage the Trust. “Trust Period” is the Trust duration, how long you want the Trust to last for. The very important term you need to put in the Trust is “Protector” because this Protector acts as a watchdog and advise the trustee on the needs of the beneficiaries. When the owner is no longer around, the protector is something like watchdog to watch over the benefits of the beneficiaries. This six terms are very important and you need to remember especially you are doing a Trust.


Types of Trust

There are three kinds of Trust. Let me start with the Living Trust and continue with the Testamentary Trust. Living Trust is the person still alive, the asset is under the person’s name and he/she setup a Living Trust. During his/her lifetime, he/she need to transfer the assets that he/she currently owns to the Trustee name. But for Testamentary Trust, when the person is still alive, the asset is under the person’s name. When the person is dead and gone, the asset is still under the deceased name until the probate is granted and the debts and income tax are cleared, then the Testamentary Trust will only be started. The third type of Trust is a hybrid between Living Trust and Testamentary Trust, so we called it as the Declaration of Trust. How does it work? When the person is still alive, the asset is under the person’s name and the person does a Declaration of Trust but the asset will still under the person’s name. To see the differences, the Living Trust is the asset will be transfer to the Trustee name but a person do a Declaration of Trust, the asset will still under the person’s name. Only when he/she passes away, the asset will be transferred to the Trustee for the benefits of the beneficiary.


Why do people setup Living Trust?

The benefit of Living Trust is the Asset Protection against negligence claims, creditors and bankruptcy. This type of Trust is getting popular among the professionals like medical practitioners, surgeons, doctors because they are exposed to very high risk, they can be very successful for the past 1,000 cases but they only need 1 case (due to negligence) and can be sued for millions. Before this happen, it’s better to setup a Living Trust for their asset protection against negligence claims. This type of trust is also known as reversionary discretionary term trust for Creditor protection and is getting more sought after by professionals.

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The downside is when you setup a Living Trust, the Trust administration fee applies at the same time you don’t own the assets anymore. Do bear in mind that there are few specialists do setup this Trust although the administration fee applies but they feel very safe because they know right now their assets are protected in case there is a  negligence claim against them.

 

Next is Testamentary Trust. Why do people setup Testamentary Trust?

It is the cheapest form of Trust because it’s in the Will. The downside is because it needs to go through a long probate process before the Trust is setup and there is no creditor protection. When you combine the asset protection and the quick cash flow where the owner is still in control of the asset, it is the Declaration of Trust. It is a very popular service and product where our clients subscribe to us.

 

Steps to Setup Your Private Trust

The first step is to define your intention of setting up your Trust and appoint a Protector during your Trust period. During your lifetime, you can be your Trust Protector and when you pass away, you appoint someone else to be the Trust Protector. Next, you need to determine the trigger event, when will the Trust kicks in? Normally there will be three types of trigger events. First is upon death, second is TPD, coma or mental disability and third is critical illness. Then you need to determine the Trust assets and who can revoke or change the Trust. You also need to determine the term of the Trust period and who are the beneficiaries and entitlement at the end of the Trust period. These are the steps of setting up a Private Trust. As a Trust service provider, we need these details to assist you in setting up a Trust.

To determine the intention of setting up a Trust, some people want to setup a Trust is because they want to distribute assets quickly upon death. If you go through a Will, you need to go through a Probate process; you need to wait for a long time. Especially you’ve minor children, all your assets are stuck there, the children basic maintenance, education or even living expenses will be the problems. Next is to preserve asset against beneficiary. If you’re worry that your beneficiaries are not financially savvy, such as old parents, spendthrift or minor children and you want to protect the assets against them. The third intention is you might want to protect your assets against liability and creditors. Recall back to the very first example, in Will, your beneficiaries may just chop your tree and take all the capital and fruits where the Trust can help you preserve your tree so that your beneficiaries can still benefits from the fruits while preserving the capital. You need to know what the intention of setting up a Trust is.

Next is to determine the Trust Asset. What kind of assets that you can put inside your Trust? It can be shares in the private limited company, landed property, banks accounts, unit trust, investment accounts and life insurance. For joint property owners/joint account holders, they need to be joint settlers to the Trust. For Will, the husband and wife need to do separate Will but for Trust, you can have joint settlers to the Trust.

Next is to determine the term of the Trust period. You can said that the Trust ends after X number of years, like the Trust ends after your youngest surviving child reaches 25 years old; or you can said that the Trust ends after the death of a particular person. For example, your parents is staying with you and you are worry that you spouse will kick your parents away from the house when you’re no longer around. So you setup a Trust and said that the Trust ends after the death of your parents.


Life Insurance -a popular and the most economical way to fund your Trust

I would recommend clients to put Life Insurance where the client is able to purchase Life Insurance. Even if the client has money, it is just one-to-one which is you will only get one dollar if you put in one dollar. If you use that dollar to buy insurance, it can bring you five/six dollars in return at the end of the day when you no longer around. In term of having a bigger fund size, insurance is definitely a safer bet. The client can also put mixture, more than one policy in the Trust followed by the cash that they want to pump into the Trust. They can have either way or both of the assets in the Trust.

In our experience, the most common problem when client want to setup a Trust will be the worries of the financial securities for the spouse and children especially the client is the main income earner. For the husband or father, the worry is the wellbeing of the wife and children and even parents. For the wife, her concerns will be more on the parents and the kids rather than the husband. That’s the reality of the things. Some businessmen would sometimes look from different angles like their assets want to be protected from the creditors so we will do some ring fencing for the clients. There may also have some cases on the client is worry about the wellbeing of the children but at the same time he worry the children will misspend the money that is given to them. So the Trust and Will will be able to take care of all these concerns about when do we let go money, when do we retain money and so on. Different family will have different scenarios, issues and worries.

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2 Comments

  • Caleb Choo

    Reply Reply March 12, 2013

    Thanks KC,

    That was a very informative article, just as I was looking for something to read about Private Trust. Do you know what’s the average cost of setting up a Declaration of Trust? Does company like Rockwills offer such services?

    • KCLau

      Reply Reply March 12, 2013

      @ Caleb, the charges will vary depending on different cases. Basically, you can count on Rockwills who specialize in providing this service.
      If you need more info, contact me through email and I’ll hook you up with the right associate.

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