As we discussed in the last issue on the difference between will and trust? Will is mainly for distribution and trust the main objective is for preservation of assets.
Imagine that you have spent your lifetime to grow your own tree of wealth, and then the tree is starting to bear fruits and you’re starting to enjoy certain some fruits from the tree. For example, you might accumulate some properties and currently receiving some property income. So, let’s say you use a WILL to will away your assets, this action is giving away your ownership to someone else when you are no longer around and you cannot stop the other person from selling away the property.
Your beneficiaries might said that “ Every year, every month I’m only getting two or three fruits from the tree and it’s too slow, so let’s chop the tree and take all the fruits in one shot.” With a WILL, this is most likely the case because you already distribute your ownership to your beneficiary. However, TRUST is for preservation, once you set up trust, something you have in mind is you want to preserve the capital but at the same time your beneficiary can still enjoy the fruits.
In summary, TRUST is for more long term.
Scenario 1: Double Tragedy
There are many reasons and worries that motivates a person to setup a TRUST. Some of them are worried because they have minor children. In most of the cases that I’ve done in Will, the husband would give 100 % to the wife, the wife would also will away 100 % to the husband. This is very common among husband and wife.
This covers the first scenario that a husband passes away surviving by the wife. What if we have a worst scenario, what if husband and wife both pass away in the same accident and leaving only their minor children behind. So he/she may worry because the children have not reach 18 years old, they are not financially capable to handle the assets. So that’s where this young couple would consider setting up a TRUST to cover (just in case) this scenario happens.
Scenario 2: Career Woman
The next scenario is let’s say husband and wife married and they have children, the wife might accumulate the assets. When the wife passes away, all her assets are given to her husband in the Will. But the wife would worry that if her husband re-marry, and then the assets that she accumulated and passed to the husband might be shared with the new wife. This is definitely not what the wife wants, right? The wife might want the assets to be given to her children rather than share with someone else, some third party she doesn’t know. So, this is another worry for career ladies who are married.
Scenario 3: Financial Illiterate Homemaker
Next worry is for man, so for man they are the breadwinner and some they have wives whom are housemaker, housewives whom are not financially savvy. So let’s say the husband will away 100 % to the wife, then knowing that the wife is not capable to handle such huge sum of assets. That is also quite a worry. If the wife doesn’t know how to handle, then maybe she will be conned or cheated of her husband’s money.
Scenario 4: New Generation Children
Next worry is the children, you give a huge amount for the children and the children at aged 18 receive this amount. I attended a seminar recently and what is interesting about the seminar is they talk about Gen X, Gen Y and suddenly, the speaker would say our babies now are Gen-S. Gen-S stands for Generation that are born with Smart Devices like Iphone, Andriod, Pad, Tab, etc.
I then overheard some participants say Gen-S also meant for Generation Sotong. Because in chinese, if a person don’t like the boss and quit his job, he is said to be “frying his boss’s sotong.” Gen-S will quit their work anytime they like. Ok So, imagine this Gen Y or Gen S that inherited a huge sum of inheritance by their father. What do you think they’ll do next?
The next thing is the children will buy a sports car and enjoy himself. So there’s no control over how the children will use the money especially if the child is very spendthrift and doesn’t appreciate the value of money.
So this is some of the worries that prompt people to think about not putting all their assets in a WILL but to house some of their asset into a TRUST.
Most common question asked is “Evanna, Is there a better way to handle my asset rather than to will away 100 % to my beneficiary? Maybe to will away a certain portion, certain portion I want to preserve.” So there’s where trust come in.
People involved in a trust
Let me share with you some of the terms and some of the people that involve in trust.
Settlor – So for a person who set up a trust, we called them settlor, he or she is the owner. The beneficiary is of course the people that you want to be benefited from the assets, so it might be your loves one, your children, your wife, your old parents.
Trust asset – assets inside the trust.
Trustee– can be a natural person or a trustee company.
Trust Period – trust period is the trust duration, for how long will the trust last for.
Protector – Next, the very important thing that I always highlight to my client is to put in a protector because this protector acts as a watchdog who will advise the trustee on the needs of the beneficiaries. So when the owner is no longer around, the protector is like a third party auditor to watch over the benefit of the beneficiaries. It can be your relative or anyone from your circle of friends and family whom you trust. So this is very important terms to remember.
Living Trust VS Testamentary Trust
There are 3 kind of trusts, let me start with living trust and second I will go deeper into testamentary trust. So living trust is when the person is still alive, the asset is under the person’s name. And then she set up a living trust during her lifetime. She now wishes to transfer her asset that she currently owns to a trustee’s name.
But for testamentary trust, the settlor would setup when the person is still alive, but the asset is under the person’s name. When the person is not around, the assets will still be under the decease person’s name until the probate is granted and cleared the debts of income tax then only the testamentary trust will start distributing to their beneficiaries.
Why do people set up living trust and why do people set up testamentary trust?
The pros, the benefit of living trust is asset protection against negligence claims, against creditors and against bankruptcy. This type of trust is very popular, getting popular among medical practitioner like surgeons, doctors, medical specialist. They are professional and they are exposed to very high risk. They can perform 1,000 successful cases but they only need one case to bring them down. Negligence claim can run up to millions of dollars. So before this happen, it is better to set up a living trust which is the asset protection against negligence claims.
But the cons, the bad point is when you set up this trust, the trust administration fee applies and at the same time you do not own the asset anymore. This type of trust must be full discretionary trust. So this is the cons but do bear in mind that there are quite substantial number of doctors and specialists who approach us to set up this kind of trust although the trust administration fee applies but they feel very secured and safe because they know their assets are protected against negligence claims. The assets will only be return to them upon retirement.
Why do people setup Testamentary Trust
So next is testamentary trust. Why do people set up testamentary trust? Because it’s the cheapest form of trust in the will. The bad point is that you need to go through a long wait for probate process before the trust is set up and there is no creditor protection. There’s the third type of trust where is the hybrid between the living trust and the testamentary trust. We called it declaration of trust.
Declaration of Trust
How does this hybrid type of trust work? When the person is still alive, the asset is under the person’s name and the person do a declaration of trust during his/her lifetime. While the person is still alive, the asset will still under the person’s name. So if you see the difference, a living trust – when he/she do a living trust, the asset will be transfer to the trustee’s name but when a person do a declaration of trust, the asset is still under the person’s name. Only when he/she passes away or certain triggering event happens (settlor can name the triggering event, for example comatose, total permanent disability, mental disable, critical illness), the asset will be transferred to the trustee for the benefits of the beneficiaries.
So it combines the asset protections side and the quick distribution of trust side and the owner is still in control of the asset during their lifetime. So this is called declaration of trust, a very popular service and product where our clients subscribe to us.
Do you want to find out more about how to protect your family with Wills & Trust? Here is a free strategy report that I highly recommend: