Information Memorandum Wills & Trusts October 2008 Private Clients Practice Group 36 Carpenter Street, Singapore 059915 Tel: (65) 6323-8383 Fax: (65) 6323-8282 Website : http://www.cnplaw.com
There s no reason to be the richest man in the cemetery. You can t do any business from there. Colonel Sanders Just like Colonel Sanders we all want to be successful and to accumulate wealth. But we also recognise that we can t take it with us. This compels us to make other arrangements to prepare for the inevitable. Reading these notes will give you a brief insight into some important aspects of estate planning for yourself and your family and help you to understand how Wills and Trusts gel together. Estate planning could be described as the art of organising your affairs in such a way that, no matter how rich or poor you consider yourself to be: you achieve your maximum potential for wealth accumulation and are able to enjoy it as much as possible during your lifetime all your loved ones and dependants are properly provided for none of your hard earned wealth (or as little as possible) is lost in unnecessary expenses and taxes Estate planning can be done at any time, but is more effective the earlier it is begun. There may be different reasons behind the estate plan depending on your individual circumstances, goals and concerns. The differing circumstances, goals and concerns of different people call for different solutions when it comes down to the finer details. Leaving aside the investment and wealth accumulation aspects of estate planning, in all cases there is likely to be an element of lifetime trusts, will trusts and a general desire to preserve the carefully built wealth and minimise taxes. Even if tax savings are not your main purpose. Colin Ng & Partners LLP Page 2
As part of your estate planning, you may want to make a simple expression of wishes with regard to the disposal of your cash, shares and other property and personal effects in the event of death. In technical terms, your property and belongings are your assets and are collectively referred to as your estate. Your wishes and intentions as to who shall inherit your estate may be achieved with a will. Or you might use a combination of a will and another formal deed or document such as a nomination of property (e.g., CPF nomination) or even a will and a simple schedule of assets. All of these things, wills, nominations and lists of assets, can be used to make things easier, less stressful and less costly for your family after your death. If you wish to preserve assets in your estate until your children (or even your grandchildren) are old enough to enjoy and manage them responsibly, this may be achieved by setting up a trust in your will. Alternatively, or in addition, you may establish a trust during your lifetime for the same purpose, or for the purpose of managing exposure to certain taxes or avoiding probate. Often a lifetime trust (sometimes referred to as a living trust ) is a preferred method of managing taxes. There are only limited opportunities to make tax savings in a will by itself, or by other means. But a will is usually still needed, even where a living trust is established, to take care of assets which have not been expressly included in the trust. That is how wills and trusts are related and can be considered together in the context of estate planning. A trust can be created specifically to minimise exposure to taxes and for other purposes, such as protecting assets from potential creditors or to avoid probate. A will is itself a type of trust even in its simplest form, since it entrusts property to an executor or trustee for distribution to others. With this in mind, we give encourage you to look more closely at wills and trusts in the following pages. Colin Ng & Partners LLP Page 3
(1) WILLS (a) What is a will? A will is a document by which you can: (i) (ii) express your intentions and give instructions as to how your property is to be distributed or dealt with after your death; and appoint a trusted person (called an executor or trustee ) to manage your estate and to ensure that your intentions and instructions are carried out. (b) Who can make a will and how is it done? In Singapore you may make a will if you are over the age of 21 and you are of sound mind, memory and understanding. Your will should preferably be drawn up by a solicitor who can ensure that it accurately expresses your intentions and that your wishes and instructions can be lawfully carried out. You must sign your will in the presence of at least two witnesses who must then sign in your presence. Ideally the signing should be supervised by a solicitor who can ensure proper compliance with the law. Many do-it-yourself wills have failed because they were not properly witnessed. (c) Choice of witnesses Anyone who could make a will himself could be a suitable witness. However, a beneficiary of your will should not witness it, otherwise he will lose his entitlement. Neither should the husband or wife of a beneficiary witness your will, for the same reason. It is not necessary for the witnesses to read your will or even be aware of its contents. At most they need only be satisfied of your identity, that you know that you are signing your will and that you understand what you are doing and are doing it voluntarily. For practical purposes, the main function of the witnesses is to witness your signature (i.e. to confirm that it was you who signed the document and not somebody else). Certainly this much can be explained to a witness who insists on Colin Ng & Partners LLP Page 4
reading your Will before signing his name. But if you do not want the witnesses to read your will and a witness wants to be troublesome, it makes sense to ask somebody else to witness the signing. This is one of the advantages of signing your will at our office courteous witnesses are always available. (d) Choice of executors The main role of the executor is to prove the validity of your will in court after your death and make sure your wishes are carried out. It is preferable to appoint at least two executors, though some people find one appointment is sufficient. If you want to appoint more than one executor, you may specify whether they are to act jointly or in substitution for each other in case the first named is unable to act. Your spouse or any beneficiary can be an executor and in many cases will be ideal. If a child under 21 is appointed as executor, he will not be able to act until reaching the age of 21. In the meantime his surviving parent or guardian will normally be appointed to act in his place. If you have a large estate you should consider appointing professional executors such as solicitors, accountants, bankers and stockbrokers, or a trust corporation. Most importantly you should ensure that the person you appoint as executor is someone capable whom you can trust to carry out your wishes and is willing to act. Sometimes, especially in a large estate, the role of executor or trustee can be an onerous task with a lengthy term of office. An unqualified person may not want to take on that responsibility. (e) Some assets cannot be left by will Your will may cover almost all your assets in Singapore and elsewhere. However, there are a few exceptions. These include the balance of cash/shares in your CPF account, which can be left to others only by making a valid nomination using a special form available from any CPF office. Shares in private companies can also be included in your will, but the Articles of Association might prohibit or restrict transfers to persons other than existing shareholders. So, in some cases, the beneficiary may be entitled only to the proceeds of sale of the shares. Property owned by you together with another person as joint tenants will normally devolve automatically on the survivor regardless of anything stated in your will. But you must bear in mind that your co-owner may die before you leaving you as the sole owner, so it is important to take account of joint property in your will. If you own any assets outside Singapore you should obtain advice on whether you need to make a separate will under the laws of the relevant country in relation to that property and also whether that property can be left by will at Colin Ng & Partners LLP Page 5
all. If you are a Muslim you may leave only one-third of your assets freely by will to persons who are not heirs. The rest of your estate is for your heirs in accordance with Muslim law, as modified by Malay custom. (f) What is probate? Probate is legal jargon for the process of proving the authenticity and validity of your will after your death. It is also the name given to the court document which certifies the authenticity and validity of your will and confirms the powers and authority of your appointed executors to administer your estate. It is necessary to produce this document, called a grant of probate, to be able to sell and transfer assets. After your death, your executors should apply to court as soon as possible for a grant of probate. If there is no will, your personal representatives (usually family members) will have to apply for a grant of letters of administration and will be appointed as administrators. The application for letters of administration takes longer and costs more than a grant of probate. The delay and expense of winding up your estate under letters of administration can be avoided simply by making a will. (g) Time frame for probate applications The time frame for obtaining a grant of probate or letters of administration is generally about 3 to 12 months depending on: (i) (ii) (iii) (iv) whether or not there are executors with a valid will the nature and extent of the assets whether documents required by the Courts are easily obtainable, and whether the executors (or, if none, the administrators and beneficiaries) are readily available to sign the court papers and other documents. Applications for letters of administration (where there are no executors, usually because there is no will) take longer than applications for probate (where there are executors appointed by a will). This is because, if there are no executors, there are additional documents to be filed and additional applications to be made to Court for the purpose of obtaining a grant of letters of administration. Further delay may be suffered because of disagreement among family members as to who will administer your estate and what is to become of your assets. This is best avoided by making a will and naming the executors so that there can be no argument. And to minimise the time and expense of administering your estate. Colin Ng & Partners LLP Page 6
(2) TRUSTS (a) What is a trust? A trust is created upon the transfer of assets (called the trust property ) to a person (called the trustee ) on the basis that the trustee shall hold the assets for the benefit of others (called the "beneficiaries"). The person who sets up the trust (i.e. the initial owner of the assets) is called a "settlor". Before the trust is established, the settlor is the absolute owner of the assets. He is said to own the assets both legally and beneficially. This means that he has the right to deal with the assets how he pleases and can also enjoy the use of the assets for his own benefit. For example, you are the legal and beneficial owner of the money in your bank account. You can leave it in the bank. You can use it to buy shares. You can spend it on your holidays. Go on a shopping spree. You can do what you like with it. But if you set up a trust of this money, the trustee becomes the legal owner (so that he has authority to operate the bank account) and the beneficiaries become the beneficial owners (the persons actually entitled to the money). The separation of legal and beneficial ownership of the trust property is a unique characteristic of trusts. The trustee has management control of the trust property, but it is the beneficiaries who are entitled to use and enjoy it, or the income from it. (b) What is a trust used for? Trusts are often used to protect assets and preserve them for the use and benefit of future generations. There are many different reasons behind asset protection trusts and these include protection from creditors, protection from predators and tax minimisation. A properly structured trust may also be used to avoid the necessity of a probate application. However, some assets in Singapore (such as HDB apartments and CPF funds) are not suitable for settlement on trust. Colin Ng & Partners LLP Page 7
(c) Protection of assets from creditors To successfully protect your assets from creditors by the use of a trust, you must not be insolvent at the time of creation of the trust nor become insolvent as a result of it. If you are made bankrupt within five years after transferring assets to a trust, your creditors will easily be able to unwind the trust and claim the assets towards satisfaction of the sums due to them. Or you could be accused of defrauding your creditors and they may be able to unwind the trust on that basis, even if more than 5 years have passed since the transfer. (d) Protection of assets from predators The head of a wealthy family should be concerned about the preservation of that wealth as it passes into the control of younger generations. The assets can be protected from dissipation, not only by those young, inexperienced people themselves, but also from their friends, suitors, spouses and business partners. A discretionary trust is ideal for this type of protection. (e) Tax minimisation Income tax can be minimised by keeping income earning assets offshore in a country where there is no charge to income tax (a tax haven or offshore financial centre). However, if you are a Singapore tax payer, this is not much use if you need the income in Singapore. And the income tax issue is of less importance than it used to be with the phasing out of tax on certain types of investment income designed to encourage remittance of foreign sourced income and repatriation of offshore cash deposits to Singapore. From 1 June 2003 and 1 January 2004, certain types of foreign income remitted to Singapore residents are exempt from tax, subject to conditions. From 1 January 2005, all interest income derived from the deposit of moneys by an individual in any standard savings, current or fixed deposit account with any approved bank or finance company in Singapore are also exempt from income tax in Singapore. However, you should consider the possibility of a charge to tax in any other country to which funds are remitted if you are tax resident in that country. If you are a US citizen or green card holder the position is more complex and you must seek specialist advice before setting up any trust for the purpose of tax minimisation. If you are a Singapore tax payer there are anti-avoidance provisions in place by which the income from a trust fund you set up in favour of certain relatives is deemed to be your income for tax Colin Ng & Partners LLP Page 8
purposes. This rule was introduced to prevent people redistributing their income to family members, such as children, who had unused personal income tax relief. There are no capital taxes, as such, in Singapore which concern us in the context of estate planning since the abolition of estate duty in February 2008. But it is possible to use a trust to minimise liability to foreign capital taxes such as death duties subject to appropriate professional advice and depending on the jurisdiction in which liability to capital taxes may arise. (f) Avoidance of probate applications and procedures A living trust may be used to help reduce the inconvenience to your family of having to apply for probate or other representation after your death. Probate and administration is a process which may take several months or even years to complete. During this time many assets, such as bank accounts, may be frozen preventing your family from getting at much needed funds. However, assets transferred to trustees by you for the benefit of yourself during your lifetime and thereafter for the benefit of your family or other persons may be accessed immediately after your death without having to apply to court for probate. (g) Choice of trust There are dozens of different types and categories of trusts. However, for practical purposes, we need only be concerned with four main descriptions. These are the fixed trust and the discretionary trust, either of which may be revocable or irrevocable. (i) Fixed trust The fixed trust has specific named beneficiaries who are entitled to the trust property in definite shares which are decided at the outset. This type of trust is particularly suitable for control o taxes, to some degree, or avoidance of probate where the settlor is not concerned about potential creditors. If the purpose is tax minimisation which requires a complete divestment of the trust property, it will be plain from the trust instrument that the settlor retains no beneficial interest in the trust property. However, the settlor has complete control over how the property is divided between the beneficiaries. Each beneficiary has a definite right to his share in accordance with the terms of the trust instrument. If the purpose of the fixed trust is avoidance of probate and there is no concern about tax minimisation or protection of assets from potential Colin Ng & Partners LLP Page 9
creditors, then the settlor will usually be the main beneficiary with the trust property passing to other beneficiaries only after the settlor s death. (ii) Discretionary trust The discretionary trust is distinguished from the fixed trust by the powers given to the trustees to choose who the beneficiaries will be, either from a list of names or from a class of beneficiaries (e.g. children and/or grandchildren of the settlor) and the amounts of their shares. The discretionary trust is suitable for all forms of asset protection and tax management. The amount, if any, given to each beneficiary is within the discretion of the trustees. Therefore, a beneficiary s creditors cannot claim any portion of the trust fund because no beneficiary is entitled as of right to any particular share. If a beneficiary is bankrupt the trustees can simply exclude that beneficiary from the trust in order to preserve the trust assets. Likewise, a divorcing spouse of a beneficiary has no claim to the trust property. (iii) Revocable trust In a revocable trust, the settlor has the power to revoke the trust and therefore the settlor effectively retains control over the assets and has the power to reclaim the trust assets at any time. A revocable trust will not adequately serve the purpose of tax minimisation and protection from creditors. But it is useful for probate avoidance, usually in the form of a revocable fixed trust, so that distribution of assets may be made immediately after the settlor s death rather than be delayed by the process of obtaining probate or letters of administration (as the case may be) in respect of the estate of a deceased. (iv) Irrevocable trust In an irrevocable trust, the settlor can neither revoke nor amend its terms after its creation. Therefore, in setting up an irrevocable discretionary trust, for example, from which the settlor is expressly excluded as a beneficiary, the settlor will have effectively given up complete ownership and control of the assets settled on trust and cannot reclaim the trust assets at any time. An irrevocable discretionary trust is suitable for all forms of lawful asset protection and tax minimisation if it expressly (and in fact) excludes the settlor from beneficial entitlement and subject to conditions of solvency at the time the trust is established and, in the case of some foreign death duties, survivorship of the settlor for a certain period after transferring assets to the trust. Colin Ng & Partners LLP Page 10