Long Term Family Financial Resilience with a Trust Structure

By Tan Hwee Heng, CFP®

This Covid crisis has demonstrated the importance of having reserves as our government called upon our reserves to support the economy. The packages provided funding across the board with salary subsidies to preserve jobs in the whole economy and various tax incentives and rebates.

Despite so, we have also seen numerous businesses struggle and household brands like Teo Heng Karaoke shut down branches to hopefully preserve their remaining capital to wait for the storm to be over. At individual levels, many individuals have adapted to ensure they and their family continue to have some form of income.

Through this period, we came to understand that in the classifications of reserves, there are 2 types of reserves, namely immediate reserves and inter-generational reserves. The assets that our government taped upon are reserves that have accumulated through the first pioneer generation. They are now called upon to help the current generation to get through the crisis. Inter-generational reserves are powerful. Families frequently encountered more crisis, in many different forms, than such mega crisis that affects everyone. Some common crisis can be caused by a wayward child, unsuccessful expansion of businesses, or a damaging marriage.

For families, such crisis may leads to a rapid decline in family fortunes, loss of reputation, loss of educational and business opportunities for future generation. In some cases, families have to downgrade their lifestyle, move out of family homes and faces hardship. Family wealth may flow out of the family, seized by opportunistic outsiders or due to bad marriages. Blame, anguish, hurt will dominate conversations within the family for long periods of time.

Is there a structure that can help manage this accumulated reserve so that the succeeding generations can have resources to call upon in all sorts of crisis? The good news is there is a structure called Trust, that is encoded in our law as well as in the Common Law that our legal system sets its foundation. For many, there is a myth that Trust structures are meant for the rich. The reality is Trust structures are meant for most Singaporean families who care for their future descendants. It is easy to create and can be relatively affordable to everyone. A Trust can be simply be created via a Will with a few paragraphs or pages of intentions, which is inexpensive. Such a Trust is called a Testamentary Trust.

In the same breath, it is a commonly held misconception that the cost of setting up a Living Trust will be a prohibitive sum that runs into tens or even hundreds of thousands of dollars. Today, even a Living Trust can be set up with a few thousand dollars. These trusts are different in the Trust is set up while the person (Settlor) is alive. There are various types of Living Trusts available for different purposes.

Types of Trust that can be used as a Family Reserves Holding Structure

Trust

Testamentary Living

Standby Trust Property Trust Investment Trust Insurance Trust Private Trust Company Charity Trust

Typically, young parents have been using their Will to create a testamentary trust to provide for their minor children over the years since minors cannot handle the estate monies till they reach 21. However, any one can even take a step further to use the same features to set up a testamentary trust to create a Family Reserve fund.

Here are some steps and considerations on how create a Family Reserves Fund using a Trust Structure.

• Develop an Estate Plan with the help of an Estate Planner

o Consider whether a Living Trust or a

Testamentary Trust or even both that fits your requirement

• Appoint Trustee using the legal instrument chosen. Choose either a

o Lay person (e.g. family members) or

Professional Trustee o Can the Trustee last the duration of the

Trust? o Will the Trustee be neutral and impartial? o Will the Trustee administer the Trust competently?

• Develop specific instructions on

o Objectives o Set conditions and instructions: Examples are - how to manage and invest the assets for longer term - how to ensure the descendants do become useful citizens - situations and conditions of distributing the assets - how to end the Trust

• Fund the Trust

o Using Current Assets like Property, Cash,

Stocks o Leverage on Insurance

For many, it may seem a very lofty intention to have a family reserves fund. But one shall not be daunted by the scale of the Estate Plan and resulting in inaction. A skilled Estate Planner and Trust team can effectively assist you.

Building financial resilience for your family takes effort. For many of us, this is the first-generation wealth and can be easily squandered away by the immediate generation. The good news is that we have the right tools available for most families to create structures for our future generations.

Regardless of whether we are in 40s, 50s, 60s or beyond, each family should consider setting a Family Reserve fund using a Trust structure that will help generations down the road.

Remember, the road will always be bumpy. Hence, providing financial resilience through careful management of family reserves are crucial.

Case example of a Family Reserve Fund using a Trust:

Mr Wee is concerned for his spouse upon his demise. He wants her to be able to stay in their present home till her demise. A major consideration he has is she will not be influenced by the children or anyone to sell the property where they built the family together. This is especially when she is left alone by herself after his passing.

Mr Wee then set it up such that the property or portions of the property (in shares) will be placed in the Trust via a Standby Trust (a form of affordable Living Trust) upon demise of Mr Wee or when either party loses mental capacity.

• Wife will not be subject to pressures from children to sell the house • Will not get cheated or gotten her Will changed under undue influence

After her demise, liquid assets and the house shall form part of the Family Reserves within the Trust. The house shall be rented out to generate income to maintain the house and distribute some dividends to family members. Mr Wee then state that if the children involved in the family business becomes bankrupt due to the personal guarantee that they have to provide for the family business, the house will be available for any of the bankrupt children’s families to stay in. Alternatively, the rental income generated can also be used to rent homes for the bankrupt child.

Further, since the Trust is holding onto both the title deed of the property and other liquid assets like shares, the assets shall not be subjected to divorce or bankruptcy proceedings of his children and future descendants.