Estate Planning
A Revocable Living
Trust
A "living
trust" (also called a revocable living trust) is legally in existence
during your lifetime, has a trustee who currently serves, and owns property
which (generally) you have transferred to it during your lifetime. While you
are living, the trustee (who may be you, although a co-trustee might also be
named along with you) is generally responsible for managing the property as you
direct for your benefit. Upon your death, the trustee is generally directed to
either distribute the trust property to your beneficiaries, or to continue to
hold it and manage it for the benefit of your beneficiaries. Like a will, a
living trust can provide for the distribution of property upon your death.
Unlike a will, it can also (a) provide you with a vehicle for managing your property
during your lifetime, and (b) authorize the trustee to manage the property and
use it for your benefit (and your family) if you should become incapacitated,
thereby avoiding the appointment of a guardian for that purpose.
A revocable
living trust, allows you to retain control of your assets as the trustee or
co-trustee and be able change the living trust as circumstances in
your life change, such as remarriage or more children. You are also able to
revoke the trust itself.
An advantage of living
trust is that it bypasses the costly and time-consuming process of probate,
enabling your successor trustee (who fills basically the same role as an
executor of a will) to carry out your instructions as documented in your living
trust at your death, and also if you are unable to manage your financial,
healthcare, and legal affairs due to incapacity.
What is an Irrevocable Trust?
As the name suggests, an irrevocable trust is a trust which
cannot be revoked by the trustmaker. In other words, once an irrevocable
trust has been established, the trustmaker cannot take or transfer back
the trust assets from the trust.
In addition, in the case
of an irrevocable trust, the trustmaker must step aside and appoint
someone else to serve as trustee of an irrevocable trust. Moreover,
generally an irrevocable trust cannot be changed or modified. Where change is
permissible, such change will require prior consent of all named beneficiaries
or a court of law.
It should also be noted that unlike a revocable trust which is intended to
close up after the death of a trustmaker, an irrevocable trust can remain
up and running indefinitely after the trustmaker’s death.
Benefits of an Irrevocable Trust include assets protections and tax saving (as discussed
below). In relation to assets protection, the trust assets are transferred to a
third party (usually a company) and therefore they are generally beyond the
reach of creditors. Moreover, the unlike a revocable trust, an irrevocable
trust is not affected by death of any of its trustees.
What is a discretionary trust?
A discretionary trust
is a trust where the trustee has the discretion as to how to distribute the
income and capital of the trust. The exercise of the trustee’s discretion is
governed by the terms of the trust deed of the trust
What is a Family
Trust?
A family trust is a
type of discretionary trust set up to hold a family’s assets. In accordance
with the trust deed, the controller of the family trust (the trustee)
distributes the income and assets of the trust to the other family members (the
beneficiaries).
A trust deed is
a document used to set up and manage a trust. It sets out the:
(a)
settler (the person who set up the family trust);
(b)
trustee;
(c)
appointor (the person with the power to remove or appoint
the trustee);
(d)
details on what the trust contains; and
(e)
management process for the trust.
The assets remain in
the trust until the trustee distributes them. The trustee is considered the
owner of assets in the trust. However, this is only on the behalf of the trust;
the trustee does not have legal ownership of any of the assets.
The Benefits of a
Family Trust
There are two main
benefits to managing assets through a family trust are:
(a) Tax Benefits
Placing assets into a
family trust minimises your family’s overall tax liability. By spreading the
family’s income across multiple beneficiaries from year-to-year, you can
minimise the tax you pay as different family members within a family group
fall within different tax brackets. The trustees have a discretion to make
greater distributions to beneficiaries who are in lower tax brackets.
(b) Asset Protection
By placing assets in
the trust, it is no longer the property of its original owner and becomes the
trust’s property. Therefore, if your personal assets are ever at risk of being
seized (for instance, if you were being sued or becoming bankrupt), the
property will be considered trust property and will not be in jeopardy.
Therefore, a family trust is a good thing to consider for those in risky
careers or those who are exposed to risk of constant litigations and other
liabilities.
What are the
beneficiaries’ rights under a discretionary trust?
Unless where otherwise
stated in the trust deed, a beneficiary of a discretionary trust cannot compel
the trustee to give them any of the trust property. However,
beneficiaries have the right to:
(a)
due administration of the trust;
(b)
seek information relating to the management of the trust;
(c)
request, but not require, the trustee to exercise its discretion
to make distributions to them;
(d)
take the trustee to court if they deal with the property in a
way which is not in accordance with the terms of the relevant trust deed.
Is a Trust Right for
You?
There are many
different reasons to establish a trust:
(a) Does your like of
business or profession expose your estate to potential legal liabilities
or litigation;
(b) Are you likely to
have contingent liabilities that might expose your estate assets
to creditors?
(c) Are you in a
general partnership that exposes your personal assets to litigation
or insolvency proceedings from your partners or creditors;
(d) Do you have a
family member who is unable to manage their affairs due to disability,
sickness or addiction?
(e) Do you have
complex assets that require professional stewardship?
(f) Are you at a risk of separation or divorce?
(g) Are you part of a
blended family?
(h) Are you interested
in tax savings for your beneficiaries?
(i) Would you like to
support charitable causes now or as part of your estate?
If your answer is
"yes" to any of the above, it is recommended that you seek our
legal advice regarding establishing a suitable trust.
If you would require
any legal assistance or advisory in set up a living trust/ an irrevocable
trust, or a family trust, please feel
free to contact us via mainacy@gmail.com
