Singapore Trusts: the preferred vehicle for wealth management and succession planning

Dovetailing the robust growth experienced by the private banking and wealth management industries, the strong growth in the Singapore trust services industry has further strengthened Singapore’s status as an international financial centre.

Regularly ranked as one of the most business-friendly jurisdictions in the world, Singapore is increasingly seen as the most attractive base for trusts based on its common law legal framework, economic, social and political stability, internationally compliant regulation, highly competitive tax regime (including no capital gains tax or estate duty), excellent infrastructure and a network of over 90 comprehensive double tax agreements (DTAs), including with many of its Asian neighbours.

Family businesses form the backbone of the Asian economy, with 85% of the companies in the Asia Pacific region owned by a family group. Over 20% of the top 750 global family businesses ranked by revenue are Asia-based, with combined revenue of almost USD2 trillion. But many family businesses are undergoing a transition; it is anticipated that over 30% will go through a generational change over the next five years.

A well-planned trust structure can offer a flexible mechanism for ensuring the orderly succession of assets and protecting wealth for future generations, while maintaining confidentiality, and is proving to be an increasingly popular option for Asian families. Pre-IPO trusts are also a useful tool for securing the wealth and liquidity created during an initial public offering (IPO), a watershed event for most business owners.

A trust, unlike a company, is not a legal entity. It is best described as an arrangement whereby property is transferred from one person (the settlor) to another person (the trustee) who then holds that property for the benefit of specified people or objects (the beneficiaries). The lack of rigid formal requirements for the creation and operation of trusts, and the tremendous flexibility of trust instruments, make them uniquely useful for estate and succession planning.

Trusts in Singapore are regulated principally by the Trustees Act, which was significantly revised in 2004. Singapore’s trust law is largely based on English trust law and can be used to accommodate most client needs. Important features of Singapore trust law include:

• Reserved powers of investment for the settlor, which permit a settlor to retain some or all powers of investment or asset management functions.
• Anti-forced heirship provisions, which means that foreign forced heirship laws are not generally enforceable against a Singapore trust.
• No foreign exchange or currency restrictions on the remittance or repatriation of capital or profits in or out of Singapore.
• No registration is required for any trust in Singapore
• A statutory duty of care is imposed on trustees in exercising their powers.

Locally Administered Trusts (LATs) are express trusts that are administered by a licensed Singapore trust company where every settlor and beneficiary is an individual and at least one beneficiary is not the settlor. Eligible LATs and their underlying holding companies, regardless of jurisdiction of incorporation or residence, are exempt from Singapore tax on certain ‘relevant income’ if the holding company is solely trading or making investments for the purpose of the trust. ‘Relevant income’ includes specific Singapore-sourced investment income, dividend income and foreign-sourced income even where it is remitted into Singapore.

Qualifying Foreign Trusts (QFTs) are trusts that are administered by a licensed Singapore trust company where neither the settlor nor beneficiary is a Singapore resident, citizen or Singapore resident company. Eligible QFTs and their underlying companies that are not incorporated in Singapore are exempt from Singapore tax on certain ‘specified income’ derived from ‘Designated Investments’. Specified income generally includes interest, dividends, rental income and gains derived from outside Singapore relating to certain investments as well as specific locally sourced investment income.

Distributions to beneficiaries of QFTs are also exempted from Singapore taxes. A trust will continue to be a QFT if a settlor or beneficiary subsequently becomes a citizen or resident of Singapore, subject to conditions

In addition to tax neutrality for foreign settlors and beneficiaries within its domestic tax law, Singapore also has an extensive network of double tax treaties across the world, which can create tax planning opportunities for clients with substantial international business interests.

Trust business in Singapore is governed by the 2005 Trust Companies Act (TCA), which sets out the legislative and regulatory framework for companies providing trust services in Singapore. Professional trust companies, such as Sovereign, must be licensed by the Monetary Authority of Singapore (MAS) and the TCA also contains very strict confidentiality provisions preventing trustees from disclosing affairs of their clients.

Singapore also offers the flexibility of using private trust companies (PTCs). These are companies formed in Singapore to act as trustees of Singapore trusts. A PTC is established with the sole purpose of acting as a corporate trustee to a trust or a number of trusts, provided those trusts are ‘connected’. They therefore enable a family to retain more control over assets settled into trust, such as a family business, than by appointing an independent trustee because family members can be involved in the decision-making process within a PTC.

On a practical level, a PTC ensures more privacy in relation to the trusts and allows for rapid commercial decisions to be made. A PTC does not compromise the validity of the trust structure and its residency for tax purposes and can provide immediate and long-term tax planning advantages. A PTC also enables the next generation of a family to be trained to ultimately take over as directors of the PTC.

A PTC is exempt from licensing by the Monetary Authority of Singapore (MAS) but must appoint a licensed trust company to administer the anti-money laundering obligations required by the MAS.

Trusts can also be highly effective in the commercial space, including:

• Holding shares in a company for the benefit of senior employees (Employee Benefit Trusts).
• Quarantining shares in a company for beneficial owners of a business before a company lists on the stock exchange and shares are made public (Pre-IPO Trusts).
• Restructuring to provide an avenue for a business to list in the property space (Real Estate Investment Trusts or REITs).

Sovereign provides global trustee and fiduciary services. Sovereign Straits Trust (SST) Ltd is a professional and independent licensed trust company established under the Singapore Trust Companies Act. SST is regulated and supervised by MAS and has a highly trained and professional staff. This means that settlors and beneficiaries of trusts can be assured of absolute security in the establishment and administration of trusts.

SST offers:

• Trust establishment services
• Trust administration services
• Trustee and protectorship services
• Tax and estate planning assistance, including asset protection
• Trustee, administrator and custodian services in asset securitisation issues
• Comprehensive offshore trustee services to both private and institutional clients
• Trust establishment in other jurisdictions through our global network of licensed affiliates
• International executorial and administrative services for wills and estates

With Asia driving the global economy, Singapore continues to serve as a global gateway for asset managers and investors to tap the region’s growth opportunities. Singapore’s asset management industry registered a 16% growth year-on-year in 2021 to reach SGD5.4 trillion (USD4 trillion), despite the global pandemic, with 78% of AUM originating from outside Singapore and 90% of total AUM invested into assets outside Singapore.

Many of Singapore’s High Net Worth Individuals (HNWI) and an increasing number of foreign HNWIs are turning to Singapore trusts as their preferred vehicle for wealth management and succession planning because of the compelling advantages that Singapore has to offer as a trust jurisdiction.