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Singapore – Wealth Planning Issues, A Frank Discussion.

12 June, 2013

 

Legal News & Analysis – Asia Pacific – Singapore – Tax

 

Recent Developments in Asia, Sunrise Industry Fuelled by Macro Factors

 

New wealth is found in Asia and that it will continue to be the case for the next few decades is an understatement. On the back of the economic instability of the developed nations of the west and a volatile global wealth market, it is not surprising that Asia is growing as a major wealth management market and Singapore is in a sweet spot to consolidate its position as an international wealth management centre.

 

There are many factors which contribute to the growth of Asia’s wealth management market. First, there is an increasing number of high net worth individuals and ultra high net worth individuals in Asia, particularly from China, India and Indonesia, giving rise to a natural need for wealth protection. Also, as entrepreneurs and patriarchs age, they will look into wealth succession. 

 

The sophistication of structures and solutions in the wealth planning industry also bode well, since the younger entrepreneurs may be educated in the west or have exposure to western structures including trust and family office. 

 

In addition, the migration of wealth and professionals from the west to Asia, for one reason or another, has also created a great platform and impetus for the wealth management industry. 

 

An interesting development is the presence of tax information exchange agreements which attract the wealthy to come to Singapore to leverage on the nation’s robust, legitimate and forward-looking system and structures to house and protect their wealth. They are of course happy to pay lower taxes here, but would steer clear of a blacklisted tax haven. As such, Singapore presents itself as a very attractive and viable option.

 

Key Objectives of Private Clients for Wealth Planning

 

Private clients have a number of objectives when it comes to wealth planning but we can distil several common objectives. These are mitigation of taxes and estate duties, protection of wealth, transition of wealth and authority to the next generation, creation of a legacy, and more importantly, privacy.

 

It is worth mentioning that there are private clients who have expressed their unreserved love for their children, but not necessarily entirely endorsing their children’s choice of spouses.  Private clients tend to have a desire to protect their assets from their in-laws. As such, structures and solutions will have to be put in place to ensure the assets are adequately ring-fenced from not just creditors but also people living under the same roof. Another key objective seems to be privacy of the family and family wealth. Typically, neither the giver of the wealth and power nor the recipients wish to have the public know how much wealth and power are involved. 

 

The key concerns of private clients would be to have a sustainable structure that provides confidentiality, flexibility and protection. Even though there are various tools and structures that can be used for wealth planning, including wills, lasting powers of attorney, insurances, offshore companies and foundations, we see the increasing use of trusts.

 

Private Trust, A Viable Solution

 

A trust might be new to some Asian private clients who are not familiar with the common law system or the concept of trust. The very fact that a rich private client is asked to transfer a substantial portion of his wealth or assets to a stranger (albeit a professional or licensed trust company), to lose control over such wealth or assets, and to pay an inception and professional fees for the setting up and operation of the trust does not make much sense at first.  However, once the private client fully appreciates the benefits of a private trust and how it works for him and the beneficiaries he wishes to bless, the decision is quite easily reached.

 

The trust is a legal arrangement, not a separate legal entity and requires a trustee to be the legal owner of all trust assets and enter into all contracts on behalf of the trust. The trustee has specific duties under the Trustees Act, Cap. 337 of Singapore (“Trustees Act”) and common law. Professional trustees are also licensed and regulated by the Monetary Authority of Singapore (“MAS”) under the Trust Companies Act, Cap. 336 of Singapore (“Trust Companies Act”). The beneficiaries of the trust must be specific or part of an identifiable class. The trust can be revocable or irrevocable. The manner in which the trust assets can be dealt with are fairly flexible and must be spelt out clearly in the trust deed. Under Singapore’s trust law, the settlor of a trust can retain limited powers in the trust (Section 90 (5) of the Trustees Act states that no trust or settlement of any property on trust shall be invalid by reason only of the person creating the trust or making the settlement reserving to himself any or all powers of investment or asset management functions under the trust or settlement). Although the Singapore legislation makes no mention of the office of the protector, a protector can also be appointed as an additional safeguard. There are also favourable tax incentives available for certain types of Singapore trust which we will not cover in this article.

 

Meeting the Clients’ Needs

 

The assets are legally transferred to the trustee and thus ring-fenced against creditors and third parties. This will give the private client a peace of mind.

 

The professional institutional trustees in Singapore must be licensed under the Trust Companies Act (Section 3 of the Trust Companies Act) and are subject to stringent licensing requirements and ongoing supervision of the MAS. They are also subject to stringent duties and obligations under the Trustees Act (Such the statutory duty of care provided for in Section 3A of the Trustees Act) and common law. This provides additional comfort and protection for the private client and the beneficiaries.

 

As the trust allows the flexibility of adding or removing beneficiaries from the trust, the private client can grant the trustee discretion within certain parameters to include deserving beneficiaries and exclude undeserving beneficiaries that should be excluded. The private client can also keep things fluid by identifying only a certain class of beneficiaries and leaving it to the trustee to determine later which persons should be included or excluded from the distributions. The quantum of distributions can also be flexible and left to the discretion of the trustee to determine based on the circumstances at the relevant time.

 

Since the settlor can retain limited powers in the trust, there is legitimacy for private clients to have some measure of control over matters without the trust being deemed a sham, provided the powers retained are not so extensive and wide-ranging that the settlor is deemed to be in de facto control of the entire trust.

 

In addition, Singapore offers other solutions for private clients. 

 

A Singapore foreign trust, for purposes of the nation’s income tax law, is a foreign trust created in writing with no Singapore settlor and beneficiary (Regulation 2A of the Income Tax (Exemption of Income of Foreign Trusts) Regulations (“Income Tax Regulations“). This means that neither the settlor nor any of the beneficiaries can be a citizen or resident of Singapore. In the case of companies, they must be foreign companies (As defined in Regulation 2 of the Income Tax Regulations) whose beneficial owners are all non-Singapore citizens and non-residents of Singapore. Such a trust can enjoy favourable tax treatment under our tax regime including tax exemption for specified income from designated investments (Regulation 3 of the Income Tax Regulations). Another key condition is that the trustee must be licensed under the Trust Companies Act (Ibid).

 

Singapore also allows the use of private trust companies, private unit trusts, family offices and family owned investment companies. These are different structures that are available but require proper and detailed planning to extract the benefits of the structure for the private client’s needs. 

 

Conclusion

 

In short, with regard to wealth management, Asia is the place to be for now and the foreseeable future. The wealthy will find that they need more sophisticated advice and solutions for their diverse needs. With the current trust law and trust structures in place to address those needs and concerns, the wealth management industry in Singapore will be well placed to meet the demands of private clients. 

 

Shook Lin Bok LLP

 

For further information, please contact:

 
Tan Woon Hum, Partner, Shook Lin & Bok LLP
woonhum.tan@shooklin.com
 

 

 

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