Why are trusts so popular with high net worth investors?

Personal Finance

Why are trusts so popular with high net worth investors?

As investable assets of HNWIs (high net worth individuals) continue to grow globally, the strategies that they can use to protect and grow their wealth will only become more complicated. One legal structure that appears to have grown in favour with them is the trust.

Published on 9 November 2016

The global wealth of high net worth individuals is projected to nearly triple in size from 2006-2025 to surpass US$100 trillion by 2025, propelled by strong Asia-Pacific growth, according to the World Wealth Report by Capgemini.

In fact, if past growth rates hold, Asia-Pacific is likely to continue to be a dominant force over the next decade, representing two-fifths of the world’s HNWI wealth, more than that of Europe, Latin America, and the Middle East and Africa combined.

And as these HNWIs’ investable assets continue to grow, the strategies that they can use to protect and grow their wealth will only become increasingly complex. One legal structure that appears to have grown in favour with them is the trust.

A trust is a legal arrangement whereby the ownership of a property is divided between two parties, such that one person is entrusted with the legal title to the property (the trustee) whilst another person (the beneficiary) retains the beneficial (or equitable) ownership of the property. Real estate, cash, investment portfolio, business shares, jewellery, art collections or other items of value such as patents copyright, can be placed in trusts.

With so much at stake for HNWIs, here are some of the key reasons why setting up a trust works for them.

Why create a trust?

Estate planning

A trust is often used in conjunction with wills by a testator (a person who has made a will or given a legacy) as a means to transfer and divide property among his or her relatives after the testator’s death. And in the event of death, as assets settled into a trust will not form part of the deceased’s estate, probate (the official proving of a will) is not required on these assets and disputes over the assets can be avoided.

Wealth protection

This is a major advantage of private trusts. As the ownership of the trust assets is with the trustee and not with the settlor, a trust can ensure protection against bankruptcy, creditors, other risks such as a battle for assets in the event of a divorce, and more.

In its report, Private Wealth Planning – Why Singapore, law firm Shook Lin & Bok noted that “the increasing number of HNWIs in Asia, particularly from China, India and Indonesia, gives rise to a natural need for wealth protection…” and further stated that “as entrepreneurs and patriarchs/matriarchs age, they will look into wealth succession. It is common knowledge that many from the second and third generations of such families do not wish, or are not equipped, to take over the wealthy family businesses”.

Family wealth planning

It’s essentially about leaving a legacy. A survey by the U.S. Trust on the attitudes and preferences of HNWIs revealed that “three in four wealthy parents say it is important to leave an inheritance to the next generation, only one in five agrees strongly that their children will be prepared to handle it. Nearly two-thirds of parents, meanwhile, have revealed little or nothing about the family’s wealth to their children.This is mainly because they are concerned that it will affect their work ethic and family privacy”.

Succession planning

Trust structures have emerged as a key tool to ensure a smooth transfer of wealth from one generation to another and help with succession planning among high net worth individuals in the region, according to a The Business Times report. Using such structures have become more popular as family wealth becomes more complex, with assets usually held across multiple jurisdictions.

Peace of mind

A trust is an ideal solution for families with complex financial arrangements. For example, a special needs trust, which provides financial support to a person who is disabled or has other special needs and is unable to work to support him or herself.  

Confidentiality

According to Aaron Mullins, Managing Director, Asiaciti Trust Singapore, a trust is a private arrangement between the settlor and the trustee for the benefit of the beneficiaries. The wishes of the settlor upon the establishment of the trust are privately held by the trustee and only the beneficiaries have the right to enforce the trust. A validly established trust completely avoids the need for a publicly disclosed probate process on the passing of the assets to the next generation.

Investment

In Singapore, unit trusts are one example of the use of trusts as investment vehicles.

Tax planning

A trust can be used as a tax planning tool in certain circumstances.

Charities

Setting up a charitable trust ensures that your assets are properly allocated and used for charitable causes. Using charitable trusts could offer you greater flexibility and control over your intended charitable contributions while helping you fulfill your philanthropic goals, and also helping with estate planning and tax management.

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