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Uncategorized

UK Estate Planning Focus: Residence Nil Rate Band Planning

For clients who are domiciled within the UK, or who are domiciled elsewhere but own property within the UK, the Residence Nil Rate Band (RNRB) is of key importance. This is the largest and latest change to UK estate planning in recent years, and since its introduction on 6 April 2017 a key trend in UK estate planning has revolved around making use of this allowance.

The RNRB is an additional inheritance tax (IHT) allowance to the current nil rate band (NRB) which currently stands at £325,000. It was introduced in stages and only reached its full amount of £175,000 starting from 6 April 2021. Like the ordinary NRB it is transferable, thus allowing the surviving spouse to make use of the allowance on their own death if it was unused on first death. This means that a married couple or civil partners may potentially pass up to £1m IHT free.

The availability of the RNRB is dependent upon a number of conditions being met. The deceased must have possessed a qualifying residential interest, all or part of this interest must be left to their direct descendants or a spouse of their descendants (“closely inherited”) and their estate must not exceed the taper threshold to a point that the entire RNRB is taped away. This leaves a person with no children, stepchildren or adopted children unable to qualify for the relief. It is also unavailable to many high-net-worth individuals.

Tapering

The RNRB is lost if the deceased’s estate far exceeds the taper threshold. If the deceased’s net estate exceeds £2 million at death, RNRB will be tapered away at a rate of £1 for every £2 over this threshold.

The effect of this is that no RNRB is available for estates with a net value in excess of £2,350,000, or £2,700,000 at the date of death of a surviving spouse where 100% of the RNRB was available to transfer from the deceased spouse.

Tapering can act to reduce the amount of RNRB that is actually available to transfer on the death of the surviving spouse. This is the case even if the RNRB was not used on first death.

Qualifying for the RNRB

With the introduction of the RNRB, a number of new definitions were added to the UK IHT legislation, the Inheritance Tax Act 1984:

A “Qualifying residential interest” – An interest in a dwelling house which has been the person’s residence at some point during their period of ownership. (Section 8H Inheritance Tax Act 1984). This definition will include a property that has been purchased and used as a residence but at the time of death was rented out, but it does not include a property purchased as a buy to let.

“Closely inherited” – Inherited by will, intestacy, or survivorship by one or more of the person’s direct lineal descendants. (Sections 8J & K IHTA 1984). Also, where the interest is left on trust where the descendant is treated as owning the asset. This means a property left to a direct descendant via a bare trust, immediate post death interest, bereaved minor’s or bereaved young person’s trust qualifies for the relief.

“Direct lineal descendants” – Children, grandchildren, and remoter issue as well as their spouses or civil partners. Also includes stepchildren, adopted children, foster children, and children of which the person had guardianship while they were under 18.

If estate exceeded the taper threshold, then the unused RNRB that is available to transfer will be reduced. If the first to die’s estate exceeded £2,350,000 then there will be no RNRB to transfer.

The RNRB may only be applied to a single property. If a person has more than one qualifying residential interest that could qualify for the relief, then their personal representatives must nominate a property to apply the RNRB to.

The property itself does not need to be located in the UK. It is possible for the RNRB to be applied to a foreign property provided all of the above requirements are met. However, this will be affected by the deceased’s domicile. If a person is domiciled in the UK, their worldwide estate is subject to UK IHT and so the RNRB may be applied to a property that is located abroad. If a person has a non- domiciled status, then their property must be located in the UK for the RNRB to apply, as only their UK estate will be subject to UK IHT.

Modern Estate Planning Techniques

Since the introduction of the RNRB, there has been a decline in the number of clients utilising Flexible Life Interest Trust (FLIT) and Discretionary Wills to protect their interest in real property. This is due to the fact that these types of Trust fail to meet the requirement that the qualifying residential interest is closely inherited.

There are therefore two modern solutions to protect the property with a trust while also qualifying for the RNRB. The first is to separate the qualifying residential interest from the rest of the estate and deal with this separately by placing it into an immediate post death interest trust for the surviving spouse, with the children nominated to inherit it immediately on the spouse’s death. This allows the residue of the estate to fall into the FLIT or discretionary trust to allow protection for generations to come, while still qualifying for the RNRB.

The second is to still utilise the FLIT over the whole estate but limit the trustees’ discretionary powers in a way that means they cease on second death. This retains all of the flexibility of the FLIT over all assets while the surviving spouse is alive, and also over all assets except the property after their death.

Both approaches unfortunately come at the cost of less protection over the property, as any protection can’t be extended beyond second death. NRB discretionary Trusts have also seen a resurgence as a result of the RNRB. This type of Trust planning had largely declined for married couples since the ability to transfer NRB was introduced in 2007, but they are now seeing a new use to help avoid loss of the RNRB due to tapering.

This use of the NRB trust involves directing assets away from the surviving spouse so that on second death, their estate doesn’t exceed the taper threshold. If leaving assets on first death directly to the surviving spouse or to an immediate post death interest for them is likely to result in pushing their estate over the taper threshold, then there may be a benefit to directing assets to a NRB trust on first death instead. On second death, the assets in the NRB trust created on first death will be outside of the estate value for IHT and if the result is that the estate is kept below the taper threshold then the RNRB is not lost, provided of course all other requirements for the RNRB are met on second death and the property is being closely inherited at that point.

Siobhan Smith

Lead Tutor for The College of Will Writing

The Society of Will Writers, UK

Categories
Estate & Succession Practitioner

Evolution Of The Estate Planning Industry – An Insider’s Perspective

Allow me to give a brief account on how the estate planning industry has evolved in this region. We started as a pioneer in bringing estate planning to the masses in 1995. Hitherto, estate planning was the domain of family offices, trust companies and private bankers catering to the elite and privileged, and their modus operandi have not changed much over time. The middle class and mass affluent were largely unaware or had little means of sourcing inexpensive estate planning services from the providers.

What struck me then was that the financial industry that houses hundreds of thousands of employees and handles trillions in asset value for people while they are alive was doing very little about the transition to the other side. The planning and management of wealth transfer from the departed to the living heirs was pretty much left to an eclectic mix of people, some professional, some not so – an estate planning industry that was highly fragmented and not well organised. This revelation conjures up immense possibilities for the industry when properly organised.

The model that we created was a network of franchisees who market to the populace and take instructions based on standard operating procedures (the distributor) along with a centralised office of legally trained personnel for vetting for quality and uniform presentation (the manufacturer). Getting this to fruition required a significant amount of capital and holding power as well as a lot of public education.

This was somewhat of a unique model in the world. Outside Malaysia and Singapore (and on a limited scale, in India and China), all other modes of providing estate planning services to the retail market on a large scale were either online self- service or through a loose alliance of like-minded estate planners. While these modes could be efficient, they were at best offering products in a limited way to the mass market, without fulfilling needs of clientele holistically (for objectives that are met by a trust set-up for example).

The launch of this model caused consternation among quite a few lawyers, not all but some were openly hostile. Many took the position that we were upstarts trying to encroach into the traditional domain of the legal profession. However, it can be seen that practitioners, left to their own device, would not have the inclination to invest in a non-core service for the long term in development of people, systems and infrastructure that could reach the masses in an efficient and cost-effective manner.

It was also very hard during the formation years to broach the subject of death. We believed that this fledgling industry would develop along a trajectory similar to that of life insurance, which is slow growth with consumer reluctance to planning for death, followed by growth from gradual acceptance and then, increasing growth due to life insurance being regarded as essential by most.

So, despite the brickbats thrown at us and consumer resistance, we persevered, with a lot of capital funding for losses, until past breakeven. Many do not realise this but the gestation period to reach breakeven can take several years. This is because investment in various systems such as custody tracking, resource training and building a distribution network can be very expensive without economies of scale. Until critical mass is reached, operations will be loss-making.

For the first decade, it was mostly red ink and a lot of shareholder support was called for. In the next decade, more players started to come into the industry, principally bank-owned trust companies. The attraction for them was to tap into their extensive customer base either through their branch network and/ or through their insurance/ mutual fund agency network. While backed by deep pockets, by and large, these attempts have failed to gain traction, beyond some limited success with online Will purchases, because of various factors. For one, when template Wills are given free to premium customers, it is not generally seen as of value. Secondly, provision of personalised estate planning services requires face-to-face interaction to answer questions and clear doubts on issues that bother clients. Thirdly, use of networks that are accustomed to selling off-the-shelf products, for sale of customised products, is problematic. It detracts from focus on sale of prime banking products. And finally, perhaps the biggest impediment to success, is the lack of understanding in managing a network of agents, who are essentially self- driven entrepreneurs, which requires a very different mindset from the control and compliance-centric mindset of bankers.

Coming into the third decade, we have seen a sharp increase in the entry of non-bank players. Especially after the pandemic set in, financial planners, agents and even entrepreneurs were hungry to look for new sources of income and the market after two decades of development looked sufficiently attractive for growth, with a seemingly low entry barrier. Writing a Will for others requires very little capital beyond computers and a website set-up. However, many do not understand what it takes to get this business up to scale which as mentioned earlier, requires heavy investment and economies of scale. For mass market penetration, merely being a manufacturer is not going to cut it without building a distribution network.

And so, many of the new entry players resorted to price undercutting to gain market share. This is a futile exercise because any price cut that wipes out profit margin (which is not particularly rich in this industry and non-existent for many newbies) means the more sales are made, the higher the loss. This loss is exacerbated by the continued entrance of me-too players who adopt the price cutting strategy. Thus, like flying ants flocking to the light and dropping off, many of the new players get attracted to the industry, have limited capital and recede after two/ three years. What has been achieved in all this is the filtering of customers who demand cheap pricing irrespective of all else and those who choose value of service; and this is good for established players.

So where is the industry heading? My belief is that those who are in the business for the long term will thrive if they differentiate from the rest by investing in the raising of quality of service and efficiency in delivery. This market segment is the one that sustains a reasonable profit margin, is still largely untapped and will continue to grow strongly well into the future.

Johari Low

Group Chairman

Rockwills International Bhd

Categories
Uncategorized

The Malaysian Budget 2022 Some Key Tax Changes

The largest ever Malaysian Budget is directed at kick starting its Covid-19 ravaged economy and helping needy Malaysians. RM332 billion has been allocated for an extensive range of far-reaching initiatives. To help fund these, significant tax changes are proposed. Of these, four key tax changes are highlighted below.

The first of these is a block-buster Prosperous Tax hike that may reap significant tax revenues from a limited group of taxpayers for a brief time. The remaining have been chosen for their lasting effects on a far wider range of Malaysians with the Tax Identification Number proposal being the most insidious of them all.

The Prosperous Tax

The headline grabbing Prosperous Tax went down like a lead balloon on the stock market which saw billions of RM wiped off its value following the announcement. It is common knowledge there were business winners during the pandemic. Super-profits in the past have incurred excess profits tax and windfall taxes. This time round, it is the Prosperous Tax. The proposal is that for high-income companies other than SMEs to be taxed at 24% on the first RM100 million and thereafter at 33%. The Prosperous Tax is slated to be introduced for just one year, in 2022.

Foreign Source Income Received in Malaysia by Malaysian Residents

The Malaysian Income Tax Act 1967 charges to tax the income of any person accruing or deriving income from Malaysia or received in Malaysia from outside of Malaysia. In a move to encourage the remittance of foreign source income to provide inputs to the Malaysian economy, an exemption from taxation was granted. The exemption took effect from 2004 and since then, individuals and companies (apart from certain specialized businesses of banking, insurance or sea or air transportation) remitted foreign source income free of Malaysia tax. This will end on 1 January 2022.

From this date, income tax will be imposed on Malaysian residents with income derived from foreign sources and received by them in Malaysia. This change will potentially affect all Malaysian residents with a foreign source income producing activity unless they choose to leave the income offshore. Examples of foreign income producing activities taxable on remittance include employment income of employees commuting overseas, consultants working overseas on foreign contracts, rental income from foreign property, wealth management involving foreign investments, holding companies with foreign subsidiaries, treasury functions of international groups, special purpose vehicles for foreign joint ventures. The list goes on.

The change may be to bring Malaysia’s tax system in line with best practices at the international level. Yet it is notable that Hong Kong with its ‘pure’ territorial tax system, pure because it only taxes locally sourced income and has no concept of foreign source remitted income, has so far resisted making any change. Further, Singapore which has a similar foreign source income tax rules to Malaysia has enacted a range of significant and practical exemptions which include an exemption if the headline tax in the foreign location is 15% or more. Similarly, Singapore has not rushed to make any change.

But equally so, the Malaysian Government hopes the removal of the exemption will create a rich new source of tax revenues. But with the removal of the exemption, Malaysia’s tax system may venture back into an area of ‘fuzzy’ tax law involving taxpayer uncertainty over which is unacceptable under its Self-Assessment System.

Difficulties exist in distinguishing between capital and income. Should the settling of a debt incurred in Malaysia with foreign source income outside of Malaysia be deemed ‘received’ in Malaysia? Would there be an element of retrospectivity applying to foreign income accumulated prior to 1 January 2022 but received in Malaysia by a Malaysian resident after this date? Will dividends received in Malaysia by residents from an offshore activity of a Labuan Company be henceforth taxed?

And then there may be double taxation issues. Tax may have been paid on the foreign source income in the foreign location. Whilst it may be possible for tax relief under current tax rules to extinguish or reduce the Malaysian tax payable, the correct amount may be difficult to ascertain. For instance, take the example of separate sources of foreign income accumulated over years in various locations and the effort required, the documents involved and the costs to calculate the amount of foreign tax relief.

These examples involve areas of considerable tax controversy. Yet the list is not comprehensive. There will be other uncertainties and contentions. In addition, the cost of collecting tax on remitted foreign source income may prove expensive compared to the collection of tax from other sources of income.

It is a fine line between encouraging inputs to the economy via untaxed remitted foreign source income and generating new tax revenues by taxing it on remittance. To achieve the optimum position, Malaysians will at a minimum want to have tax certainty and need clarity on the ‘safe harbour’ transactions.

Perhaps also the final legislation should include targeted exemptions to allow certain foreign source income to be remitted tax free. Exempting foreign source income subject to tax at a headline rate of 15% or more in the location of source would make a good start. Failing which, the proposal may result in the flow of repatriated foreign source income being stemmed and net tax revenue after costs lower than expected.

Tax Identification Numbers

In another move to bring Malaysia’s tax system in line with international practices, Tax Identification Numbers (TIN) will be introduced in 2022 with the aim of broadening the tax base and to prevent leakages of taxation.

The TIN is a discrete set of characters or numbers issued automatically by a tax authority to both individual and non-individuals whether they have a tax file number or not. Because a TIN will be given to everyone and every entity, the TIN is designed to identify the TIN holders whenever a transaction is made enabling a check on compliance with their tax obligations.

The TIN is required to be given by both parties to a transaction and potentially enables the tax authority to monitor for tax evasion. One might imagine that a tax file number will be required to take out a life insurance policy, open a share trading account, invest in a unit trust or to purchase a motor vehicle. This information is then relayed to the tax authority to examine whether the transaction is reflected in an income tax return, or the expenditure or activity is consistent with the income declared by the taxpayer.

Even those who believe they are presently under the tax radar screen, the high possibility of being detected by the TIN system should weigh heavily on their minds and make them think more carefully about meeting their tax compliance obligations and paying their fair share of tax.

Tax Compliance Certificates

In a further move to discourage tax evasion and make sure the system is working fairly, a Tax Compliance Certificate (TCC) will be required as a pre-condition for tenderers to participate in government contracts. No details have been issued concerning the TCC, but it will be an official document as proof of being current with tax filings and payment of taxes.

The TCC will only be issued if the tenderer is listed as a taxpayer, is up to date with tax filings and whether income tax is paid as of a certain date. Internationally, such reviews also embrace custom duties, withholding taxes, indirect taxes, and sometimes immigration compliance. Quite possibly the TCC may be given on an annual basis.

To obtain the TCC, certain information and documents may need to be submitted. The TIN (mentioned earlier), the tax file number, proof of the tenderers address, and details of the business bank account are probabilities. In what might be an interesting development, the TCC process may even drill down to the ‘good standing’ of the owners of the business; and in the case of a company, its directors, before the tenderer can obtain the TCC.

Much of the above is speculative for discussion purposes but nevertheless based on historical and international experiences. Further developments are keenly anticipated.

Mike Grover

Former Head of Tax at International Accounting Firm

Categories
Wills

Professional Executor Expedites Estate Settlements

Precepts Trustee Ltd. provides professional executorship services which is fast becoming the preferred choice for people who are drawing up their Wills. While testators (persons drawing up a Will) may have a strong preference of appointing their family members as executors, it will also be prudent to appoint Precepts Trustee Ltd. as a substitute executor in the event their intended layperson executor is unable to execute his or her role.

An executor undertakes estate administration duties when a testator passes on. It may seem like an honourable appointment, but layperson executors often do not have the time, commitment and technical knowledge when met with unexpected circumstances. This may result in an unfortunate deadlock situation and other resulting emotional entanglements.

Here is a case highlighting the estate administration of a Housing Board (HDB) property.

Background

Our client was a filial single man who wrote a Will indicating that Precepts Trustee was to be appointed as the executor and the original Will was kept in custody with Precepts Legacy.

As soon as Precepts was alerted of our client’s passing, we initiated an asset search compilation according to the Inventory of Assets provided by our client. At the same time, we conducted a Will Reading session for his beneficiary, his aged mother who was accompanied by his 3 siblings.

A Twist of Circumstances

As raised by his siblings, it was discovered that our client was also pending an inheritance from his late father. It was a HDB property which the family of 6 lived in and which was intended to be passed down to all 4 children. The HDB property was owned equally as Tenants in Common by both parents and in their respective Wills, the 4 children were to inherit 50% share jointly upon the parents’ respective passings.

Before our client’s father passed away in 2018, he had appointed his 4 children, which also included the deceased, as joint executors and beneficiaries of his estate. Unfortunately, as the executors had little idea on how they were to proceed to apply for the grant of probate nor could they transfer the said 50% to themselves as beneficiaries, the matter was left unattended and soon forgotten. Over 2 years had passed, and the estate administration process had not even started.

Disagreements

With an unsettled inheritance from our client’s late father, we were unable to sign off the estate until all assets were fully transferred/ distributed to our client’s mother. Our client’s siblings were however unwilling to budge and insisted on executing their late father’s Will and transfer the shares of the HDB property to themselves despite each already owning a HDB property. They were adamant that they should co-own their family home where they grew up together with their mother.

The Final Resolution

At the same time, Housing Development Board wrote to our client’s siblings as executors of their late father’s estate and Precepts Trustee Ltd., being the executor of our client’s estate. It then became clear to the family that they would not qualify to own another HDB property, even a fraction of it, as they had an existing property. The HDB property had to be sold and the proceeds would be split amongst the beneficiaries.

This was a logical solution, but it meant that the elderly mother would be left with no place to live as her children were unable to accommodate her in their respective homes. With Precepts Trustee’s involvement, we suggested that they renounce their rights to receive the HDB property as a more straightforward solution. This move would render the HDB property to fall under the purview of the Intestate Succession Act. The consequences therefore resulted in the transfer of the property to the deceased’s spouse and the deceased’s child – our client and his mother.

Although it took them several months for deliberation, they eventually agreed to it.

The Role of Precepts Trustee Ltd

Precepts Trustee took over the estate administration duties and provided the written renouncement of rights by the 3 siblings as well as computation of the portion for transfer. The breakdown of the share for transfer to the mother is illustrated below for reference:

Adding up the portions from the 3 siblings (18.75%) and the late Testator’s share (31.25%) with her own portion (50%) meant that the mother would eventually own 100% of the HDB Flat.

The estate settlement took about a year from the demise of the Testator to the entire disbursement to the beneficiaries. Without the team’s perseverance and diligence to follow up and work with the parties involved, it would have been another stalemate with no alternative but to adhere to HDB’s requirement to sell and distribute the sale proceeds of the HDB property which would not have been the ideal solution.

Alvin Lai

PreceptsGroup International Pte Ltd

Categories
Trust

My Legacy Is In The Name Of My Trust

How do I choose a name for my Trust? Should it carry my name? Should it follow my child’s name? Or should I name it to a unique memory or places my family had been to?

When you establish a Trust, you are required to provide a formal name to identify the Trust to its trustees, the beneficiaries and the relevant legal authorities. Besides appearing on all Trust documents, the selected Trust name will also appear on bank accounts which hold your Trust assets, the CPF and insurance nomination forms which you nominate your Trust as the beneficiary. Very often, the names of the Settlors are most commonly used to name the Trusts.

If a Trust name is too long, for example ‘The Robert V. and Patricia S. Hernandez Family Trust’, it is not possible to fit into the limited space for the bank account name to hold the Trust assets or name of the CPF/ insurance nominee when filling in the nomination forms.

On the other hand, if it is too short, where the Settlor’s surname is commonly used, for example ‘Tan Family Trust’, it might be too common and does not differentiate from other similar trust name like ‘Tan Sui Family Trust’, that may create confusion in sorting out legal documents. Although using the Settlor’s surname carries the Settlor’s family identity, it may give rise to concern over privacy issues.

Things to keep in mind when naming a Trust:

1. Consider the Settlors and Beneficiaries

The most obvious choice is to create the Trust in the name of the Settlor, the person setting up the Trust. For example, if Jenny Chang is the Settlor, the Trust can be named ‘Jenny Chang Family Trust’. Otherwise, consider the beneficiaries who will benefit from the Trust, such as the minor children. For example, ‘Joseph and Mona  Chang Trust’. If the beneficiary is an organization or a charity, the trust name which can facilitate the ease for registration with The Commissioner of Charities should be considered.

2. Keep the Name Short

Before you finalize on a Trust name, consider the practical aspects of your choice. Because it is necessary to re-title any property in the name of the Trust, choose a Trust name that can conveniently appear on checks, titled deeds and bank accounts. For example, “Hernandez Trust” is less cumbersome than “The Robert V. and Patricia S. Hernandez Living Trust Fund.”

In Precepts, the rule of thumb in choosing a Trust name is

(i) The name of the Trust should not be too abbreviated.

(ii) To keep the Trust name within total characters not exceeding 30 spaces for the ease of opening and operating bank accounts and CPF/ Insurance nomination.

(iii) The name of the Trust should not carry an apostrophe [‘s] or any special symbol [+, -, @, #, $,*, %, !] to avoid any ambiguity and potential typographical errors. The symbol [&] which denotes ‘and’ is acceptable though not encouraged.

If the Settlor would like to keep his/ her Trust confidential, the name of the Trust can be any name not related to his/ her actual name subject to the above rules when choosing a Trust name.

Jenny Tan

AEPP®

Trust Manager Precepts Trustee Ltd

Categories
Estate Planning

The Importance Of Holistic Estate Planning

Elijah* (not his real name) had written his Will with Precepts. He passed away recently, leaving behind his wife and his special needs daughter. He had expressed that in the event of his demise, the care of his special needs daughter was paramount.

Elijah was a businessman, whose business generated good profit to provide for him and his family. Thinking that he had a sustainable source of income, he had not paid much attention to include life insurance in his estate planning. Unfortunately, his business was badly affected due to the Covid-19 pandemic. By force of circumstances, he had to downsize his business which took a toll on his health. This led him to fall ill eventually and he did not recover from it. Prior to his passing, he had resorted to using his savings and other means to keep his business afloat while providing for his family at the same time. A substantial part of his savings was depleted in the process.

With Precepts Trustee Ltd acting as the executor of his estate, we had the responsibility of collating his assets and to administer his business. As he was the sole shareholder and sole director running his business, his passing had left a void in the business. His wife or employees were not able to replace him.

The major concern was the lack of liquid assets to provide for the family and the employees of the business while waiting for the extraction of the grant of probate and calling-in of other assets in the estate. The estate also had some outstanding mortgage loans faced with inadequate liquid assets. Hence the likely scenario is that the executor will have no other options but to sell the property.

This brings us back to the importance of holistic estate planning and the routine review to cater for life changes. From the case of Elijah, the lessons learnt are:

a) The importance of keeping reserves for rainy days.

b) Having sufficient coverage on the life of the breadwinner of the family as part of estate planning.  In the event of premature demise, this would provide adequate liquidity to the estate and family members. 

c) Importance of reviewing your estate plan every 2 to 3 years or if you have experienced changes in life, such as addition of new family members, change of career, change of personal financial position, falling ill or losing an important family member. 

d) If you are a business owner, you need to have in place a successor or an exit plan for the business. This is to ensure the business continues to function in your absence. Depending on your objectives, setting up a trust may help to put the plan in place. 

Please approach our Estate and Succession Practitioner for advice if you have any concerns on your estate planning matters. 

*Facts and background of Elijah has been altered due to privacy reasons.

Leong Mun Kid

Head of Department, Trusts

Precepts Trustee Ltd

Categories
Uncategorized

The Private Trust Company (PTC) Solution

By Mr Lee Chiwi
Excerpt from PreceptsGroup Succession and Trusts in Wealth Management (4th edition) Book

The use of the trust has its merits but there appear to be some limitations where it concerns the person of the trustees. How can this be improved? This is where we now introduce the concept of a PTC (private trust company). This is a structure that has now surfaced in Singapore over the last few years. It is essentially premised also as a trust but where the PTC is a special purpose vehicle (a company) incorporated by the founder to act as the trustee of the family trust to hold ownership of the family companies. When it comes to family companies, the PTC offers aspects that may be absent in the traditional trust and address those short comings that were identified earlier.

Whereas the traditional trust form requires the settlor give up ownership over certain assets to someone else, in the PTC, the settlor might be more comfortable in shifting his assets into a special purpose vehicle where it is his family members that are seen as “owners” or the legal shareholders. The founder being used to the concept of a holding company sometimes sees the PTC as something quite similar except that the PTC is also the family trustee. The PTC offers a structure where the founder could make the transfer and consolidate the ownership of his diversified family businesses, investments and real estate into one vehicle.

In reality, the shareholders are not the persons who gain anything out of the trust assets since it is the class of beneficiaries who are entitled to the distributions of the trust. The shareholders can be the same people as the beneficiaries, but may not be so.

A comparison table comparing between the Traditional Trust and the PTC is set out below:

Aspect Traditional Trust Private Trust Company 
Entity Form Not an entity An incorporated company 
Trust Management, Administration and Control Trustees The PTC through its appointed Directors 
Type of Trust Discretionary Trusts as the modern approach Discretionary or Fixed Trust elements for family branches 
Restrictions on type of Trust None 

Confined to specific family trusts, where settlor and beneficiaries are connected persons 

Governance Trust Deed & the Trust Law 
  • Trust Deed, Trust Law & 
  • Laws relating to Companies 
  • Special form of Memorandum & Articles with sole objective to act as trustee for specific family trust 
  • Family Council and Family Charter 
Protectors Common to have protectors as watchdog of the trust Unnecessary as there is a family council which supervises the board of the PTC 
Taxation Taxed as though corporate entity Needs looking into the tax aspects concerning the trust cum corporate structure 
Ownership of Trust Assets Trustees PTC itself 
Parties involved in trust Settlor & Trustees enter into Trust Settlement Settlor & PTC enter into Trust Settlement 
Distribution of Trust assets income and capital Beneficiaries can be non- related persons Beneficiaries must be connected persons to the settlor/s 
Shareholders None PTC may have shareholders but they do not benefit from trust in anyway unless they are also beneficiaries. There may be no shareholders if the PTC is 

structured as a company limited by guarantee 

Administration Aspects Trustee responsible, audits are optional Other than directors & shareholders, the company secretary, registered office. Usual appointment of auditors to carry out audit 

Conceptually the Singapore PTC is similar to PTCs allowed in some offshore jurisdictions to give broader breadth and scope to the trust industry in Singapore.

Categories
Uncategorized

Why Set Up a Trust?

By Mr Lee Chiwi
Excerpt from PreceptsGroup Succession and Trusts in Wealth Management (4th edition) Book

There are many different reasons why your client may consider setting up a trust. The following are examples:

To make adequate provision for the client’s family in case of unforeseen circumstances.

Preservation of wealth within the family.

To prevent heirs who lack the financial maturity from squandering away their inheritance.

Protection and provision for infants, special needs or vulnerable persons.

To assist in tax planning. Setting up a trust may help to reduce tax liabilities.

To make a gift with conditions based on the client’s wishes or the beneficiary’s circumstances.

Guidelines could be drawn up on how the trustees should deal with the trust, and at what age and in what circumstances the intended beneficiaries could have full benefit from the trust.

Asset Protection where assets settled under a trust would under certain conditions be free from creditor attack or be under a liability used to pay off the debts of the settlor or beneficiary.

To mitigate estate duty, where it might be applicable in the jurisdiction concerned.

If the client feels that an outright lifetime gift is not appropriate, the trust is one way to achieve such purposes.

Avoidance of Forced Heirship rules. In this connection, to provide benefits to heirs who might otherwise not be able to benefit from the settlor’s estate at death because of restrictions on how his estate is to be disposed.

The objectives in setting up a trust can also roughly be summarized under six heads:

• Economic, Tax and Estate Duty Minimization

• Succession and Inheritance

• Wealth Preservation and Enhancement

• Maintenance and Provision for the family

• Asset Protection and Avoidance of Potential Adversity

• Philanthropic, Charitable and Esoteric purposes

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Family Office

By Mr Lee Chiwi
Excerpt from PreceptsGroup Succession and Trusts in Wealth Management (4th edition) Book

Some of the high-net-worth individuals (HNWI) may have the resources and need to set up what is termed as a “Family Office” to manage the substantial wealth and private matters of their family. The Family Office model is largely borrowed from the United States where the origins of the modern family office had likely emerged from. It is essentially a structure that engages in the management and succession of say a family’s diversified wealth like a corporation. Like other corporations, the Family Office employs permanent staff and professionals to undertake various functions relating to investments, asset management, legal affairs, trusteeship, risk management, and tax. Professionals that are engaged include asset managers and investment advisers, trustees, in-house counsel, tax advisers, and accountants. Family members may be appointed as board members alongside external persons with expertise that the family may lack among themselves.

A tenet of the Family Office is the objective of educating the family members, especially the younger members on the values, objectives, investments, and financials concerning wealth management and their grooming to take leadership positions in the future as part of the ongoing succession and generational planning for the family.

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What is a Person’s “Domicile” and Its Relevance for Probate and Administration

By Mr Lee Chiwi
Excerpt from PreceptsGroup Succession and Trusts in Wealth Management (4th edition) Book

A person’s domicile is basically the place where he intends to make his permanent or ultimate home and where he will return to, even if he may presently reside somewhere else. In the law of probate and administration, the domicile of a person determines the right of that person to make a will and how his estate is to be distributed. The domicile therefore also determines the country where the primary probate process is to be obtained in relation to the deceased’s estate and the rights of his personal representatives to administer his estate.

Some of the factors that determine a person’s domicile include:
• his nationality and place of residence;
• whether the person has bought or owns any property in the country;
• whether his family is with him;
• the length of time that he has been living in a particular country.

For some people who may have several ‘residences’ and other assets in different countries, his personal representatives may have to confirm and prove the most probable country of domicile. A person can possess only one domicile at any one time.

Case Study of Peter Rogers May v Pinder Lillian Gek Lian [2006] SGHC 39

In the proceedings, issues were raised as to whether the deceased had died domiciled in Singapore or in England. The executor had commenced probate proceedings in Singapore on the basis that for the last 30 years of the deceased’s life, Singapore had represented the focal point of his personal, social, financial and business activities. Documents, such as the deceased’s passports, his personal tax submissions and newspaper reports articulating his actual intentions all served to fortify the conclusion that the deceased was domiciled in Singapore prior to his death. He had also significantly assumed Singapore citizenship.

On the other hand, in an attempt by his widow to stay certain court proceedings, she contended that the deceased had always been domiciled in England, notwithstanding his close connection to Singapore. The deceased was born and educated in England and had at all material times an English passport in addition to his Singapore passport, stayed in London regularly, owned property in London, had married her in London and was even on the London electoral role. She also commenced proceedings in England for a declaration that the deceased had died domiciled in England. The Court ruled in favour of the executor’s application for a determination whether a notation should be endorsed on the grant of probate that the deceased died domiciled in Singapore.

The Court also held that: “A testator’s domicile was not determined by the place where a will was prepared or the identity of those involved in preparing the will. The place where a will was made and the law pursuant to which it was made did not establish or even begin to point towards the domicile of a testator. After all, even a declaration of domicile in a will was legally irrelevant as this issue would in the final analysis be determined by the court taking into account the entire matrix”.