In the specific context of a small and open economy, a loss of trust in a jurisdiction can lead to capital flight when investors start to withdraw money from that jurisdiction. This undesired economic outcome is not simply about a reputational loss of trust, but also about the loss of long-term trust created between families and wealth management professionals. In May 2008, the European Union’s Economic and Financial Affairs Council (ECOFIN) discussed the use of trusts in the light of improving transparency, as part of the legitimate fight against money laundering and terrorism financing. In the same year, the US Advisory Council on Financial Responsibility used the term ‘trust company’ to identify organizations that were not regulated depository institutions or SEC-registered investment advisers. The Reserve Bank of India also issued a consultative paper in May 2008 to provide potential Indian entrants, such as non-banking financial companies, clarity on the trust company business, to help prevent high-net-worth individuals and families, who might otherwise use offshore trust companies, from shifting their assets offshore.
The World Economic Forum, in its 2013 Global Risks Report, ranked ‘failure of governance’ as the fifth most serious global risk. Trusts and trust companies are often associated with this concern. Trusts are a type of trust arrangement used in the common law tradition, similar to the type of trust in civil law jurisdictions, where the ownership and control of assets in respect of which the trust is settled are no longer vested in the settlor who established the trust, but are instead transferred to the trustee. Trusts have sometimes given rise to revenue leakages and regulatory concerns. On the other hand, they are used to address social and economic needs such as family asset preservation, philanthropy, retirement, succession and tax planning. Many specific concerns relating to secrecy, tax, money laundering, corruption and terrorist financing find roots in families and wealth preservation.
The Role of Trust Companies in Singapore
The trust industry is seeing increasing partnerships between financial institutions and trust companies for the joint offering of customer advisory services relating to wealth management issues. In Singapore, MAS announced in April 2017 that custodian banks with trust capabilities could soon be in a position to better compete against independent trust companies. This follows proposals to fine-tune the capital framework. MAS is pondering capital rules requiring both private bankers and independent trust companies to set aside capital for their future discretionary trust business. However, custodian banks with trust capabilities will not be required to defend towards Singapore’s future regulatory capital requirement. Overall, Singapore’s wealth management business, including funds and family offices, has grown at a compounded annual growth rate of about 15% over the last decade.
Singapore is set to become a leading wealth management hub by 2012 with more than US$2 trillion in assets under management. Much of this growth can be expected to come through the city-state’s thriving trust industry, whose number is expected to double within the next couple of years. A mix of tax incentives, liberal regulation as well as transparency in corporate governance make it an ideal place for trust players to come in not only to set up and base their services, but as well to make Singapore their information center. In the 2017 Singapore Trust Industry Review, the Monetary Authority of Singapore (MAS) said that Singapore’s trust business is growing due to the city-state’s many initiatives aimed at boosting the appeal of local trust structures.
Providing Trustee Services
Some individuals set up trusts on the firm understanding that wealth is only one part of an inheritance and does not owe the entire scope of successful inheritance and benefits. A trust can provide the monetary funds and the necessary time that allows for the safeguarding necessary to raise future generations, to maximize their gifts and projects. The administration of the trust can remove personal bias or conflicts with beneficiaries, help pursue wealth retention for all including long-term impact investing, helping to provide protection from potential threats and mitigating related dangers for beneficiaries – which can be made presciently.
Although some individuals believe that trust companies are only for the rich, today trust companies serve families of all wealth levels by providing services that help preserve family wealth, transfer private time-consuming burdens, as well as wealth in a timely and efficient manner. From well-to-do families with established businesses and in various stages of asset accumulation, to high-net-worth families, to the top 1 percent of families.
Different trust companies provide different ranges of trust services. Typically, trust companies’ roles include acting as trustees, protectors (or in some cases, “enforcers”), i.e., custodians/holding agents of financial or real estate assets, and/or in some wills, estate and estate planning contexts, executor and/or administrator of estates. In many jurisdictions, it is common practice for professional trust companies to be the administrator of trust(s) when the size of the trust estate requires or requires professional management intervention. For example, such professional trust companies can engage in the investment of such large trust estates in mutual funds, individual securities, and insurance products.
Trust companies are businesses that are licensed or approved by the government to provide trust and trust-related services. Operating as corporate trustees, trust companies undertake the role of trust administration, taking titles to assets, administering them, ensuring they are managed, and ultimately distributed in accordance with the instructions set out in the trust document. Trust companies vary widely in terms of the services they provide and the markets they serve.
Asset Protection and Wealth Management
– Wealth Preservation: A trust can also be used for the retention of assets beyond the death period for the future benefit of the chosen beneficiaries. The trust allows you to create a lasting legacy that is not eroded or used up by care costs. Trusts can also be used for the purpose of wealth appreciation by investing the trust fund in an exciting opportunity that the settlor believes in, such as a new start-up business or valid investment. The trust also offers a higher level of inflation protection through the trust investment. This is because the growth and income stream are likely to outstrip inflation. Trusts can enjoy certain benefits, such as asset protection, tax-saving, privacy, and running away from forced heirship. Some settlers use offshore trust structures in certain parts.
Trusts are used for a wide range of asset protection and wealth management purposes. Some of the principal reasons why people set up offshore trusts in the first place include: trying to ensure that their wealth will be protected against risks arising from political instability or economic upheaval in the settlor’s home country or elsewhere – this is the reason why families from countries with a history of instability or regimes prone to expropriation of private property often set up offshore trusts and funds. Trusts can help prevent the risk of “financial decapitation”, where settling taxes of the settler’s personal assets leaves members of the family with no resources. Trusts can also enable individuals to leave assets to family members without the settling taxes of the recipients of the same asset.
Estate Planning and Succession
As a tool, it is important to integrate the concept of a trust into one’s global estate planning consideration. A trust can provide various tax and non-tax benefits and could be governed by one’s choice of applicable laws, with the ultimate objective of being to further preserve one’s wealth and ensure one’s legacy continues the way that one intended. A settlor can provide for an offshore or onshore trust, however, each jurisdiction provides for specific rules which would govern the trust. For example, some jurisdictions impose tax liabilities on the trust from day one, or enforce relatively onerous trust reporting requirements, additional stamp duties may be imposed if the trust derives income from certain underlying assets such as residential properties, or there may be restrictions on the duration of a trust. Some jurisdictions provide for forced heirship laws, which means that a fixed share of an individual’s assets must pass to certain categories of family member upon the individual’s death, regardless of the individual’s testamentary wishes.
With the rise of globalization and more individuals relocating to different countries for work, the idea of success and wealth has also moved across borders. As wealth becomes more international, so does the plan to handle and manage that wealth. Hence, it is important for individuals to consider having an international estate plan, a tool to manage wealth across various locations. This includes preparing for changes in family structures, marriages, ensuring the continued financial protection of family members, ensuring the continued ability for a business or related business interests to flourish, considering the ability for beneficiaries to access governing laws, if an individual no longer wishes to be governed by the rules of their home country, or even to generally minimize one’s global tax liability from an inheritance perspective.
Benefits of Trust Companies in Singapore
Respondents reported that such benefits arose predominantly because of a strong and supportive rule of law, multicultural, stable and globally trusted leaders, and a regulatory environment that afforded flexibility, respect for the decision-making of families, and a careful equable focus of protecting the international financial center of Singapore. Respondents perceived trust companies would and should act exclusively for trusts and individuals with significant wealth and would and should not engage in any business other than the management of assets specifically as trustees, protectors, enforcers, or for providing nominated services and that all other legal services could and should be sourced elsewhere. Trust companies would and should develop and maintain a strong, well-trained, professional, and experienced workforce that is diverse, flexible, and creative, supportive, closely engaged with the clients, local and global communities, dedicated supervisors, and in a stable working environment guided by clear strategies, practices, policies, and procedures for purposes of supporting the clients’ needs.
This paper reports the preliminary results of empirical data gathered through fifty interviews with private wealth management industry professionals and related professionals in Singapore. The intention is to identify the perceptions and preferences of these practitioners as well as the entrepreneurs and family business owners as to the role, scope, and benefits of trust services in Singapore. This qualitative study is exploratory and seeks to develop some theory on the actual needs and preferences when establishing an offshore vehicle for private wealth management and succession purposes. In general terms, respondents reported family and dynasty wealth succession planning, the fiduciary and trusted nature of relationships, confidentiality, asset protection, and the privacy benefits afforded the family by moving some or all of their assets to Singapore as very important factors when choosing trust services from trust companies.
Confidentiality and Privacy
To protect the confidentiality of its operations and the trust business, a Singapore trust company has to ensure that its employees understand that their obligations of confidentiality continue even after their employment with the trust company has ceased. Employees should generally be advised that the duty of maintaining the confidentiality of trust business will continue as this is necessary to keep the trust business secure. They may be required to sign confidentiality agreements with respect to the information they have acquired during the period of their employment. If they have gained some security clearance that gave them access to sensitive information, they must also ensure that they return all information to the trust company prior to joining another organization.
Under the Trust Companies Act, trust companies are required by law to treat as confidential all information relating to their trust business or the affairs of their customers. They are also required to provide a legal undertaking to the authority. All employees must ensure that they do not disclose such confidential information, and they are to keep all dealings with the authority and its officers secret. In the rare cases when such information is leaked, employees are immediately removed from their jobs and taken away from sensitive areas of the trust company, and in the most serious cases, expelled from the company.
Tax Planning and Optimization
Trust companies also assist with establishing and managing trading and investment companies to aid in tax governance solutions. These companies are ideally structured within the trust environment to ensure that the desired tax exemptions or geographical risks have been minimized. Trust companies can also assist investment advisors and arrangers with establishing and managing Cyprus-based Investment Clubs in which the members receive the same reduced tax advantages as Cyprus tax residents, whether they are private or corporate investors. Furthermore, they can assist with Cyprus-based Diaspora Bonds for wealth funds intending to provide investments in Cyprus and/or opportunities in a multitude of Cyprus-based companies which use Cyprus as a platform to invest. Providing varied tax governance solutions could help promote higher business reinvestment in the local economy.
In terms of tax claims and compliance, trust companies can assist with establishing foreign tax claims and compliance rules. As part of their services, they can provide VAT advice and management tax filing, withholding tax advice, report maintenance documentation, transfer pricing policy advice, and foreign exchange gain/loss advice.
Trust companies can assist with tax planning and optimization because they have comprehensive taxation knowledge, which helps in overcoming tax planning complexities and risks. This ensures that tax planning is done efficiently with minimal or no tax penalties. Trust companies working across multiple jurisdictions can also assist in establishing and managing internationally-based trusts, foundations, private trust companies, and trading and investment companies. These entities provide additional tax optimization solutions.
Flexibility and Customization
If the trust company can be deemed to be a third-party beneficiary of the agreement, a special benefit of this approach is that the trust will not have any beneficiaries under the standard that would apply in relation to a determination of ‘who are the beneficiaries, exclusive of a person who holds a power of removal or a general power of appointment that is held in a nonfiduciary capacity, that can remove or discharge the trustees and replace the trustees with new trustees not related or subordinate to the person who has the power to discharge or remove the trustees’. Because of this, the trust company should be the sole ‘de facto’ beneficiary of the trust. When deeming a third-party a beneficiary to the agreement, the IRS adheres rigorously to the rule articulated in Simmonds Estate. In that case, the decedent created an irrevocable life insurance trust. The decedent also became the initial trustee of the trust, and the assets of the trust were used to acquire life insurance policies naming the decedent’s daughters as the beneficiaries of the policies. In addition, the agreement described the persons who could exercise the powers granted to the trustee, the decedent, the beneficiaries, and add powers. The threshold issue within this context, and the potential downfall of all trust companies, is whether the trust company will have enough independent official powers.
Trust companies, like power of appointment trusts, allow a settlor to create a trust with the utmost flexibility and customization. Both power of appointment trusts and trust companies share the common objective of allowing market forces, freedom of contract, and human ingenuity to thrive. With a trust company, the settlor appoints the directors and officers of a trust company, and those individuals collectively, whether acting alone or in conjunction with the other person or the major person, are able to direct the exercise of a majority of the voting power of the trust company. The task of managing the company is usually performed pursuant to the fiduciary duties owed by the directors and officers to the company acting collectively. A trust settles assets to the trust company and enters into an agreement with the trust company, which agreement sets forth the peculiar terms of the relationship between the settlors, beneficiaries, and the enacted directors and officers. These are often terms of desire, not terms of necessity. The compensation may or may not be appropriate. The trust company provides services to the trustee, the settlor, the settlor’s beneficiaries, or a charitable organization designated by the settlor.
Asset Preservation and Diversification
While mediating wealth succession, trust companies can also act as a partner in structuring a family business and managing personal wealth. In this way, the professional nature of the trust companies will help to preserve the assets held within the trust for the family. Managing a portfolio enables the spread of risk: by holding assets across different industries and companies, a family can achieve different financial returns, including reducing overall risk. Proper investment and wealth planning not only acts as protection, but also ensures the preservation and progression of family wealth. The result is that the family’s assets are better protected. The wealth that is preserved can also be used to contribute to those social and philanthropic causes which the family feels strongly about.
In Singapore, most people seek to preserve and grow their assets for the benefit and security of their future generations. In the 2014-2018 period, the total wealth of the country expanded 9.9 percent year-on-year. Singapore had 184.4 thousand millionaires by the end of 2018. Beyond the necessity of country preservation, Singaporeans also believe that it is important to leave a legacy for their loved ones. Being able to pass on the family business, or a portion of personal wealth beyond one’s lifetime, is an important personal goal for many individuals.
The use of concepts from sociology and institutional theory provides a new and different way of looking at the trust industry. It moves future research assessing the role of intermediaries, reducing the transaction costs of contracting in sophisticated financial transactions, outside of but consistent with Solove’s focus on contract costs in his contribution to beneficial uses of dispositive law. It also encourages further work on the role of social factors in financial affairs. And finally, by suggesting that culture related to religion, family, class, and local governance may have contributed to the local development of practice systems and institutions, this study is consistent with the literature suggesting that culture and institutions of developed countries might be special cases.
