Setting Up a Discretionary Living Trust in Singapore

What is a discretionary living trust?

A trust is a legal arrangement between several parties to effect the transfer of assets. The owner of the assets is the “settlor”, who wishes to allow the transfer the legal title of the assets to a “trustee” and the beneficial ownership to the “beneficiary”. The trustee, as the legal owner, has management control over the assets. However, the benefits and entitlements will go to the beneficiary. Note that the settlor and the beneficiary can be the same person.

Different types of assets, or property, can be placed in trust. Common examples include cash, real estate and shares.

The unique feature of a discretionary living trust is that the trustee is granted the power to exercise discretion in making distributions to the beneficiaries. This is in contrast to a fixed trust, where the distributions have already been pre-arranged by the settlor. For example, the trustee in a discretionary living trust may choose the beneficiary from a list of names or classes (e.g. spouses, children) in contrast to a trustee in a fixed trust who can only distribute the benefits of the assets to an appointed beneficiary appointed by the settlor.

Why should I set up a discretionary living trust?

Long-term planning – The key benefit of a discretionary trust is flexibility. The trustee can choose to exercise his or her discretionary powers according to changing circumstances. For example, in a family situation where the trustee is a father and the beneficiaries are his two daughters, the trustee may choose to distribute more assets to the married daughter to take into account her increased financial commitments or to grant the unmarried daughter a house to enable her to have a roof over her head. As circumstances may change over time, discretionary living trusts allows the trustee the flexibility and leeway to make such decisions.

Asset protection – In transferring the legal title to the trustee, the settlor has no more rights to the assets. In any future event of bankruptcy or insolvency, creditors will not be able to claim the settlor’s assets provided the trust was made more than 5 years ago and no fraud was involved.

Convenience – Setting up a living trust will help your family to avoid applying for probate or other representation after your death. These procedures may freeze your assets, meaning they cannot be used for several months or even years. However, the legal arrangement in the trust will allow for the assets to be used immediately by the beneficiaries.

Tax savings – If you set up a trust in a country with no or low tax, you will be able to minimise tax. Singapore does not charge tax on several transactions, such as the remittance of foreign income or interest income earned from fixed deposits in Singapore-based banks.

How to set up a discretionary living trust?

A discretionary living trust must be made expressly and in adherence to the formality requirements under section 7 of the Civil Law Act whereby the trust must be manifested in writing.

Other than the formality requirements, for the discretionary trust to be validly constituted, the “three certainties” consisting of:

• The intention to create a trust;
• The subject-matter of the trust (e.g. cash, real property etc.); and
• The parties involved (beneficiary, trustee, settlor)

must be clearly identified and certain in the trust deed. For instance, the trust property has to refer to a house with a specific address or a specific bank account rather than a vague and unidentifiable subject-matter like the bulk of the settlor’s residuary estate.

The beneficiaries of the trust must also be identifiable. For instance, identifying the beneficiaries as the “friends” of the settlor might be too vague for the Court to establish who are the intended beneficiaries since it is impossible to ascertain who are the “friends” of the settlor.

In addition, the settlor will also create a Letter of Wishes to provide guidance to the trustee for exercising the discretionary power under the trust. This is not a legally binding document and can be altered by the settlor.

As a discretionary living trust often involves the transfer of a substantial, if not all of the settlor’s assets, a person looking to set up a discretionary living trust should consult a trust lawyer to ensure that the documentations and legal requirements of a trust are adhered to. This would prevent a situation whereby the the Court strikes down the trust for being invalidly constituted.

For more information on trusts and setting up trusts in general, you can also refer to our article on “Trust law in Singapore”.