By DAR Wong

Recently, I met a client who has been running a family business for decades after inheriting it from his father. The business involves the importing and exporting of raw materials and cuisine spices. Distribution covers the majority of local supermarkets and large restaurant chains. Unfortunately, the third generation has no succinct interest in running the business due to their tertiary education in other professional fields.

In our conversation, the owner lamented to me that there is no heir apparent that he could impart his commercial activities to. Selling or folding up an operation reaping a few millions of profit a year is never his wish. Spontaneously, I proposed to him that he could set up a Living Trust Fund (revocable) or Living Irrevocable Trust Fund.

Broadly speaking, the purpose of erecting a trust fund is to protect the family wealth or an individual. The initiator is known as Grantor or Trustor who will transfer all his assets i.e. operating business, property, cash, bonds, physical equity, stocks etc. into the Trust Fund upon erection. Effectively, the tax bracket of the Grantor /Trustor will be reduced owing to the disowning of assets. On the other hand, the income tax of a Trust Fund will also usually receive many exemptions and grants from the Government.

Upon effect, the Trust Fund will normally be placed under the custodian of at least 2 trustees in whichever country’s jurisdiction. The Fund will clearly state whether it is meant for public charity or for family descendants. Thus, all beneficiaries are nominated and registered into the Trust Fund’s constitution. In addition, the Grantor /Trustor could also appoint a qualified asset fund manager to manage the asset and produce the income in the desired range according to the assessed risk factors.

From there, all beneficiaries are entitled to receive dividends on the income generated from the Trust either on monthly basis or any periodic cycle. Other features can also be set legally like granting the beneficiary for purchasing a home for the first time, education expenses, accidental disability etc. In a gist, it just means that you decide how to disburse your money!

While a Trust Fund is set up to acquire a family business or multi-businesses, the net profits generated from the commercial activities legally will flow up in the form of distributions to beneficiaries. The constitution comprises the pre-set Standing Operating Procedure laid down by the founder and to be executed by the Trustees. Hence, management leaders can be hired and trained to duplicate the business operations and create profits for the Trust Fund.

Most people think that setting up a Trust Fund is for wealthy people. However, a normal middle-income person who has accumulated his wealth through savings, investments or ownership of one or more real estates may just qualify to erect a Trust Fund for his children as well. This would ensure that the inheritance would not be squandered after the Grantor /Trustor dies.

Apart from enjoying the incentives like lower tax bracket, fair distribution to all beneficiaries and prevention of liquidation by the next generation, another advantage is to deter schemes against the family assets since they need to be verified by the Fund Trustees.

There are many ways to protect the family’s heritage especially when wealth is concerned. Being unfamiliar with this mechanism does not necessarily disqualify you from erecting a Trust Fund to safeguard your business or assets. Continue to explore the alternative ways if you are genuinely looking to create such a deed for yourself.

~ DAR Wong is a registered Fund Manager in Singapore. The opinions are solely at his own. He can be reached at dar@dektosinvestment.com

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