A private trust has become an increasingly popular tool for wealth management, financial protection and succession planning, but what is a private trust, and how does it safeguard your future finance?

What is a Trust?

In essence, a private trust is legal arrangement under the common law which could be structured to protect individuals' global assets against  potential economic and political uncertainties. A private trust could also be a measure for confidentiality and effective succession/estate planning. Normally, a private trust will be set up in established offshore common law jurisdictions with stable political environment such as the British Virgin Islands, Singapore and Cayman Islands.

When setting up a private trust, the settlor transfers the legal title of his assets to another person, the trustee, with instructions on how he wishes his assets to be managed for the benefit of designated beneficiaries. Since a private trust set-up and on-going administration will require the trustee to have high level of fiduciary duties, financial and legal knowledge, a professional trustee company will normally be appointed as the trustee. Between the settlor and trustee, they will sign a private agreement called the trust deed, which outlines the settlor's appointment of the trustee, the trustee's power, discretions and restrictions, the description of trust assets, the provisions of the trust, and the nomination of the beneficiaries. While the settlor may be included as one of the beneficiaries, the trustee may not. The responsibility of the trustee is to protect the trust assets, ensure the provisions of the trust are executed, and that the beneficiaries' interests are protected. The settlor could specify his/her wishes on how the trustee should apply the trust assets for the benefit of the designated beneficiaries through a written notification, sometimes called the letter of wishes.

Types of Trust

Depending on your needs and circumstances, you can request the establishment of different kinds of trust. While most of the professional trustees have their own standard trust, which is designed to address the needs of common estate planning and confidentiality, a modified standard trust caters to those in need of slight modifications to the trust deed because of family concerns, and a customised trust proves useful in cases of complicated asset combinations, where the distribution of which may require a special deed to be drafted.

In general, an irrevocable discretionary trust arrangement is one of the most common types of private trust structure, which gives the settlors more flexibility and higher degree of asset protection. 

Benefits from Asset Distribution

One of the advantages of separating the legal and beneficial ownership of trust properties is the orderly distribution of assets. The reason is simple: once the assets of the settlor are passed onto the trustee (and ceased to be the settlor's estate), the assets can be distributed to the beneficiaries in an orderly manner, free from possible family disputes and time-consuming probate. The private trust also allows the asset to be distributed anytime, whether it's before or after the death of the settlor. Also, when the assets are placed in a trust and no longer part of the settlor's estate, they can be distributed smoothly without the delays from the lengthy and expensive probate.

By designating who to benefit how much in the deed or letter of wishes, the settlor can be assured protection of the family wealth against dissipation by extravagant family members, or by spouses marrying into the family. The settlor can also state in his wishes for the wealth to be distributed to the beneficiaries in a regulated and orderly manner, in order to encourage responsible and wise spending.

Confidentiality and Potential Tax Savings

The private trust deed is a private agreement between the settlor and the trustee, and remains  confidential as there are no registrations or reporting requirements for trusts locally in Hong Kong and in most the common offshore jurisdictions.

If properly structured, an offshore private trust could be used to mitigate the tax exposure of the settlor and beneficiaries pending on the settlor and beneficiaries' tax residency, such as estate duties and gift tax. Nonetheless, it is wise to seek professional tax advice on applicable tax laws. In addition, the trust is also a reliable tool in averting risks related to political upheavals or economical instabilities, as a trust normally holds its assets in a politically stable jurisdiction.

In all aspects, a private trust offers peace of mind by safeguarding your assets and ensuring your assets will be properly distributed to designated beneficiaries according to your wish. Contact your financial consultant and find out more on how you can benefit from a private trust.

Special Thanks:
Felix T Y Fung, Head of Trusts & Fiduciary Services Department, The Bank of East Asia, Limited

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