Trusts as a financial planning tool

Dear Sven,

I’m a keen investor who’s been living in Vietnam for six years now. I have a few property investments abroad, and I own a small stock portfolio. I have a son who is six years old and is about to start his first year of school. I would like to set aside the majority of my investments to finance his university education when he comes of age. I am worried that if I happen to pass away while living in Vietnam that my estates may fall victim to disputes among my family members after I am gone and that my son might run the risk of not receiving what he is due. Also, I would not want the funds intended to finance his education to be exposed to excessive taxation upon my death. I’ve been told that setting up a trust might solve my problem. Could you explain how a trust works in more detail?

There are two things that are guaranteed in life: 1) you will pay taxes and 2) you will die. Obviously the fact that you have dependents and your thoughts on your own mortality make you a little anxious about your son’s future and the future of your personal estate.

Trusts used to be reserved for the aristocracy as a mechanism to transfer wealth across generations. Large corporations like Standard Oil and JP Morgan were even referred to as “trusts” in the early 20th century. Nowadays, a trust is available to anybody. The trick is to find a suitable person to act as trustee.

In layman’s terms, a trust allows you to hand over your assets to a professional who holds them for the benefit of a third party. The person who you would hand your assets over to would be known as the trustee, which could be a person or a company. As the primary contributor of the assets, you would be known as the settlor. In this case, the third party would be your son, who is known as a beneficiary under the agreement.

The above structure is akin to having the portion of your assets run as a separate company. You might think that handing over your assets to a third party is a crazy idea, especially if you are considering appointing your estranged, bipolar brother-in-law as the trustee. The good news is that there are many companies who specialize as trustees. A great example is Sovereign Trust in Hong Kong who could set you up via your independent financial advisor in Vietnam. The bad news is that if you would like a company to act as your trustee, the value of your assets would have to be extremely high.

What are the main benefits of a trust? The main benefit is that you would be assured that the assets held within the trust would be distributed to your intended beneficiary upon your death, without the hassle, delays and legal proceedings of having your estate split up via your will. The legal agreement is also very concrete. If you were to pass away when your son is 16 years old and he receives his inheritance straight away, it’s possible that he would run away from home and spend all the money, as any teenager might. However, with the trust you could stipulate that he would only be able to receive a portion of the funds when he reaches a certain age. Secondly, your inheritance tax situation. Trusts can heavily mitigate inheritance taxes. However, certain jurisdictions, like the US and UK are changing laws to allow trusts to be taxed more heavily. Therefore, jurisdictions like the Isle of Man, Guernsey and Jersey would be most efficient.

For a trust to be most effective you would have to have no beneficial interest in the assets held within the trust, so you can kiss that “Mediterranean holiday you were planning after selling that house you had held in the trust” goodbye. Luckily your death will ironically benefit many because you managed to protect your assets from your squabbling relatives through your shrewd judgment of using the trust.

BIO: Sven Roering is a partner and financial planner at Total Wealth Management PTE. Ltd . He holds an Economics Degree from Rhodes University in South Africa, and is a candidate in the Chartered Financial Analyst (CFA) program, having successfully completed level 1 and is currently working towards the level 2 exam.