Buying Under Trust
Testamentary Trust
Whilst many people would be familiar with the concept of a trust, not many would be aware that the Will can sometimes be used to create a species of trust known as the “Testamentary Trust”. This type of trust is very useful for family legacy planning involving beneficiaries who are young or have special needs. In this month’s newsletter, we take a closer look at the key concepts and issues in relation to Testamentary Trusts.
KEY CONCEPTS
I. Parties
There are three parties namely:
1. Settlor, or the creator of the trust.
2. Trustee, the person(s) entrusted with the legal ownership to the assets of the Settlor and hold these assets
on trust for the Beneficiaries.
3. Beneficiaries, who have beneficial ownership over the assets of the Settlor and who are the ultimate recipients of the Settlor’s assets in accordance with the terms of the trust.
II. Legal requirements for the parties
The legal requirements for the Settlor and the Trustee are that he/she is at least 21 years of age, not a bankrupt and of sound mind. The Settlor should have legal ownership of the assets which are subject to the trust. Apart from the legal requirements for the Trustee, we would recommend that the Settlor ought to appoint someone whom the Settlor can trust to act in the best interests of the Beneficiaries.
III. Time of creation
The Testamentary Trust would take effect upon the death of the Settlor. This is different from the inter vivos trust, which would take effect during the lifetime of the Settlor and upon the declaration of trust by the Settlor.
IV. Purpose of the trust
The Settlor may stipulate that the Trustee may apply the assets held on trust for certain permitted purposes, such as the advancement of education of the Beneficiaries, hospitalisation or medical expenses of the Beneficiaries, as well as the day-to-day living expenses of the Beneficiaries.
V. Tenure of the trust, or the date when the trust is determined
The tenure for the Testamentary Trust would typically be fixed at a certain milestone, take for example, when the Beneficiary (s) turns 30 years old or when the Beneficiary graduates from university.
CASE STUDY
To illustrate how a Testamentary Trust would operate, let us consider the example of a Settlor who intends to pass all of her assets to her young child aged 3. The Settlor has taken out a life insurance policy which would pay out a large lump sum of money upon the demise of the Settlor. Apart from the insurance payout, the Settlor also has in her name a property and a bank account with large amounts of cash.
In these circumstances, the Settlor is faced with a conundrum – on the one hand, she wishes to have all his assets passed on to her child but on the other hand, she is also concerned about the risk of dissipation of her assets in the event that her child receives the full amount of insurance payout and her other assets at one go.
If, however, the Settlor, opts for a Testamentary Trust to be set up under her Will, she may specify that the trust shall only determine upon her child turning 35 years of age. In the meantime, she may specify payment milestones, for example, a lump sum of $30,000 to be paid out by the Trustee to her child every year from the time that her child turns 21, until such time when her child turns 35, at which time her child shall be entitled to all of her assets.
In the meantime, to ensure that her child’s needs are taken care of, she may specify that the Trustee may make payments out of her assets for certain permitted purposes including, the education of her child, hospitalisation or medical expenses of her child or for the maintenance of her child.
KEY CONCEPTS
I. Parties
There are three parties namely:
1. Settlor, or the creator of the trust.
2. Trustee, the person(s) entrusted with the legal ownership to the assets of the Settlor and hold these assets
on trust for the Beneficiaries.
3. Beneficiaries, who have beneficial ownership over the assets of the Settlor and who are the ultimate recipients of the Settlor’s assets in accordance with the terms of the trust.
II. Legal requirements for the parties
The legal requirements for the Settlor and the Trustee are that he/she is at least 21 years of age, not a bankrupt and of sound mind. The Settlor should have legal ownership of the assets which are subject to the trust. Apart from the legal requirements for the Trustee, we would recommend that the Settlor ought to appoint someone whom the Settlor can trust to act in the best interests of the Beneficiaries.
III. Time of creation
The Testamentary Trust would take effect upon the death of the Settlor. This is different from the inter vivos trust, which would take effect during the lifetime of the Settlor and upon the declaration of trust by the Settlor.
IV. Purpose of the trust
The Settlor may stipulate that the Trustee may apply the assets held on trust for certain permitted purposes, such as the advancement of education of the Beneficiaries, hospitalisation or medical expenses of the Beneficiaries, as well as the day-to-day living expenses of the Beneficiaries.
V. Tenure of the trust, or the date when the trust is determined
The tenure for the Testamentary Trust would typically be fixed at a certain milestone, take for example, when the Beneficiary (s) turns 30 years old or when the Beneficiary graduates from university.
CASE STUDY
To illustrate how a Testamentary Trust would operate, let us consider the example of a Settlor who intends to pass all of her assets to her young child aged 3. The Settlor has taken out a life insurance policy which would pay out a large lump sum of money upon the demise of the Settlor. Apart from the insurance payout, the Settlor also has in her name a property and a bank account with large amounts of cash.
In these circumstances, the Settlor is faced with a conundrum – on the one hand, she wishes to have all his assets passed on to her child but on the other hand, she is also concerned about the risk of dissipation of her assets in the event that her child receives the full amount of insurance payout and her other assets at one go.
If, however, the Settlor, opts for a Testamentary Trust to be set up under her Will, she may specify that the trust shall only determine upon her child turning 35 years of age. In the meantime, she may specify payment milestones, for example, a lump sum of $30,000 to be paid out by the Trustee to her child every year from the time that her child turns 21, until such time when her child turns 35, at which time her child shall be entitled to all of her assets.
In the meantime, to ensure that her child’s needs are taken care of, she may specify that the Trustee may make payments out of her assets for certain permitted purposes including, the education of her child, hospitalisation or medical expenses of her child or for the maintenance of her child.
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CONCLUSION
Testamentary trusts are commonly incorporated into Wills to enable the Settlor to preserve his/her assets. Indeed, this may be a better alternative than having a Will without a Testamentary Trust which would leave the Settlor’s assets directly to the Beneficiaries. In any event, you need to look for a good family legacy planning law firm with extensive experience with the incorporation of Testamentary Trusts in your Wills. Should you have any queries pertaining to Testamentary Trusts, please engage good lawyers. *The information shall not be construed and be relied upon as legal advice and all readers are advised to seek separate legal advice for all matters related or arising from the issues raised above. |
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