The author of this article ponders whether the trusts sector is going to fully survive the advent of the Common Reporting Standard.
The launch of the Common Reporting Standard, operating for about a year now, was controversial and it remains a subject of sometimes fierce debate (see an example here). The CRS, which covers a network of agreements by dozens of countries to exchange data to foil tax cheats, raises issues about whether even the most legitimate wealth structures face certain risks. What, for example, could happen to trusts?
In this article, Wendy Yeo, who is trust director at Equiom Singapore, considers the terrain. She has extensive experience in wealth structuring and banking. She also holds the STEP Diploma in International Trust Management and a bachelor of arts degree from the National University of Singapore.
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The idea of setting up a trust, and thereby handing responsibility for your money and/or assets to a third party trustee, is relatively commonplace across many jurisdictions and has been in place for centuries. Interestingly, the trend has only caught on in Asia in the past few decades as the number of wealthy people who might make use of a trust has dramatically increased. The reasons for setting up a trust are varied but there is an ever-growing need for maintaining confidentiality and protecting wealth for future generations, with an emphasis on tax-efficient planning. Setting up a trust can achieve these aims and that is why it is becoming popular for Asians.
Recently, there has been a growing concern about whether trusts will continue to be fit for purpose in light of the introduction of tax transparency and reporting measures, particularly the Common Reporting Standard. Since 2014/2015, many clients have been asking what the impact of CRS is likely to be on their trusts and offshore assets. Some are wondering if they still need a trust as their assets would no longer be private. Others, arguably in a knee-jerk reaction, have terminated their trusts completely.
Now, with the impact of CRS settling in, the question is, will trusts still be relevant?
While CRS does take away a degree of privacy, it does not eliminate many of the other benefits associated with establishing a trust. To better understand the relevance of a trust as part of wealth planning, I think it is important to look at the most significant needs of trusts’ primary market, the high net worth individual.
High net worth individuals are a discerning market, with varied needs. They often hold a diverse range of assets, comprising, for example, real estate (both long-term investment and development projects globally), interests in start-up or well-established trading entities, artwork and antiquities, and digital currencies. When it comes to wealth planning, the fundamental pillars of asset protection, succession planning and confidentiality are of the highest importance to them and that is why they seek to partner with a trusted adviser. By looking at these main drivers of wealth planning we can determine whether the future of trusts is truly under threat.
The issue of confidentiality is always an important one, whether it is through regard for personal and family safety or just keeping the media and public interest at bay. While CRS does require some information to be reported to the financial authorities, information disclosed is not made publicly available and, as such, the confidentiality provided by a trust still meets these needs.
The importance of income protection and succession planning for future generations is still present with the introduction of CRS. The need to have a succession plan in place for high net worth clients with international and often complex family structures cannot be overemphasised. Critically, many wealthy Asian families are still first generation empire builders versus the ‘old money’ generations of Europe and the US. They have worked hard for what they have today while their children and grandchildren lead a relatively comfortable life. The second and third generations are often well-educated and some have settled in foreign countries. The need to ensure that their hard-earned wealth is preserved is important to these patriarchs and matriarchs and a trust continues to provide them with this security.
Certain benefits provided by a trust, such as creditor protection, are important to many when planning for their family. Unforeseen circumstances may present themselves to the family at some point in the future and proper planning can help mitigate any negative impact on their family fortune.
As tax obligations continue to evolve, a trust coupled with an insurance policy will be able to provide beneficiaries with immediate liquidity to pay for any inheritance tax or provide cash flow to the family as required.
In the context of CRS, a trust has the additional benefit of consolidating all assets under a single structure. This provides a strong level of consistency in the required reporting to relevant authorities.
According to Knight Frank’s The Wealth Report 2018, the number of wealthy individuals is continuing to grow year-on-year, especially in Asia where the ultra-high net worth population (taking into account those with net assets of $50 million-plus) is predicted to increase by 15 per cent by 2022. With this kind of foresight, the need to do some form of planning is becoming even more important and trusts are still very much a significant part of that equation.
So to answer the question, “do trusts have a future in the 21st century?” The answer is “most definitely!”
This article has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The article cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Equiom to discuss these matters in the context of your particular circumstance. Equiom Group, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this article or for any decision based on it.