If you’ve ever thought about a Trust, it’s probably because you hate the idea of going through probate. Trusts have been heavily marketed on that basis over the past several years and, yes, trusts certainly do avoid probate. But, there’s a whole lot more to trusts than just that. In fact, avoiding probate is not even one of the top three reasons for a living trust. In my opinion, it’s #4. To set the record straight, here are the top 6 reasons why you should have a family trust.
Reason #1: Protecting Property for Certain Beneficiaries
This is seldom mentioned as a reason for a trust, but it’s probably one of the most important reasons. When most of us think about estate planning, we think about giving our property to our spouse, our children, and other loved ones after we die. However, sometimes our intended beneficiaries just aren’t able to handle an inheritance due to the size or jurisdiction.
Minor children are the usual suspects here. Many countries don’t even allow minor children to own property because they’re just too young. Instead, your Executor would appoint a trustee to hold the property until they reach majority age (usually age 18). Even then, parents cringe at the thought of an 18-year old getting any amount of money in a lump-sum. The first thing they might do is quit school, buy an expensive car, and head to Thailand or the Philippines for the beaches.
But, minor children aren’t the only ones who might squander an inheritance. Most experts agree that no one under the age of 25 should be given an inheritance outright because they generally are not mature enough to handle large sums of money. Of course, there are many people over the age of 25 that shouldn’t have money either. Some are spendthrifts at heart, others are in not-so-good marriages – many parents would prefer the in-law/s not to have access, still others are going through bankruptcy. Then there are those who are just too frail and incapacitated to manage property on their own. Giving any amount of money or property to any of these people is never a good idea.
That’s when a trust becomes a vital part of your estate planning; i.e. a trust allows you to give your hard-earned money and property to those you care about while protecting it for them at the same time.
Sometimes, not all of the contents of the Trust should to be distributed such as a family home or the luxury villa overseas. These assets can be instructed to be kept within the Trust perhaps for the whole family use or rental income or both.
Reason #2: Reducing or Eliminating Estate Taxes
Hong Kong does not have estate duty anymore, this was removed in 2006 but other countries do. Perhaps these taxes are due because your Domicile dictates (UK) or your assets in the country exceed the allowance (UK – GBP325,000 / US$ - US$5,430,000) or there maybe transfer or gains taxes to consider (Australia/Canada.)
Many people are unaware that certain Trusts can eliminate or reduce the taxes due.
For example, a UK Domicile person would have to pay 40% tax on assets valued over GBP325,000 on a global basis meaning that the estate is valued from assets all over the world. Given the average cost of an apartment in HK, it is not hard to get past this value. By creating certain types of Trusts, these taxes can be removed.
Reason #3: Managing Property upon Incapacity
One of the major concerns that many of us have today is not about dying - it’s about living too long! We see it all around us - we worry about our parents living in their own home. We worry about their bills being paid and whether someone will walk off with their money. In many cases, we are powerless to help them because all of their property is in their own name. Unfortunately, without doing some prior planning, the only option we have is to file an application with the probate court to have a guardian appointed for them. That’s a gut wrenching experience because all their personal and financial affairs will have to be paraded before total strangers, and they will be forced to suffer the indignity and humiliation of being declared incompetent.
It doesn’t have to be that way. Many people try to avoid that result by putting certain properties (particularly checking and savings accounts) in joint name with a son or daughter. That enables the son or daughter to pay their bills, but it doesn’t provide a lot of help with other financial matters. It also creates more problems when the parent dies because those accounts pass automatically to the son or daughter and leaves the other children out in the cold.
A better solution is an enduring power of attorney. A power of attorney allows you to designate the people you want to help you with your financial affairs. However, as good as a power of attorney is - and I’m a firm believer that everyone over the age of 50 ought to have one - it does have some shortcomings. First, your attorney may find some financial institutions difficult to work with. Second, it may not give your attorney all the powers needed to manage your affairs. For instance, if you were making gifts to family members on a regular basis, your attorney would not be able to continue making those gifts unless that was specifically stated in the document.
A much better solution is a trust. A trust allows your successor trustee to take over whenever you resign or become incapacitated. There is generally no interruption in the management of your property, and there is no court supervision. Trusts also enjoy a greater level of acceptance throughout the legal and financial community, and a broad range of statutory powers regarding the management of trust property. While it is true that a living trust isn’t effective unless your property is in the trust, a power of attorney will enable your attorney to transfer property into your trust if you can’t do it on your own.
Reason #4: Avoiding Probate.
It is true that property in your trust will not go through probate when you die. That’s because the trust instrument spells out who gets the property. Jointly-owned property, with rights of survivorship, doesn’t go through probate, either. It passes automatically to the surviving joint owner.
That does not mean, however, that your successor trustee is free to distribute the trust property immediately. It’s not as simple as that. Just because your property is in trust doesn’t mean that your outstanding debts don’t have to be paid. Likewise, estate taxes still have to be paid and the probate court still wants some fees even though most of your property may avoid probate.
Does that mean that everyone should avoid probate? No this is not possible in HK I’m afraid as certain assets must be distributed via probate here: Bank account, MPF, Group Life Insurance and Property. Anything under insurance such as personal life or pensions can be nominated to your beneficiaries and are paid out on production of your death certificate, which incidentally can take up to 6 – 8 weeks to issue in HK.
Reason #5: Avoiding a Will Contest
It is true that a will is far more likely to be contested than a trust. That’s because a will goes into effect only when a person dies, whereas a trust goes into effect as soon as the trust instrument is signed and generally lasts for some time after the owner’s death. If you’re going to contest a will, all you have to do is prove that the testator was either incompetent or under undue influence at the precise moment the will was signed. To contest a trust, you have to prove that the settlor was incompetent or under undue influence not only when the trust instrument was signed, but also when each property was transferred to the trust, when each investment decision was made, and when each and every distribution was made to the owner or anyone else. That is virtually impossible to do.
Moreover, it costs nothing to contest a will. All a disgruntled family member has to do is object when the will is presented for probate, then hire lawyer on a contingency fee basis, and wait for the final outcome. A disgruntled family member has nothing to lose. On the other hand, contesting a trust generally involves a substantial commitment of time and money. Whereas a will contest is heard in probate court, a trust contest is heard in civil court where there are substantial filing fees and formal procedures that have to be followed.
Still, some people argue that will contests are seldom successful, so why bother with an irrevocable living trust? The answer is threefold: First, a will contest puts a screeching halt to the settlement of an estate. Most will contests take a minimum of two or more years to complete and, during that period, no distributions will be made to anyone. Second, defending a will contest involves lots of attorney time that results in large legal fees. Even unsuccessful will contests end up costing HK$400,000 or more in legal fees. And, those fees come out of the estate, which means that much less for the beneficiaries. Third, many will contests are settled before they ever get to court. In that case, the estate will be further diminished by the amount of the settlement that is eventually reached. In the final analysis, will contests are time consuming and expensive. The best way to avoid them is through an irrevocable living trust.
Reason #6: Privacy
Most of us naturally dislike the concept of probate because it is a public process. Theoretically, anyone can go into probate court when a person dies and look at the estate file. You can read the will, you can find out who the relatives and beneficiaries are, you can look at the claims of creditors and the list of assets, and you can find the phone numbers and addresses of estate beneficiaries. Unscrupulous sales people often go through estate files to locate grieving heirs to prey on. Disgruntled heirs, even friends and neighbours, often like to poke their noses into an estate file to see what’s there. And, with the advent of the internet, they don't even have to get themselves down to the probate court to take a look. All they have to do is fire up their computer in the comfort of their own homes. To see this for yourself, take a look at all the Wills of the Rich and Famous people under http://bit.ly/2f8SNNb. Th... wills are available simply because they are considered public documents once they're admitted to probate. But, that's not all. Now, probate courts are posting all the events associated with the settlement of an estate on the internet for anyone to see in real time.
Trusts can prevent all of that. Trusts are private; they don’t get filed with the probate court, and no one gets to look at them unless the settlor or the trustee allows it. Some people put a high value on privacy - some people don’t. In my experience, most individuals know whether they will have a problem with a family member or some other person regarding their estate. In those cases, privacy becomes a very important concern and one that should properly be addressed with a revocable living trust. It's no accident that almost all of the Famous People whose wills are displayed on our website have utilized a living trust to keep their affairs private.
These, then, are the top 6 reasons why you should have a trust. If one or more of these reasons apply to you, then you should consider a Family Trust to assist in alleviating any future problems.
We’re here to help and answer any question you might have. We look forward to hearing from you.