Consider these 6 reasons why you should create a Family Trust – you don’t have to be wealthy to do so.

Family trusts allow families to create a lasting financial legacy through their estate planning. 

You can simplify your family’s experience after your death by creating a family trust for assets you want to pass on.

Reason #1: Protecting Property for Certain Beneficiaries

One of the most important reasons for a trust is this, but it is rarely mentioned. The majority of us think about estate planning in terms of giving our property to our spouse, children, and other loved ones after we die. Sometimes, however, our intended beneficiaries are just not able to handle an inheritance due to their age, the size of the estate, or the jurisdiction of the assets.

The usual suspects here are minor children. Children under the age of 18 are not even allowed to own property in many countries. As an alternative, your Executor would appoint a trustee to manage your property until your children reach majority age (usually 18). Nevertheless, many parents cringe at the thought of their 18-year-old getting a lump-sum inheritance. They might quit school, buy an expensive car, and head to Thailand or the Philippines for the beaches.

Inheritances aren’t just squandered by minor children. Generally, experts agree that no one under 25 should receive an inheritance outright since they are not mature enough to handle large sums of money. Of course, many people over the age of 25 shouldn’t have money as well. There are those who are spendthrifts at heart, and others who are in unsatisfactory marriages – many parents would prefer not to allow their in-laws access, and still others who are in bankruptcy. Additionally, there are those who are too frail and incapacitated to manage their own property. It is never a good idea to give money or property to any of these people.

This is when trusts play an important role in your estate planning; in other words, trusts allow you to give your personal property to those you love and protect it for them at the same time.

There are times when not all of the contents of the Trust should be distributed, such as the family home or the luxury villa overseas. There are a number of assets that may be instructed to be kept within a trust, perhaps for the benefit of the whole family or for 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 may be transfer or gains taxes to consider (Australia/Canada.)

Many people are unaware that certain Trusts can eliminate or reduce the taxes due.

By creating certain types of Trusts, these taxes can be removed.

Reason #3: Managing Property upon Incapacity

In today’s society, one of the biggest concerns is not dying – rather, living too long! There is no doubt that our parents are concerned about living in their own homes. We worry about whether they will be able to pay their bills and whether someone will walk off with their money. Often, we cannot help them because all of their property is in their own name. Without some prior planning, our only option is to apply to the probate court to appoint a guardian for them. Having all their personal and financial affairs paraded before total strangers is a gut-wrenching experience, as they will suffer the humiliation and indignity of being declared incompetent.

That doesn’t have to be the case. Some people try to avoid this result by putting certain properties (especially checking and savings accounts) in joint names with a son or daughter. It allows the son or daughter to pay their bills, but not much help with other financial matters. In addition, it creates more problems when the parent dies, since the accounts automatically pass to the son or daughter, leaving the other children out in the cold.

Enduring powers of attorney are a better solution. You can designate the people you want to assist you with your financial matters with a power of attorney. Even so, I believe that everyone over the age of 50 should have a power of attorney, despite its many benefits. The first issue is that your attorney may find it difficult to work with some financial institutions. Second, your attorney may not have all the powers needed to manage your affairs. If, for instance, you regularly made gifts to family members, your attorney was not permitted to continue making those gifts unless the document specifically allowed it.

The best solution is to create a trust. Trusts allow your successor trustee to take over in the event of your death or incapacitation. The management of your property is generally uninterrupted, and there is no court supervision. Additionally, trusts enjoy greater acceptance within the legal and financial communities, and a wide range of statutory powers regarding their management. Even though a living trust can’t function without your property, a power of attorney allows your attorney to transfer property into your trust if you are incapable of doing so.

Reason #4: Avoiding Probate.

In the event of your death, the property in your trust will not be probated. It’s because the trust instrument specifies who gets the property. Property owned jointly with rights of survivorship does not go through probate either. The surviving joint owner receives it automatically.

However, that does not mean that your successor trustee can distribute the trust property immediately. There’s more to it than that. Your outstanding debts must be paid even if your property is in trust. Although most of your property may avoid probate, estate taxes and probate court fees must still be paid.

Does that mean everyone should avoid probate? No, this is not possible in Hong Kong because certain assets must be distributed through probate here: Bank account, MPF, Group Life Insurance and Property. In Hong Kong, anything under insurance, such as personal life and pensions, can be nominated to your beneficiaries and paid out upon the production of your death certificate, which, incidentally, can take up to 6 – 8 weeks.

Reason #5: Avoiding a Will Contest

Trusts are less likely to be contested than wills. Due to the fact that a will becomes effective only when the owner dies, while a trust becomes effective as soon as the trust instrument is signed and typically lasts for some time after the owner dies. To contest a will, you need to prove the testator was either incompetent or under undue influence at the time the will was signed. In order to contest a trust, you must prove the settlor was incompetent or under undue influence not only when the trust instrument was signed, but also when the property was transferred, each investment decision made, and every distribution made. It is virtually impossible to accomplish that.

Furthermore, contesting a will is free of charge. A disgruntled family member only needs to object when the will is presented for probate, hire a lawyer on a contingency fee basis, and wait for the outcome. There is nothing to lose for a disgruntled family member. In contrast, contesting a trust generally involves substantial time and financial commitments. An appeal of a trust is heard in civil court, which has substantial filing fees and formalities that must be followed. A contest of a will is heard in probate court.

Many people argue that will contests are rarely successful, so why bother with an irrevocable living trust? A will contest halts the settlement of an estate in three ways. It usually takes two or more years for a will contest to be completed, and no distributions are made during that time. As a result, defending a will contest requires a great deal of attorney time, resulting in a high legal fee. In the end, even unsuccessful will contests cost HK$400,000 or more in legal fees. This means that beneficiaries receive less money from the estate as a result of the fees being deducted from the estate. Thirdly, many will contests are settled before going to court. In such a case, the estate’s value will be further diminished by the final settlement amount. 

Final analysis, will contests are time-consuming and expensive. Irrevocable living trusts are the best way to avoid them.

Reason #6: Privacy

In general, we dislike the idea of probate since it is a public process. The estate file of a deceased person can be viewed in probate court by anyone. A will can be read, relatives and beneficiaries can be identified, creditors’ claims and assets can be viewed, and estate beneficiaries can be contacted by phone and email. In estate files, unscrupulous sales people often prey on grieving heirs. 

It’s not uncommon for disgruntled heirs, even close friends and neighbors, to poke around in estate files. Moreover, the internet allows them to check out the probate documents without ever having to visit the court. The only thing they need to do is fire up their computer at home. To see this for yourself, take a look at all the Wills of the Rich and Famous people under … wills are available simply because they are considered public documents once they’re admitted to probate. It doesn’t end there, though. Probate courts now post all events associated with the settlement of an estate live on the internet.

The creation of a trust can prevent all of that. Trusts are private; they are not filed with the probate court, and no one can see them unless the settlor or trustee permits it. Privacy is important to some people and not to others. In my experience, most people know whether they will have problems with family members or other individuals regarding their estate. During these circumstances, privacy becomes a very important concern and should be addressed with an irrevocable 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.

Creating a family trust ensures that your assets are managed according to your wishes for the benefit of your beneficiaries, whether they own physical property or shares in a company.