Navigating Taxes for Different Trusts: Which One Works for You?

Recently, one of my subscribers asked me about the tax differences between inter vivos trusts and testamentary trusts. I'd like to clarify that while I'm not a tax expert, I've gathered some insights from conversations with my tax-savvy friends. Keep in mind that what follows is a broad overview applicable to Singapore. For personalized advice, it's best to consult qualified tax professionals.

Let's dive in. My expertise lies in using different structures to assist clients in Estate Planning. In this field, Trusts are vital tools for safeguarding wealth, managing assets, and smoothly transferring them to beneficiaries.

Two common types of trusts people consider are inter vivos trusts (living trusts) and testamentary trusts. While each has unique benefits, understanding their tax implications is essential for aligning with your financial goals.

**Inter Vivos Trusts:**

Inter vivos trusts are set up during your lifetime and become effective immediately. One notable perk is avoiding probate, which can save costs and speed up asset distribution. Here's a simplified look at the tax pros and cons:

1. **Skipping Probate Fees:** Assets transferred during your lifetime into an inter vivos trust might skip probate, reducing related costs and delays.

2. **Managing Tax Impact:** With this trust, you control the assets and can time distributions to beneficiaries for better tax outcomes.

A potential downside is that for properties, there's a hefty stamp duty when transferring them into a living trust.

**Testamentary Trusts:**

Testamentary trusts are established through your will and come into play after you pass away. These trusts also have tax advantages:

1. **No Stamp Duty for Property:** When property goes into a testamentary trust, it doesn't attract stamp duty—a significant advantage when dealing with properties.

2. **Sharing Income Wisely:** These trusts allow you to divide income among beneficiaries, potentially lowering overall tax obligations by utilizing lower tax rates.

3. **Timing Distributions:** Though less immediate than inter vivos trusts, you still have flexibility in timing distributions, which aids in strategic tax planning.

However, testamentary trusts face the hurdle of assets going through probate, which can expose them to creditors before settling into the trust.

For trust income, most are taxed at their own rates, separate from your personal rates.

In the end, selecting between inter vivos trusts and testamentary trusts involves thinking about your financial objectives, family dynamics, and tax implications. While living trusts offer control and prompt benefits, testamentary trusts can save on stamp duty (a type of tax) and provide unique opportunities. Consulting an estate planning professionals can guide you through trust taxation complexities, helping you choose the structure that secures your wealth and supports your loved ones.

Remember, Singapore's tax laws evolve, and trust taxation is complex. Seek advice from a tax pro who's well-versed in Singapore's current regulations. When it comes to withholding tax (a tax on specific payments to non-residents), it can apply to certain distributions from trusts. This is like a sort of tax on income generated within Singapore that's paid to beneficiaries outside the country. There might be tax treaties signed between Singapore and the foreign countries which can potentially mitigate the tax implications. However, rules vary, so it's wise to consult tax experts familiar with the latest details.

By Thomas Tan.

With over 25 years of experience in the financial advisory landscape, specializing in retirement and estate planning, I'm dedicated to helping you secure your financial future. Whether you're an executive, business owner, or a mass affluent individual, my team and I are here to provide tailored strategies that create sustainable passive retirement income and fortify your estate.

Rest assured, your financial well-being is at the heart of everything we do. If you have questions, concerns, or simply want to explore further, please don't hesitate to reach out. Remember, your financial journey is unique, and together, we'll navigate it with expertise and care.

Thank you for being a part of our community. Until next time, here's to prosperous planning and a future filled with financial peace of mind.

Warm Regards