Shielding your assets for the business owner

As a business owner, there will always be ups and expected downs in the business. Owners always want revenue and profits to keep going up, but an experienced businessman will tell you that it is never always rosy and every once in a while, there will be bumps along the way.

I was speaking with a business owner recently and he shared about his concern for protecting his assets in the event of an unexpected downturn.

As he is in a dilemma to grow his business and protect his assets at the same time, he got caught in between.

I shared, “Do you know that if you would like to expand your business very quickly and grow, you should at least ensure that your family is well protected and taken care of first. Then you can expand aggressively with a peace of mind.”

For example, put aside 20% of whatever assets you have and draw a line on it, ringfence it to ensure it is shielded. For the remaining 80%, you can continue to take on even more aggressive growth of the company to the next multiple level.

The 20% becomes wealth and assets that is shielded and can still continue to work hard in various forms. So even if the worst case of bankruptcy happens, the assets can potentially be protected.

However, do take note that you have to plan and plan early when times are great and there is surplus. Doing this when times are challenging might mean that it is too late.

Of course, when a person is riding high in business, it is very difficult to imagine or foresee any bumps ahead.

So speak with an experienced business and financial advisor early to explore more in depth how you can shield and ringfence your assets.

Why should you set up a Trust

Why should a businessman or wealthy individual setup a Trust for your Family?

Trusts can override inheritance tax, gift tax, etc which would otherwise be incurred by the beneficiaries in certain countries if it is transferred through a Will. For this reason, wealthy families choose to pass on the assets to their children and future generations through this vehicle.

It is a cost effective and secure arrangement to preserve wealth as it provides additional benefits such as tax savings and confidentiality.

With families members going global, the nationality or residency of beneficiaries is important because of the tax implications.

Changing Family Dynamics

Family systems are growing more complex as disputes and divorces are becoming common. If the owner of assets anticipates ugly divorce scenarios in the family, he or she would be better off placing the assets in a trust and directly apportion to deserving beneficiaries.

Family members with debt burden or facing matrimonial challenges or claims for professional negligence will still be able to reap benefits from the assets without directly owning them.

If a potential successor is a spendthrift or bad at managing money, then a trust is an ideal arrangement to distribute income and benefits periodically or progressively to that person.

Foresight and understanding of the family members’ needs and progressive dynamics of relationships are important for the establishment of trusts.

If the asset owner is single, then trust is an ideal way to manage the assets, income and investments in case he is incapacitated by sickness or age. The appointed trustees can manage the assets as directed by the settlor.

Trusts offer confidentiality; therefore you can avoid conflicts within the family and make discreet provisions for certain beneficiaries.

Asset Protection

In the case of professionals or business owners with high-risk profiles, the protection of personal assets from being attached to any litigation is a crucial concern. For business owners, if their fortunes turn, they run the risk of defaulting creditors. There is a possibility that their personal assets will be used to meet their credit obligations in the event of litigation. Likewise, professionals such as doctors and lawyers are also at risk of being sued for professional negligence, and there is a possibility that their assets will be used to settle compensation claims.

Placing personal assets in trust will protect the assets from such claims because the ownership of the assets is transferred to the trust and the settlor does not have any more legal rights over the assets.

Business Continuation

In family businesses, placing the shares of the business in a trust will ensure its continuance despite any potential disputes among the family members or bankruptcy of the family members.

Disputes within family members are not uncommon, and if circumstances go awry, any of the family members can sell their shares, which will lead to fragmentation of ownership and dilution of power held by the family. Placing the shares of the business in a trust and splitting profits and benefits to the family members as beneficiaries will preserve the family business for generations to come.

Tax issues

Placing assets in the trust alienates the settlor from the assets and all earnings accruing from the assets. If your income is significantly high, and the income you generate from your assets further adds to your taxable income, and you fall under a higher personal taxation bracket, then it is prudent to transfer the income-yielding assets into a trust, where your family members with marginal tax liability are the beneficiaries. This way, you can alter the tax liability on the assets to a lower bracket and enjoy tax savings.

In Singapore, a trust’s income is taxed at a flat rate, and distributions made to the beneficiaries are then deducted from the taxable income and subjected to tax in the hands of the beneficiaries at the relevant personal tax rates. But it interesting to note that certain types of incomes, such as dividend income earned by the trust, will not be subjected to tax at the trust level; however if that income is distributed to the beneficiaries it becomes a taxable income. Proper structuring of trust is crucial.

Succession Planning

Trusts can provide for the flexibility of choosing the beneficiaries and also determining when the assets need to be passed on to the beneficiary. For example, if the beneficiaries are minors, the assets can be placed in trust and passed on at a later stage when they are legally adults or progressively when they attain prescribed milestones, such graduation, marriage or first child.

If the immediate descendent is financially well-off and is subject of higher tax bracket, or is a resident of jurisdiction with high estate duty, passing the assets to them directly will increase their tax liability. In such circumstances, placing the assets in a trust and passing the benefits to grandchildren may be more prudent.

Sociopolitical uncertainty

If you are a resident of a country where sociopolitical upheavals are occuring, then it makes more sense to settle your assets denominated in home currency into a trust incorporated in stable jurisdiction, where the currency is less volatile. This will preserve the value of your assets. Singapore is a popular choice among foreign high net-worth individuals for its sociopolitical and economic stability and the resilience of the Singapore dollar.

Speak with an experienced trust advisor to value add to your family wealth.