In the estate planning realm, trusts have long been recognized for their ability to provide flexibility, control, and various benefits such as optimizing taxes and protecting assets from creditors. However, trusts can also play a crucial role in avoiding family disputes, particularly when multiple family members are involved in a family business, according to Matt Richards, Founder of Watiga Trust Ltd. In our conversation with Richards, we explored the diverse type of trusts available to families seeking to safeguard their assets for future generations.
Q: Can you tell me more about yourself? Why did you choose to study law and how did you start your company, Watiga?
Richards: I am an Australian, but I have been living in Singapore since 1999.
Law is very interesting to me because there are many layers in it. It is the rules that people agree that their community needs to live within and abide by. And there are many fields available for people who study law – they don’t have to just be a traditional lawyer, but can use their skills and understanding gained from the study of law in many professional fields.
Before setting up Watiga, I was a general counsel and head of legal and compliance of a private equity fund. I had a lot of transactional experience and had to deal with trustees (people managing trusts). During that time, I felt that there could be more efficient and effective ways that trusteeship can be done.
In 2012, I set up Watiga, and while doing work with trustees in some corporate finance transactions, I realized that there were not many homegrown Singapore-based corporate finance-focused trustees. I thought that this represented an opportunity in the market that we could fill, and so went on to assemble a team that focuses on trust solutions for corporates and investors. Watiga Trust became licensed by the Monetary Authority of Singapore in 2016.
Our move into legacy and wealth planning trust solutions came out of a need from our clients. As we worked with our clients, many of whom are fund managers and business entrepreneurs, on their corporate finance transactions, we realized that they are also in need of traditional trust solutions for their personal affairs, as much as their corporate needs.
Q: What’s the difference between Watiga and other trust companies?
Richards: I think that different trust companies have different advantages. For us, our advantage is that through the Watiga platform, we can facilitate the underlying commercial transaction that our clients wish to undertake. We understand the underlying investment activities, we know how to do transactions, mergers and acquisitions (M&A) and financings, and how private equity and venture capital funds work. We’re able to deal with, account for, handle the paperwork, and handle the inflows and outflows of monies in alternative investment structures.
We’re here to think alongside our clients and come up with solutions with them for situations that others may find too difficult to deal with.
Filling in the Gap
For example, on the corporate side, we can fill in the gap by assessing client and transaction risks and then (if acceptable) taking on those mandates that bank-based trustees might not be able to do because of their internal policy reasons. Some bank-backed trustees prefer to not have operating companies into their trusts due to liability management considerations for the bank such as risk of loss in the operating company, transaction monitoring considerations, or director liability.
In this case, people may consider engaging non-bank backed trust companies like ours. As long as we have the visibility, comfort and confidence in the whole company structure, we can be the trustee of a family trust that holds these operating companies. Trustees have transaction monitoring requirements for anti-money laundering purposes and so, it is necessary for the trustee to have visibility of what is actually happening in terms of fund flows and underlying transactions.
We should also note that even in the trusts that we set-up, our clients do continue to maintain their liquid investment portfolios, like stocks, bonds, mutual funds, etc., at private or commercial banks, and also continue to interact with their existing relationship manager or private bank. We do not unsettle the client’s existing banking relationship. It is just that the trustee is Watiga, rather than the bank itself, acting as trustee where the assets are held.
Q: What kind of trust services do you provide?
Richards: We provide the usual services such as trust establishment, drafting of trust deeds, trust accounting and distributions, and tax reporting – basically all the necessary things that professional trustees do to deal with trusts.
Some less commonly known trust services that we provide are successor (or replacement) trustee and trustee administrator services.
Successor or replacement trustee service is when for example, a client couldn’t work things out with their bank trustee. We can sign a deed of replacement with them, take over the trust and become the replacement trustee. The trust (and the underlying assets in the trust) continues, it is just that the trustee, which is the legal owner of the assets, has changed.
Trustee administrator services may be relevant when families want to set up their own company and act as the trustees for their own trust, also known as a private trust company (PTC). For this type of setup, where they are not appointing another company to be their professional trustee, Singapore has a regulatory requirement that they have to appoint a licensed trust company to be their trust administrator for anti-money laundering purposes. Even though the family are board members of the trust and may have more control over its structure, having a licensed and reputable institution as a trust administrator can monitor and make sure that the trust is compliant with the regulatory requirements.
Q: We have talked a lot about trusts but why do people need/set up trusts?
Richards: There are many types of trusts and each has their own purpose. For example, a family trust is a type of trust that families use to pass on wealth to future generations, a charitable trust is a trust for charity donation purposes, unit trusts are for pooling investor funds together, and so on.
When a family business involves multiple family members, people can use a trust to avoid family disputes.
For example, a family business that involves four children, but the father or mother is actually the one holding all the company shares in their name. Instead of dividing the shareholding into four 25% blocks to all four of their children, the parent can put the shares into a trust so that the ownership stays consolidated, even after that parent’s passing. This way, the parent doesn’t have to worry about things like what happens if one of the siblings wants to sell his shares to someone not within the family after the parent passes away.
Some families also want to ensure that the assets only pass down to their own descendants through the generations, and not be at risk of third parties marrying into the family and then taking family assets in a matrimonial dispute context.
Q: You mentioned unit trust, something that people may not be so familiar with. Can you explain what is a unit trust?
Richards: A unit trust is a trust for people who want to pool investor monies together. It is solely used for investment purposes. You can think of it as a very simplified mutual fund, private equity fund or venture capital fund.
For example, you have an opportunity to buy a real estate (such as a shophouse) and you need $8 million to do this, but you don’t have enough money. You gather some family and friends, and each of you put in different amounts into this unit trust. Each fund contributor will own the trust in “units” based on their contribution. When enough money is collected, the trustee of this unit trust will do the transaction and sign the purchase agreement.
Q: What is the difference between a unit trust and an investment holding company?
Richards: The difference between a unit trust and an investment holding company is that a unit trust has less administrative work, may help save money and can also be a more flexible vehicle without the share capital or dividend restrictions of an investment holding company.
First, instead of having a shareholder agreement to govern how people hold shares of a company, it is a trust deed, where you hold units and can have different economic arrangements among investors. For example, the lead arranger or sponsor of the transaction may get a higher return from the investment than other passive investors. These instructions that different profits may go to particular unit holders can be written into the trust deed.
Just like shares in a private company, units can be sold or transferred, subject to limitations in the trust deed and compliance with regulatory restrictions. Any decision making can also be done by voting among the holders of the unit trust or it can be delegated to a sponsor or the trustee.
Administrative and Privacy Benefits
Administrative and Privacy Benefits
Second, for an investment holding company, someone will still have to be responsible for maintaining the company and doing all the accounting, taxes, and filings. If it is a Singapore company, you have to go through all the compliance requirements, Accounting and Corporate Regulatory Authority (ACRA) registration and submitting annual accounts to authorities. With a unit trust, the trustee will usually be the one who’s going to take care of the structure. Even though accounting still needs to be done so there’s accountability to unit trust holders, these accounts do not need to be publicly lodged, and the identity of the investors is also confidentially maintained by the trustee.
Third, creating a unit trust with a licensed institution can assure you that the trustee will follow instructions on what is written in the trust deed, will comply with regulations and transactions are properly handled (including with respect to compliance with “know your counterparty” regulatory requirements).
Can be Cheaper
Lastly, sometimes unit trusts can be cheaper than an investment holding company, but the cost depends on the underlying assets that a trust company holds and administers. The more you put into the unit trust, the more bookkeeping, custodizing, and accounting for, which means more time and effort that needs to be put in to manage the trust.
Q: Can you give us a ballpark of how much does a unit trust cost?
Richards: Our charge can be based on a percentage of assets or it can be a fixed annual retainer fee with additional time costs for ad-hoc portfolio activity. We estimate at the outset the time needed to administer the trust and the underlying assets.
Q: Any upcoming rules or trends that you see that might drive more people to potentially consider trust?
Richards: We are definitely seeing some client activity where people are migrating their offshore structures from traditional places such as the British Virgin Islands (BVI), Cayman Islands and Seychelles, to places like Singapore, due to increasing compliance cost of maintaining those offshore companies.
Singapore has also introduced a relatively new corporate structure called the Variable Capital Company (VCC) to promote re-domiciliation of investment funds back to Singapore by providing better operational flexibility. VCCs are very attractive and families are starting to use VCCs for various reasons including for legacy planning and wealth management purposes.
Q: Any interesting hobbies or interests?
Richards: I like to run long distance, especially when overseas. I have done over ten full marathons and many several dozen half marathons so far. We have a running group that we go out most weekends here in Singapore, it is called the Crystal Skull Running Group (laughs!).