Article: Forced Heirship Laws and Singapore Trusts

What are forced heirship laws?

Under forced heirship laws, a person is not free to dictate who will inherit their estate. Instead, forced heirship laws require a deceased person’s estate to pass to one or more family members. However, forced heirship laws may be mitigated through certain legal means.

Forced heirship laws differ widely from state to state. In some countries the deceased person absolutely cannot alter the forced heirship disposition of their estate, while in other countries the deceased person can direct that a portion of their estate pass outside of the forced heirship rules if a portion of the estate is left to protected heirs. Forced heirship laws are found in states (particularly civil law jurisdictions) such as France, Germany, Italy, Spain, Latin American countries, Japan, Russia, Indonesia.

Singapore trusts may protect assets from forced heirship laws

However, forced heirship laws may be mitigated through certain legal means. One way is to establish a trust or foreign company to own property. Under Singapore law, a foreign person may set up a trust (governed by Singapore law and with Singapore trustees) which can avoid the effects of forced heirship laws.

Section 90(2) of the Trustees Act (Cap. 337, 2005 Rev. Ed. Sing.) (the “Trustees Act”) states that “[n]o rule relating to inheritance or succession shall affect the validity of a trust or the transfer of any property to be held on trust if the person creating the trust or transferring the property had the capacity to do so under [the law applicable in Singapore, the law of his domicile or nationality or the proper law of the transfer]” (the “anti-heirship rule”).

The statutory conditions for the anti-heirship rule are (Section 90(3) of the Trustees Act):

i. at the time of the creation of the trust or transfer of the property to be held on trust, the person creating the trust or transferring the property is neither a Singapore citizen nor domiciled in Singapore; and

ii. the trust is expressed to be governed by Singapore law and the trustees are resident in Singapore.

However, given that Section 90(2) of the Trustees Act pertains only to the validity of the trust or transfer, it would still be open to a protected heir or other person to challenge ownership to the trust assets on the basis that they are part of the forced heirship assets or that they can be traced from the same. This is because, while the trust may be validly constituted or there was a transfer of possession of assets to the trust, the protected heir could argue that there was no valid transfer of title to the property from the pool of forced heirship assets to the trust. In such an event, two plausible scenarios may arise.

First, the property may have been transferred to a person deemed at law to be a bona fide purchaser for value without notice (of any issues with title to the property in question). Generally, such a person would have valid legal title. However, if the transferor of property never had the beneficial or legal title to the property to transfer to the other person / trustee in the first place. The transferee / latter person would still not have valid legal title to the property unless the seller of the property had implied or ostensible authority to deal with the property and the true owner of the property may then be estopped from asserting her claim.

Second, the property may have been transferred to a person who is not a bona fide purchaser for value without notice. This includes a person who did not give good consideration for the property, e.g. she received it as a gift, is a beneficiary of an estate or is a beneficiary to a trust. Such a person would not obtain valid title to the property if the title to the property was impinged in the first place.

The protected heir could also contend that the trust is in fact a sham trust (i.e. that the parties to the trust did not intend to create the trust but instead intended to give a false impression that they had created the trust). For instance, the settlor purports to transfer legal title to the trust assets to the trustees and invest the beneficiaries with equitable interests in those assets when in fact, it is the settlor who intends to retain ownership of, and all associated rights and interests in, the assets and does so, with the trustee’s assistance. It is the intention to deceive, rather than the underlying motivations of the parties, that is relevant. It requires proof of a shared intention of dishonesty between all the parties involved in the creation of the trust.

Proper law of transfer of ownership of property

Where property is located in foreign jurisdictions, and transfer of ownership of property is involved, conflicts of laws issues arise, e.g. what is the applicable law governing the transfer of ownership of property? This is important because under s 90 of the Trustees Act, the issue of the transferor’s capacity may be determined by the proper law of the transfer.

In general, the applicable law on issues of ownership of movable property would be the law of the country where the movable property is located. E.g. if the asset is cash, fund units, negotiable instruments located in Singapore, the applicable law on issues of title to the cash is accordingly Singapore law.

The applicable law on issues of title to shares of companies and depository certificate of the corporate entities depends on whether, under the law of the place of incorporation of these entities, shares or depository certificates are transferrable by registration and whether shares or depository certificates are negotiable instruments. If under the respective laws, shares or depository certificates are transferrable only by registration, then the applicable law is likely to be the place where the register of the entity is kept. If under the respective laws, shares or depository certificates are negotiable and transferrable by delivery without endorsement, then the applicable law is the law of the place where the share certificates or depository certificates are physically situated. If under the respective laws, shares or depository certificates are non-negotiable and transferrable, but not based on registration, then the applicable law is the law of the place of incorporation of the entity.