In this topic, we will be talking about Private Trust. We will learn about what is the difference between Will and Trust; if you have a Will, do you still need to set up a Trust?
I will also share the steps on setting up a Trust and the fees involved if you are interested.
The difference between a Will and a Trust is a Will is mainly for distribution while a Trust is mainly for preservation on assets and wealth. Imagine that you have spent your life to grow a tree of wealth and the tree is starting to grow fruits and you are starting to enjoy some fruits from the tree.
For example, you may accumulate some assets and properties, so currently you are receiving some interest or rental income. When you use a Will as a tool to distribute away your fruit tree, it becomes a distribution tool. So, when you will away your assets, it is like giving the ownership to someone else.
You cannot stop this person from taking some fruits from the tree every year and then decide to chop the tree and take away the fruits because you have already given the ownership to your beneficiaries.
On the other hand, a Trust is for preservation. Once you set up a Trust, you want to preserve the capital (your tree) and at the same time ensure that your beneficiaries can still enjoy the fruits. A Trust is more for the long term compared to the Will.
Reasons for setting up a Trust
Some of them worry because they have minor children. In most of the cases I have handled for Wills, the husband will give 100% to his wife and the wife will also will away 100% for her husband. This is a very common situation.
The second scenario is what if both husband and wife pass away in the same accident and leaving minors behind? It is the main worry because the children have not reached 18 years old and are not financially capable to handle the assets. There is where the Trust can help in this scenario.
Another scenario is a married couple with children. The wife may have accumulated some assets and when she passes away, she may pass all her assets to her husband in the Will. The wife may worry because the husband might remarry and share her assets with another woman. This is not the wife’s intention. She may want the assets that she passed to her husband to be given to the children rather than be shared with a third party.
The next worry is for men. Most of them are the bread-winners and some of their wives are home-makers and housewives who are not financially savvy. If the husband were to will away 100% for his wife, she may not be able to handle such a huge sum of assets and might get conned or cheated.
Another worry is when you leave a huge amount of money for the children in your Will. When they are aged 18, they will receive this amount and might want to buy a luxury item like a sports car. There is no control over how the child will use the money, especially if he or she is very spendthrift and does not appreciate the value of money.
Is there a better way to handle my assets rather than will away 100% to my beneficiaries? Maybe you want to will away a certain portion and preserve the rest. This is where a Trust comes in. Let me share with you some of the terms used involving Trust.
For those who set up the Trust, we call them “settlors”. They are the owners of the Trust. “Beneficiaries” are those whom you want them to benefit from the assets such as your loved ones, spouse, children or even your parents and siblings.
“Trust Assets” are assets inside the Trust. “Trustee Company” is the party that handles and manages the Trust.
“Trust Period” is the duration you want the Trust to last. A very important term you need to put in the Trust is “Protector” because this Protector acts as a watchdog and advises the trustee on the beneficiaries’ needs. When the owner is no longer around, the protector is something like a watchdog to watch over the benefits of the beneficiaries.
These six terms are very important and you need to remember them, especially if you are doing a Trust.
Types of Trust
There are three kinds of Trust. Living Trust is where the person is still alive and the asset is under the person’s name and he or she sets up a Living Trust. During his or her lifetime, he or she needs to transfer the assets that he or she currently owns to the Trustee’s name.
For the Testamentary Trust, when the person is still alive, the asset is under the person’s name. When the person is dead and gone, the asset is still under the deceased’s name until the probate is granted. When the debts and income tax are cleared, then the Testamentary Trust will only be started.
The third type of Trust is a hybrid between Living Trust and Testamentary Trust. So, we call it the Declaration of Trust. How does it work? When the person is still alive, the asset is under the person’s name and the person does a Declaration of Trust but the asset will still be under the person’s name.
To see the differences, the Living Trust is the asset that will be transferred to the Trustee’s name but for a person who does a Declaration of Trust, the asset will still be under the person’s name. Only when he or she passes away, the asset will be transferred to the Trustee for the benefits of the beneficiary.
A benefit of Living Trust is the Asset Protection against negligence claims, creditors and bankruptcy. The downside is when you set up a Living Trust, the Trust administration fee applies at the same time you do not own the assets anymore. Do bear in mind that there are few specialists to set up this Trust. Although the administration fee applies, they feel very safe because they know right now their assets are protected in case there is a negligence claim against them.
It is the cheapest form of Trust because it is in the Will. The downside is because it needs to go through a long probate process before the Trust is set up and there is no creditor protection. When you combine the asset protection and quick cash flow where the owner is still in control of the asset, it is the Declaration of Trust. It is a very popular service and a product where our clients subscribe to us.
Steps In Setting Up Your Private Trust
The first step is to define your intention of setting up your Trust and appoint a Protector during your Trust period. During your lifetime, you can be your Trust Protector. You can appoint someone else to be the Trust Protector when you have passed away,
Next, you need to determine the trigger event like when will the Trust kicks in? Normally there will be three types of trigger events. First is upon death, second is TPD, coma or mental disability and third is a critical illness.
Then, you need to determine the Trust assets and who can revoke or change the Trust. You also need to determine the term of the Trust period and who are the beneficiaries and entitlement at the end of the Trust period. As a Trust service provider, we need these details to assist you in setting up a Trust.
To determine the intention of setting up a Trust, some people want to set up a Trust because they want to distribute the assets quickly upon death. If you go through a Will, you need to go through a Probate process; you need to wait for a long time. Especially if you have minor children, all your assets will be stuck there; the children’s basic maintenance, education or even living expenses will be the problems.
Next, it is to preserve assets against your beneficiaries. If you are worried that your beneficiaries such as your old parents or minor children are not financially savvy, you want to protect the assets against them.
The third intention is you might want to protect your assets against liability and creditors. Recall the very first example in Will where your beneficiaries may just chop your tree and take all the capital and fruits. This is where the Trust can help you preserve your tree so that your beneficiaries can still benefit from the fruits while preserving the capital. You need to know what the intention of setting up a Trust is.
The next thing is to determine the Trust Asset. What kind of assets that you can put inside your Trust? It can be shared in a private limited company, landed property, bank accounts, unit trust, investment accounts, and life insurance.
For joint property owners or joint account holders, they need to be joint settlers to the Trust. For Will, the husband and wife need to do a separate Will but for Trust, you can have joint settlers to the Trust.
Next, determine the term of the Trust period. You can have the Trust ends after X number of years like after your youngest surviving child reaches 25 years old or after the death of a particular person.
For example, your parents are staying with you and you are worried that your spouse will oust them from the house when you are no longer around. You set up a Trust that ends after the death of your parents.
Life insurance, a popular and the most economical way to fund your Trust that I would recommend clients is to take up life insurance when they have the capabilities to purchase one. Even if the client has money, it is just one-to-one. You will only get one ringgit if you put in a ringgit. If you use that ringgit to buy insurance, it can bring you five or six ringgit in return at the end of the day when you are no longer around.
In terms of having a bigger fund size, insurance is definitely a safer bet. The client can also have a mixture such as more than one policy in the Trust followed by the cash that they want to pump into the Trust. They can have it either way or both of the assets in the Trust.
In a Nutshell
The most common problem when clients want to set up a Trust will be the worries of the financial securities for the spouse and children, especially when the client is the main income earner.
For the husband or father, the worry is the well being of the wife, children, and even parents. For the wife, her concerns will be more on the parents and the kids rather than the husband. That is the reality of things. Different families will have different scenarios, issues, and worries.
Some businessmen would sometimes look at it from different angles like how to protect their assets from the creditors. Here, we will do some ring-fencing for the clients. There are cases where the client is worried about the well being of their children and that they might misspend the money given to them.
The Trust and Will will be able to take care of all these concerns like when do you let go of the money and when do you retain it.
Written by: Evanna Phoon
This article was first published on 19 December 2017