Rockwills Wealth Planner

Trust

Trust

A trust is a legal arrangement by which an individual (called the settlor or trustor or donor) transfers ownership of an asset or group of assets to a trustee to hold for the benefit of beneficiaries until certain conditions are met (e.g. the expiry of a specific time period or death of the donor), whereupon the ownership passes to the beneficiaries.

While a will deals with the transfer of a person's assets after his/her death to beneficiaries, a trust can be used to transfer specific assets to specific beneficiaries before or after death.

The main reason for a person to do a trust is that he wants to give the beneficiary the benefits arising from the ownership of an asset but not the decision making and responsibility entailed in ownership. The most common example would be the git of an asset to a child through a trust. Doing it through a trust ensures that the child benefits from the income earned from the asset but need not manage the asset.

For those who want to set aside an asset or a fund for certain beneficiaries, such as a special needs child, it is advantageous to do a revocable living trust in addition to a will. A revocable living trust is a trust written and revocable during a person's lifetime. It only becomes irrevocable on the settlor's death so the settlor can still reverse the ownership. And while the settlor has passed ownership of the asset to the trust, the settlor can still control the asset by making himself the trustee and/or the main beneficiary until his death after which the trust responsibilities can be passed on to a professional trustee.

The main advantages of doing a trust are:

		1.	The asset need not be subjected to probate process time and cost, and transfer of ownership from the trust to the beneficiary can be immediate;
		2.	Asset transfer is confidential;
		3.	The asset can be transferred to benefit a beneficiary upon the settlor's incapacity (as opposed to death) and
		4.	Conditions for the transfer of ownership to beneficiaries can be spelt out to be fulfilled beyond the settlor's death. It is also possible to use a discretionary trust (one where the income distribution to beneficiaries is at the discretion of the trustee) as a tax-savings device (Look out for tips in WealthBox).

The main disadvantage of a trust is that the asset must be unencumbered from debt.

A trust can also be included in a will in the form of testamentary trust which is a trust that takes effect only upon death.

The different types of private trusts that can be created are:

1. Insurance Trust
2. Declaration of Trust
3. Investment Trust
4. Special Needs Trust
5. Private Purpose Trust
6. 3 Generation Business Trust
7. Business Value Protection Trust
8. Property Trust
9. Charitable Trust
10. Asset Protection Trust
11. Maintenance Trust
12. Retirement Trust

Each of these terms is explained in the glossary.

The issues that a settlor would consider for a trust would be similar to those that he would consider when writing a will (see under Wills). All estate planning requirements can be covered by the use of both a will and a trust instrument.

There is one issue that is not covered by a will and this is on the issue of how a person can protect his assets, meant for beneficiaries, from his creditors.

In the case of death, unpaid debts of the testator have to be settled before distribution can be made and this cannot be avoided through a will. However, a person can take a reducing term assurance policy to cover outstanding debts so that the beneficiaries would not be hampered by debt upon his/her death.

Alternatively, he can transfer his assets under a trust for the benefit of another, subject to conditions, which are:

1. the trust must be irrevocable;
2. must not include the settlor as the beneficiary; and
3. are subject to bankruptcy rules.

Basically, he can do what he wishes with his assets so long as he is solvent but when he is insolvent, the creditors can apply to void asset transfers and recover assets transferred. Under bankruptcy law, if he transferred within five years of being declared bankrupt, there is a question of whether he is transferring to avoid payment to creditors.

Even in the case of an insurance nomination to beneficiaries or under an insurance trust under Section 166 of the Insurance Act, there is the possibility of the proceeds being claimed by creditors if the policy holder is bankrupt within five years of death.

Still, it is possible for a person to transfer assets through a trust to beneficiaries to prevent the loss of such assets in a divorce case, provided:

1. the trust is irrevocable;
2. the beneficiaries do not include the settlor; and
3. the trust was set up before the commencement of divorce proceedings.

If the settlor is concerned about the assets he transfers under a trust getting into the hands of creditors of a beneficiary, he can create a discretionary trust that enables the trustee to have discretion to change amounts for distribution and add or remove beneficiaries such that the affected beneficiary is excluded from any benefit under the trust if a bankruptcy action is taken against him.

Instead of a third party trust, some prefer to sign a declaration of trust. The difference is that, unlike a trust where ownership is transferred to an appointed trustee, the owner in this case merely signs a deed declaring who he is holding in trust for and the conditions by which ownership title transfers to the beneficiaries, usually with appointment of substitute trustee/s. While he may or may not include himself as a beneficiary, the advantages are that he is in absolute control of the asset and avoids the trustee costs. However, such an arrangement does not protect the trust assets from divorce or creditors' proceedings.

As in the case of selecting an executor, selecting a trustee requires thought. One can name one or more as trustee and the trustee can be a family member, a third party friend or a trust company. Considering that the settlor is giving substantial authority over the trust assets to the trustee, the choice must be done with great care. Even if the settlor names himself as trustee, he has to select substitute trustee/s in case he is no longer around or able.

In making such appointments, it is important to have fallback arrangements. One is to appoint a protector who can oversee and provide direction to the trustee before he manages or disposes or distributes in a certain way. Most importantly, there should be provisions in the trust deed for appointment and removal of trustees and their successors. If the beneficiaries are given the right to remove the trustee, then it would be advisable to restrict the type of trustee they can appoint, e.g. only a licensed trust company.

A trustee's role, like that of the executor, is very onerous and the trustee should be compensated with a fee (in the absence of specific provision, under the Probate and Administration Act 1959) he is entitled to claim up to 5% of the value of the estate for services rendered subject to approval of court).

His responsibilities include management and administration of the trust, keeping track and accounting for transactions, making decisions on distribution, and overseeing investment. He not only holds assets but has to ensure they are productive,

Someone like this has to be honest, competent, have the time and the experience and knowledge to deal with the intricacies of the law. While a well-intentioned family member may agree to act as trustee, he may realise later that he does not have the time or the skills required and hand the work to someone else. If he has an interest or is close to someone with an interest in the trust, he may find that he is unable to act impartially. The family member with conflicting interests can drive a wedge between different beneficiaries and strain relationships. Hence, the appointment of trust companies as trustee has become increasingly popular.

While it is possible to have co-trustees, it is generally not advisable to do so because:

1. there is greater likelihood of disagreement or deadlock on decisions regarding trust management and
2. costs go up.

Trusts, like wills, can be very complex and require sound advice from specialists in the field. When contemplating the setting up of a trust, please consult a lawyer or trust company experienced in trust plans.

Trust FAQs

How many types of trust are there?

Generally, trusts are divided into 3 main categories i.e. express trust, implied trust and statutory trust. For express trust, it consists of living trust (sometimes known as inter vivos trust) and testamentary trust, whereas implied trust as those created by the courts based on the circumstances before the judges. These are classified as resulting trust and constructive trust. Finally, statutory trusts are those created by the written law automatically when the situation described in the law takes place. An example would be that of inheritance by minor children where the executor-cum-trustee holds their inheritance for them until 18 years old. Another example is under section 166 Insurance Act 1996, where the nomination of spouse and children creates a statutory trust for their benefit.

How can Trust Creation be used to provide for my beneficiaries?

Trust can be used in many ways to benefit your love ones. Below are some examples:

i.	To have a fund that is immediately available for their maintenance, education and medical expenses while waiting for the extraction Probate or Letters of Administration and the distribution of the assets.
ii.	To provide for the next three generations to finance their education and medical expenses
iii.	To protect the hard earned assets from being claimed by the creditors of the settlor and/or the beneficiaries
iv.	To protect the assets from spendthrift beneficiaries
v.	To ensure the special needs of minor children and disabled children are taken cared of.

What assets are normally used as trust asset?

usually they are:

i.	Life insurance policy
ii.	Unit trust
iii.	Cash
iv.	Capital investments with an asset manager
v.	Land property (which is free from encumbrances)
vi.	Shares of listed and unlisted companies

Can a trust be revoked and amended?

yes it can when it is a revocable trust.

What is the role of a Protector?

he is essentially a "watchdog" for the beneficiaries, though in law the position does not exists but the powers of the protector can be extensive if it is provided in the trust deed. The powers of the protector can be to recommend distribution of the income to the beneficiaries, to approve investments, to remove the trustee and to review the performance of the trustee.

What are the benefits of creating a trust?

there are numerous advantages, among them are:

i.	The distribution of the trust assets are quicker than Probate
ii.	It can be designed to provide for creditor protection
iii.	The distribution of the funds are done in accordance with your wishes as stated in the trust deed
iv.	Preservation of the trust assets is possible with the right terms being stated in the trust deed

1.	What is a power of attorney?
A:	it is a legal instrument where the donor (grantor of the power) gives the done power to act on certain matters specified in the power of attorney, on behalf of the donor. The Power of Attorney Act 1949 applies only to West Malaysia.

2.	Can a power of attorney be revoked?
A:	if it is a revocable power of attorney created under section 5 of the Act, it is revocable. However, if it is created under section 6 (irrevocable for valuable consideration) or under section 7 (irrevocable for a fixed period), it is only revocable when the donor and done agrees in writing to terminate the power of attorney.

3.	When is nomination used?
A:	In Malaysia, it is found and used with regards to insurance policies and the moneys of a member in the Employees Provident Fund (EPF). The rules on nomination for insurance and EPF are stated in the Insurance Act 1996 and EPF Regulations 1991 respectively. Nomination made under s,166 Insurance Act 1996 (to spouse, child and parent, when there is no spouse and child at the time of nomination) and nomination for EPF cannot be revoked by a Will.
	Approaches: Estate Planning > Muslim Distribution >>

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