November 18, 2018, Sunday
Wong Chaw Chern
A complete and holistic financial planning pyramid encompasses three wealth components – accumulation, protection and distribution.
Broken down, it describes the process flow where you start to accumulate your savings and investments, then protect your wealth against any unexpected events with insurance before deciding on how you will distribute your asset when the time comes.
In our opinion, the average Malaysian already has in place, a well thought-out and decently executed investment and insurance plan.
These covers the wealth accumulation and protection components. Briefly, here’s an example of what they generally consist of:
1)Wealth accumulation – Investments in properties, shares, Unit Trust Funds and bank deposits
2)Wealth protection – Medical and life insurance.
3)However, in many cases, the application of the third component and final piece of the financial planning pyramid puzzle – wealth distribution, is still found wanting.
A news report published in 2013, stated that RM45 billion worth of inheritance claims are still frozen by various agencies, lends credence to our belief.
Whether it’s the thinking that death is too taboo a word or procrastinating the idea of planning the distribution of wealth until a ‘later’ age, the truth is – one should plan, and preferably, to do it as early as you can.
Unexpected events do occur and sometimes, at the unlikeliest of times.
For example, if the deceased had not made any wealth distribution plans before passing on, a bickering among his/her beneficiaries or children on who should receive what, can have enormous repercussions. These can potentially tear the family apart, and with it, the family wealth and values.
Proper estate planning can go a long way towards preventing any unwanted occurrences.
So write your Will or remember to update it if there has been any significant changes such as: changes to your marital status, replacement of beneficiaries or if there are notable changes to the size of your estate.
However, if either retaining control of your wealth even after planning to distribute it away or wanting a more tailored approach towards your estate planning, a Private Trust may be more of what you are looking for.
A Trust is a legal instrument which is written on a Trust Deed for the Settlor (the person who creates the Trust) to provide instructions to the Trustee or Trust Administrator for them to hold, manage and distribute the assets to his intended beneficiaries. In this issue, we will talk about a Private Trust, which is a living trust.
Advantages of a private trust from a will
1)Assets are not frozen
Even after writing a Will, when a person passes away, his/her assets will still be frozen while waiting to obtain the grant of probate from the court.
The grant of probate is needed to allow the designated executor, who is appointed by the deceased person to administer and distribute out his/her estate. Generally, this may take between three to six months. Crucially, this may be the time when the deceased’s family members may need the money the most.
For example, if the sole breadwinner has passed away, his spouse may be unable to use the frozen money to pay for the children’s college tuition fees or other important monthly expenses.
In the case of a Private Trust however, for the assets already held by the Trust, they are not frozen and the Trust operates as normal and pays out according to the Settlor’s instruction.
For the assets which the deceased have nominated to the Trust eg: EPF or insurance proceeds, the transfer process can be started immediately without the grant of probate.
If a person dies intestate or without a Will, a long, lengthy and costly process await the family members.
Furthermore, the deceased’s assets would be distributed according to the Distribution Act 1958 instead of what may be his/her wishes.
2)Decisive appointment of beneficiaries and conditions
The Settlor can appoint anyone as the beneficiaries, even himself. For Muslims, assets held under the Private Trust falls outside of the Settlor’s estate, hence is not subject to the Faraid distribution.
Besides that, the Settlor can determine the timing and condition of the particular distribution eg: Instruct the Private Trust to only distribute out the beneficiary or children’s portion upon turning 30 or for the Trust to help with grandchildren’s education expenses.
Instructions can be as specific as spelling out that the Trust will only pay as long as the grandchildren is able to maintain a minimum grade of 3.5 CGPA.
When a Private Trust is created, all the assets are held in the name of the Trust hence the Settlor and Beneficiaries remain confidential.
Moreover, unlike a Will, when the assets are distributed, it is done so to the intended beneficiaries discreetly and privately.
When a Trust is already in place, it can provide a safety net to the Settlor or for the family in case of unexpected occurrences.
If a person falls under mental incapacitation which renders him/her unable to execute any decisions, all his assets remain under his ownership.
In other words, the beneficiaries are unable to utilise the money and the assets for the family’s needs.
With a Private Trust, the Trust is able to take over and perform the necessary procedures as previously instructed by the Settlor.
These may include arranging for medical care, application for EPF withdrawals and providing for the family’s expenses.
In the case of other emergencies, for example, if for whatever reason the Settlor is put in lockup and no next-of-kin to post bail, a Private Trust may come in handy.
The assets in the Trust will be professionally managed in accordance to the Settlor’s specified mandate; this helps to prevent any mismanagement by beneficiaries who may not be financially astute or to prevent any spendthrift family members from mis-using the assets.
Depending on the size of the Trust, the fund managers can be instructed to invest in local, regional or in various asset classes.
The Trust will be managed to achieve its specified objectives eg: generating returns necessary for successive generations and make available liquidity whenever distributions or payments are necessary.
6)Bankruptcy or creditor protection
A Private Trust is able to provide creditor or bankruptcy protection for all the assets held under the Trust; provided the Trust structure is made Irrevocable and it will take effect after 5 years.
A Private Trust can be set up to last for a maximum period of 80 years.
Combined with the Settlor’s ability to set the timing and condition of the distribution, a Private Trust can be made to benefit successive generations of a family – provided the assets are substantial of course.
Conclusion Contrary to popular and long-held belief, Trusts are not reserved exclusively for the rich.
Neither are the fees staggeringly high nor the assets required to be in the mind-boggling tens of millions of ringgit range.
In some cases, RM500,000 could be enough to set up a Private Trust.
However, it is important to consult a financial adviser or investment professional like Areca Capital in order to specifically tailor the Trust to the Settlor’s needs.
Talking about assets for the Trust, aside from cash, there are various other assets that can be used to inject into the Private Trust.
Areca Capital is a niche Malaysian fund management company. We are a firm believer in the advisory-based approach towards investing. For any enquiries, ontact us at 03-79563111 or by email: [email protected]
Disclaimer: The article is produced based on material and information compiled from reliable sources at the time of writing. The article is not an offer, recommendation or advice to transact in any investment products, including the stocks or funds mentioned within. Investors are advised to consult professional investment advisers before making any investment decision.
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