Lately, I’ve learnt of a handful of negative remarks from financial advisors when it comes to setting up a living trust (cash trust) with a trust company. To name a few, they include:
- Cash trusts are unregulated.
- Trust companies are operating ‘Ponzi schemes’.
The ultimate reason for such remarks is – Trust companies promise and are able to deliver their projected returns for years to their clients while continuing their duties in protecting and safeguarding wealth for their next generation.
As part of practice, I would keep abreast on relevant industry news and updates related to estate planning matters. Of which, I like to share my insights on these developments so that you are briefed on the differences in viewpoints between a financial advisor and an estate planner, thus, allowing you to analyse it better.
First, What is the ‘Point of Focus’?
Upon review, I noticed the #1 comment from financial advisors on living trust (cash trust) lies on their projected returns only. They did not expound much on other features and benefits of a living trust. So, this led to a series of questions asked that are ‘investment-centric’ which include:
- What are their underlying investments?
- How do living trusts (cash trust) generate consistent returns?
- Who are the appointed fund managers?
- Where are their prospectuses and investment reports?
Indeed, the above views are valid if the focus is on investments. I believe it is reasonable to ask the above questions as part of your investing due diligence.
For example, if you intend to invest in unit trust, you may check the background of the fund management house, ensure that the fund manager is licensed, read up the fund prospectus and learn about its investment strategies before putting your capital into it. This is valid as your motive is to attain investment gains.
But, should living trust (cash trust) managing cash be viewed as investment vehicles?
Also, should living trust (cash trust) managing cash be compared with unit trusts, stocks or other investment vehicles?
The answer is an obvious ‘No’. This is because ‘living trust’ is a wealth protection and preservation tool. As a Senior Estate Planner view, setting up a living trust (cash trust) is an estate planning vehicle and not an investment vehicle. Therefore, it is fundamentally flawed to comment about living trust in terms of its investment viability as the focus is not to attain investment gains.
Let me expound on this:
The Fundamentals of Setting up a Living Trust (Cash Trust)
Supposedly, you have X amount of capital and you would like to entrust a friend to keep and manage the capital on behalf of you for a specific period of time. In this case, you have a private arrangement as follows:
- Settlor: You.
- Trustee: Your friend.
- Trust Deed (Instruction): Keep and manage the capital.
- Trust Period: The agreed specific period of time.
So, which friend of yours should you entrust your money with? Obviously, you’ll choose a friend who is trustworthy and willing to take on this responsibility. You wouldn’t entrust one who is of poor character with your money. Similarly when you intend to set up a living trust (cash trust), your considerations should be on the trust companies that you should be entrusting with. Such would include:
- Background of the trust company
- Background of the directors and shareholders of the trust company
– What are their experiences?
– Are they qualified lawyers and trust practitioners?
- Fulfilment of licensing & regulatory requirements
- The reputation of the trust company
– Did the trust company default on its duties to its clients?
- The structure of Trust Deed
– What are the responsibilities of your trustee?
– What is the structure formed to administer and manage cash?
Hence, the first key question on setting up a living trust (cash trust) is – Your level of trust towards a certain trust company. This is because all trust arrangements began with trust or faith between two key parties: the settlor (you) and the trustee.
The Purpose of Setting up a Living Trust (Cash Trust)
The motive for setting up a living trust (cash trust) is very different from making investments. This is because the former is about protection and preservation the latter is about productivity. In this view, one should consider – ‘What are the circumstances or situations you’ll like your assets to be preserved and managed by your trustee?’. Could they be:
- Due to: Physical Incapacities: disease, disabilities, dementia, coma
– Living maintenance + Nursing Care + Medical Expenses for yourself and your beloved family members.
- Unforeseen Lawsuits
- Unforeseen Bankruptcy
In addition, if your main concern is about ‘prolonging wealth after death’, you could instruct your trustee in the trust deed on the frequencies and conditions of income to be paid to your beneficiaries.
The Responsibility of a Trustee : Fiduciary Duty
A trustee has fiduciary duty to manage the assets entrusted, in accordance with the interests and wishes of its settlor (clients). In Malaysia, trust operations and activities are strictly regulated not only to protect clients wealth, but also to promote a healthier and more vibrant financial ecosystem on the national level. To name a few, trust companies are regulated by:
- Trustee Act 1949 (ACT 208)
- Trust Companies Act 1949 (ACT 100)
- Companies Act 2016
- Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (AMLA)
- Wills Act 1959
- Probate and Administration Act 1959
Thus, trust activities fall under different legislations and under the purview of various regulatory authorities in Malaysia. Trust activities carried out by trust companies are under the SSM’s purview and they are also subjected to other written laws that fall within other regulators such as BANK NEGARA MALAYSIA and SECURITIES COMMISSION MALAYSIA.
Such regulations would include how or where trust companies could park or invest the cash entrusted. This is stated in detail under the Trustee Act 1949 Part II, Investments, Authorised Investments in section 4. Hence, it shows that Malaysia has a proper structure and framework to govern how all of these entrusted assets are to be administered by trust companies.
Hence, by going through this flow:
- The Fundamentals
- The Purpose
- The Responsibility
I believe it is obvious for living trust (cash trust) not to be compared with other investments. In my opinion, they are inherently different. Comparisons are meaningful only if the items are similar in nature. An apple is to be compared with an apple. The issue often lies in people comparing items of different nature and make or form conclusions out of them, which are quite irrelevant.
Let’s use the game of basketball and football as an example. Could a football coach go to a basketball court and determine the rules of basketball based on his techniques, methods and skills of playing football? Obviously, that is crazy & impractical at all.
So, if you want to set up your trust, you should seek professional advice from an Estate Planning Practitioner. But, if a person purely wants to invest, I would suggest that he or she seek professional advice from a financial advisor.
In summary, I believe living trust (cash trust) is inherently an estate planning product, not an investment vehicle. Thus, the considerations to set up a living trust (cash trust) is different in comparison to making an investment decision. So, if you aim to invest for gains or profits, you should invest in other vehicles that could achieve your objectives and not be setting up a living trust (cash trust) as it is meant for wealth protection and preservation, then later wealth creation.
I understand there is a place for constructive feedback. Here, my view is that all the confusion made on living trust (cash trust) and trustee companies can be resolved via an elevation in the knowledge of estate planning among the public. In short, I like to end this by listing down several pertinent questions:
- Are living trust (cash trust) products created to deceive the Malaysian public?
- If presently, trust companies are capable of generating their projected profit / income consistently while safeguarding the trust capital, does it mean that their operations are illegal or unregulated?
- Is there no proper regulation to govern trust companies in Malaysia?
- In Malaysia, if trust companies breach any fiduciary duties, won’t the regulatory bodies of this country take legal actions against them?
As an estate planner with 10 years of experience providing will and trust services to 4,000+ clients, my answers to all the above questions are ‘No’.
Hopefully, I had cleared some of your concerns on living trust (cash trust). So, in your case, if you wish to set up a living trust to safeguard your wealth, I’d like to work with you.
You can start by filling up your details below to book yourself a short 30-mins consultation session to find out the latest practices of a Will or a Trust to best protect your assets.