Wills & Trust Funds

Private trust funds, once thought as only for the very rich, are increasing in popularity among the middle class hoping to avoid potentially crippling asset freezes upon death. A private trust is a fund set up to transfer the legal ownership of a person’s assets to trustees that manage, hold and distribute such assets for his or her beneficiaries, often upon death.

According to private trust companies, the main advantage over traditional wills is that money and assets in trusts are immediately available to beneficiaries, whereas in wills, assets are frozen upon death and beneficiaries must go to court for a probate and settle the deceased’s liabilities, a process they claim can take up to two years before assets can finally be distributed.

Fees range from RM1,000 to RM18,000, depending on the complexity and type of trust. Aside from conventional trusts, there are also insurance trusts that are funded by life policies. Another is a “declaration of trust”, where firms such as Rockwills act as backup trustees who take over upon contingencies such as illness or death.

Trusts and Islamic laws

A possible reason for the rising adoption of trusts is they are not bound by faraid law that mandates specific proportions of how a Muslim’s estate upon death is to be distributed, where a woman’s inheritance is half of a man’s. One’s parents and siblings also have claim to the assets under the Islamic law. Muslims cannot write wills either.

“There’s no such thing as Islamic trust. It’s just a trust. All of your assets belong to the trust. So your distribution doesn’t fall under faraid distributions. The Trustee will be the one who will distribute on your behalf.

Estate lawyer - confirmed that assets in a trust that take effect immediately, and not only upon one’s death, are not subject to faraid law as they’re no longer part of one’s estate.

Not without pitfalls

Despite the attractiveness, trusts are not entirely free of drawbacks.

According to RHB’s Chieng, these include a drop in trust asset values, excessive trust borrowings, loss of income from trust assets, or trust assets used as security for a company or personal borrowings of a beneficiary or of the person who established the trust.

There is also a risk of abuse by trustees and this could be mitigated by appointing “protectors” in the trusts. Normally, the protector is to monitor the trustee and ensure the trustee does its work following the terms of the trust deed. The protector can also direct the trustee on the amount to be paid every month to a beneficiary. This is also provided it is written in the trust agreement. 

Lawyers also urged caution over using private trust funds as an alternative to wills. One noted that moving assets to a trust essentially meant surrendering control over these and losing the right to determine how they are distributed.

A will, on the other hand, can be changed at any time. A lawyer can advise you on how best to arrange your properties and finances to ensure both flexibility and protection. The scenarios that required setting up a trust fund and paying a third party “high fees” to manage it were extremely rare.

An expert also dismissed claims by private trust companies that asset distribution could take up to two years with a will, pointing out that getting a probate would only take a few months, especially in Kuala Lumpur courts.

How long assets are distributed depends on the nature of the assets, but it certainly doesn’t have to take two years. However, it depends on the availability of the executor to go to the lawyer’s office and sign the necessary documents. Having a professional executor may speed things up, but will of course cost more. 

Others well verse in this industry contested the view that trusts were more shielded from legal dispute, saying they could be challenged in court just as with wills. A civil law trust can fail if it doesn’t comply with specific criteria: certainty of subject matter, certainty of intention and certainty of object,” the lawyer said, adding that states have yet to enact statutes to provide for an “Islamic law trust”.

A lawyer experienced in estate and trust litigation expressed reservation about relying on private trust companies instead of lawyers for estate planning, saying that the former “tend to be salesmen and profess expertise where they have none. Some experts questioned the quality of work by some private trust operators, asserting that some resembled boilerplate documents that suggested ignorance of applicable laws.

Some clients who formerly engaged private trust companies, which dispensed advice that were clearly misleading or wrong in law, e.g. advocating terms that contradict the rule against perpetuities, giving advice against civil procedure, etc,” he added.

Estate planning should involve writing a will because it covers assets that are not specified and those to be acquired in future. Comparatively for private trust funds, assets must be specified and transferred to the trust.