By Jessica Wee
A Fixed Deposit or time deposit at banks is the most popular financial tool that conservative investors are willing to invest in to safekeep their funds. What’s there not to like? It being straightforward is the attraction to many people plus the advantage of being capital protected for up to a certain amount by most governments makes it seem a safer way to save your money. This is largely to promote confidence and stability in the nation’s financial system.
Cash trusts have been growing increasingly popular as an alternative vehicle for investing cash in Malaysia. Promoted as an estate-planning tool, many seem to find its potential of delivering a competitive yearly return rather attractive.
Cash trust is a living trust where your money is managed and made available to your beneficiaries when the inevitable happens – death! Indeed, some conservative investors are setting up cash trusts to work it as their personal fixed/time deposit.
Advantages of a having a cash trust
Probate is the court-supervised process of distributing a deceased person’s estate. Depending on the estate, as well as the assets and individuals involved, probate can become a lengthy and costly process, which may not only delay distributions to your beneficiaries but also cut down on what they inherit.
By placing selected assets in a trust, those assets would be dealt with separately from the probate process and in accordance with your instructions without reference to court.
Saves money and time
As discussed, trust can save money by avoiding probate expenses at your death.
Trusts are also likely to hold up better than a will in the event that someone comes forward to contest the distribution, which can also save your estate money.
This can mean a faster distribution to your beneficiaries – shortening the time frame from months or years to just weeks, without any additional expenses to the estate. In the scenario of cash trust, the funds will be available to the beneficiaries within weeks without the need to produce a Letter of Administration.
A trust is a private document between the parties involved and does not become part of the court record. In other words, no one can later go and search court records to find out more about the distribution of your estate.
If you’re in capacitated
If you become ill or incapacitated, the person you have chosen as successor trustee can step in and manage your affairs without the intervention of a court. In this way, you can avoid a court-appointed conservatorship for your affairs — which can lead to financial abuse.
Provides certainty and peace of mind
When a trust is drawn up correctly, it sets out a clear plan to deal with all of your assets. This can help prevent you from unintentionally disinheriting someone, can help you provide care for a loved one with special needs into the future, and even protect assets from certain people.
All of these things can give you peace of mind now, knowing that your estate will be handled exactly as you wish later. The existence of the trust can also provide certainty and comfort to your loved ones during an already stressful time because you’ve laid everything out for them.
Interest income from the cash trust is paid out annually to the settlor ie person who created the trust. Returns are projected to be between 6-9% (nett) i.e. higher than the current fixed deposit/time deposit.
Reasonably low entry
A cash trust can be set up in multiples of RM20,000 (USD4k+), making it accessible to the middle income earners.
Disadvantages of a cash trust
Credibility of the trust company
There have been instances of companies representing themselves as a trust company to sell this financial product and provide incredible returns to lure more customers. It is utmost important to do your own due diligence before handing over your hard earned money. Some are said to be ponzi schemes!
Withdrawal before end of tenure carries a high penalty
You may lose up to 20% of your capital should you decide to terminate the trust deed in the event of your need to use the funds for an emergency.
You would need to incur a setup fee of ~ 5% of the total fund in the trust and there is an annual management fee of ~2%.
In a nutshell, cash trust is a living trust set up to manage and distribute cash more efficiently and should be considered as an essential part of your estate planning in addition to insurance and a will.