How to use an insurance/takaful trust, living trust or testamentary trust for your beneficiaries’ well-being.
How to use trusts for your beneficiaries’ well-being.
A Trust is a useful tool for estate planning with the following benefits:
- Benefit payout: Controlled administered payment VS a lump sum payment.
- Designated: You have full control on who and how the assets are distributed, including to non-immediate family members or illegitimate children.
- Minors: Helps to make sure beneficiaries who are minors (children) receive regular payouts especially if both husband and wife pass away together.
- Financial security: Helps to protect beneficiaries from others (and self) from creditors, scams, and blowing the money.
- Immediacy: Funds are immediately disbursed without having to go through the probate or estate administration process (for both insurance and living trusts).
Types of Trusts
- Insurance / takaful trust
- Living trust
- Testamentary trust
- Cash trust
What is an Insurance / Takaful Trust?
An insurance / takaful trust allows for payments from life insurance policies to be given in a thoughtfully planned out and controlled manner to your intended beneficiaries. An insurance trust has a number of advantages over an insurance nomination or will writing.
- Insurance / takaful trust to distribute insurance / takaful monies.
- Absolute assignment to the trust company.
- Trust deed instructions.
- Helps make sure wise and proper estate planning.
How is an Insurance / Takaful Trust Different?
An Insurance / Takaful Trust has the following benefits:
- Benefit payout: Controlled administered payment VS a lump sum payment.
- Designated: You have full control on who and how the assets are distributed, including to non-immediate family members or illegitimate children.
- Minors: Helps to make sure beneficiaries who are minors (children) receive regular payouts especially if both husband and wife pass away together.
- Financial security: Helps to protect beneficiaries from others (and self) from creditors, scams, and blowing the monies.
- Immediacy: Funds are immediately disbursed without having to go through the probate or estate administration process.
An Insurance / Takaful Trust also has the following considerations:
- Insurance Assets: The trust is limited to only life insurance assets (as opposed to a private trust).
- Irrevocable: The trust once setup is irrevocable and non-amendable.
- Islamic Inheritance: An Insurance Trust is not subject to Faraid laws of distribution as once setup is no longer part of the estate.
What is a Living Trust?
A living trust is created during a person’s lifetime while still alive. A living trust helps bypass complexity and expenses which may arise through the probate process. A trustee is appointed to manage the assets as per wishes outlined in the trust agreement.
Living trusts can be either revocable or irrevocable. A revocable trust can be amended or change the terms and beneficiaries as desired. While an irrevocable trust has the rights relinquished to the trustee and can no longer make amendments to the trust.
What is a Testamentary Trust?
A testamentary trust is created by the testator’s will. The key difference compared to a living trust is the testamentary trust only takes effect after the testator’s passing and going through the probate process. A trustee is appointed to manage the assets and for it to be professionally managed.
A testamentary trust is often used for minor children, children with special needs or aged parents who have difficulty managing the assets that would be inherited. A testamentary trust can also be set up to give towards various charities. A testamentary trust will typically take effect until a triggering event such as a child reaching a certain age or upon the demise of parents.
What is a Cash Trust?
A cash trust is a simplified trust that allows you to only put in cash as the underlying trust asset. A cash trust will typically lock-in your funds for a number of specified years with a penalty for early withdrawal/closing the trust. A cash trust has the benefit of quick disbursement to your beneficiaries upon passing without going through the probate process. An added advantage of a cash trust is that it generates returns for you while remaining in the trust so your funds do not remain idle.
How to Setup a Trust
You will need to decide on the assets that you wish to set up in a trust. The legal ownership of the trustee is set to a trustee who will hold, manage, and distribute the assets upon passing away. The condition can also be set if the individual has total permanent disability or in a coma.
A trust document states the trustee’s responsibilities and the terms to administer the insurance trust. You will want to plan the Insurance Trust in consideration of your goals, your intended beneficiaries, and the amount of distribution. Work with an advisor to decide on the distribution and trustee company according to your wishes and goals.
Goals to Consider
- Emergency funds
- Settlement of debts/liabilities
- Annual household/family maintenance costs
- Children’s education funding
- Medical expenses for self and family
- Giving/charity
- Other goals
Fees
- Insurance Trust Appointment Fee
- Other Fees (deeds, letter of wishes, etc)
- Annual Trustee Fees
Conclusion
A trust is a highly effective way to make sure that your intended beneficiaries receive your assets the way you want it too. A trust may be suitable for you if you have assets above RM1,000,000 and want the assets distributed quickly and efficiently in a timely manner. This is especially important if you have a family especially with a spouse dependent or minor children.