Middle class squeeze drives trust fund boom

Rockwills Trustee Bhd deputy CEO Azhar Iskandar Hew speaks to Malay Mail Online in Kuala Lumpur. — Picture by Saw Siow Feng
Rockwills Trustee Bhd deputy CEO Azhar Iskandar Hew speaks to Malay Mail Online in Kuala Lumpur. — Picture by Saw Siow Feng

KUALA LUMPUR, May 22 ― 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.

“Sometimes for the very well-to-do ― money is not really an issue for the next-of-kin, not too bad, because they already got money. If the father is very rich, chances are the wife and children will have some money there, so they won’t die of hunger if the father dies. But for the middle class, it’s a bit different,” Rockwills Trustee Bhd deputy CEO Azhar Iskandar Hew told Malay Mail Online in an interview.

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.

Trust funds prevent splurging

Tyre shop owner Joe Wong said he set up a private trust fund with Allianz last December for his parents and his brother’s family, financed with life insurance policies worth RM700,000 to RM800,000.

Wong, who is 42 and single, told Malay Mail Online that a private trust fund allows the inheritance to be doled out periodically so that beneficiaries do not get a lump sum instantly.

“That is the good thing for the future of family members. If, let’s say, got will, give RM1 million, 10 days can wallop already,” he said, attesting to the popularity of trusts abroad.

He added that he was also preparing a will, but believed wills were more open to legal contest compared to trusts.

RHB Trustees Bhd head Tony Chieng speaks to Malay Mail Online in Kuala Lumpur. — Picture by Saw Siow Feng
RHB Trustees Bhd head Tony Chieng speaks to Malay Mail Online in Kuala Lumpur. — Picture by Saw Siow Feng

According to Azhar, Rockwills has over 8,000 private trust funds, with the value of assets close to RM2 billion.

Clients comprise the upper middle class, which is defined as those who have RM1 million to RM2 million in assets including properties, and the high net-worth who have RM20 million in assets. They include employees, retirees and business owners, most of whom are aged between 35 and 50.

Azhar also said the disappearance of Malaysia Airlines Flight MH370 and the Flight MH17 crash in Ukraine had led to a 200 per cent hike in private trust funds and that since after, it has been increasing by 20 per cent. The slowing economy has also spurred business.

“When the economy is a bit slow, opportunities are slightly lesser, so that will give them more time to spend on discussing their estate plan,” he said.

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.

“We will be the one who will distribute on your behalf,” RHB Trustees Bhd head Tony Chieng told Malay Mail Online in an interview.

Estate lawyer Nizam Bashir 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.

But he noted that this has yet to be tested in the Shariah courts, with the closest being the case of Barkath Ali Abu Backer vs Anwar Kadir Abu Backer in 1997, where the plaintiff sought a declaration that the properties were subject to a trust and not to faraid law. But the court stayed the proceedings as it refused to take jurisdiction over the case.

“Nevertheless, to my mind, so long as the instrument in question complies with the Islamic law applicable to it, it should operate along the same lines as ‘hibah’, or Islamic gifts ‘inter vivos’, i.e: Shariah courts accept ‘hibah’ as being a method to plan your estate and it takes the property out of the estate, so to speak,” Nizam told Malay Mail Online, using the Latin phrase to describe a gift given during a donor’s lifetime.  

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, though Alfin Abdul Majid from Maybank Trustees Berhad said 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,” Alfin, assistant vice-president of products, private trust, told Malay Mail Online in an email interview.

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,” K. Shanmuga, who has experience with succession disputes, told Malay Mail Online.

He added the scenarios that required setting up a trust fund and paying a third party “high fees” to manage it were extremely rare.

Shanmuga 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,” the lawyer said.

Nizam 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”.

Requesting anonymity, he questioned the quality of work by some private trust operators, asserting that some resembled boilerplate documents that suggested ignorance of applicable laws.

“I have also had 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.

Rockwills’ Azhar said 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. 

Related Articles