Financial Planning: Trusts in the spotlight

"We are proud to feature a recent article where Sherry Sheriff, our esteemed co founder, lends her expert insight on Financial Planning: Trusts in the spotlight. Her voice stands out as a guiding force, offering the need for trusts as the population ages and traditional care structures change, advocating for personalized estate planning that includes provisions for unique circumstances like digital assets. We invite you to read the full article to explore the diverse perspectives from Danny Wong, CEO of Areca Capital Sdn Bhd and Nor Fazlina Mohd Ghouse, CEO of Maybank Trustees Berhad as well as Sherry Sheriff, Co Founder of Wahine Capital Sdn Bhd"

Public awareness of using a trust as a tool for estate planning has risen since the outbreak of Covid-19. But knowledge of how trusts work remains low, with some people falling prey to unregulated cash trust products in the market. Instead of safeguarding their wealth over the long term for their next of kin, they lost hundreds of thousands of ringgit, or millions in some cases, by investing in these unregulated products.

So, it may be time for the public to learn more about estate planning and trusts, given that one in five Malaysians will be 65 years old and above by 2056. How their money is managed and used, whether by themselves or their next of kin, is something they would want to seriously consider.

Overall, the increase in awareness and interest in trusts is evident across all demographics, in particular among high-net-worth individuals (HNWIs) with complex asset holdings, says Maybank Trustees Bhd (MTB) CEO Nor Fazlina Mohd Ghouse.

Such a phenomenon has contributed significantly to MTB’s private trust business. “Since the pandemic, MTB’s private trust business has increased twofold,” she says. As at June 30, the firm had about RM73 billion in assets under management.

Danny Wong, CEO of Areca Capital Sdn Bhd, concurs with Nor Fazlina, which is why the firm launched its private trust services in October last year. HNWIs with more complex financial needs are typically those who ask for such services.

“Our clients have been following us for many years. Some of our investors were 50 years old when I was 30. Now that I’m 50, they are 70. They’ve been asking me for financial and estate planning solutions.

“They say: ‘Danny, I’ve been with you for years, but my children don’t understand investment. If I pass it down to them, I’m worried the next day, they will spend the money too quickly or they could get scammed. What solutions do I have?’”

Wong’s answer to such concerns is private trusts. The trust market is divided into two types of trusts: revocable and irrevocable trusts. The terms of a revocable trust can be changed any time, whereas the terms of an irrevocable trust can only be altered with the consent of the beneficiary, or the one who receives the benefits of the trust.

“We set up a trust for them depending on their objectives. We tend to encourage them to set up irrevocable trusts [that can last a maximum of 80 years] for long-term financial planning,” he says.

The reason that a trust tends to be used as an instrument for long-term financial planning, such as funding the education of one’s grandchildren until they reach adulthood. The intention of the settlor, or person/entity who sets up the trust, is to ensure the basic needs of their children or grandchildren are provided for.

Sherry Sheriff, co-founder of Wahine Capital, a financial technology (fintech) start-up that focuses on women’s financial empowerment, agrees that more Malaysians are exploring estate planning services and trusts after the pandemic. It is also because people are getting wealthier.

“As the region becomes more affluent, people are looking for solutions to preserve their wealth and manage the transfer of this wealth to the next generation. Estate planning companies have noted a marked increase in interest in estate planning,” she says.

Trusts will be increasingly relevant to the general public

Yet, the number of people enquiring about trusts and estate planning remains low, based on the figures provided by the Malaysian Institute of Estate Planners (MIEP) and news reports, Sherry points out.

MIEP says about 80% of Malaysians do not have valid wills, while news reports estimate that RM70 billion to RM90 billion in assets are frozen due to a lack of estate planning, primarily within the Islamic inheritance system.

There could be several underlying reasons. For one, there is a lack of estate planning service providers in the country. “Consider that there are only 1,455 licensed financial planners in Malaysia, compared with 61,000 licensed unit trust agents and 85,000 life insurance agents,” says Sherry.

In addition, setting up a trust is costly to the man in the street as it is taxed at a similar rate to a company.

“The costs in terms of taxation, trustee fees, legal costs and others may add up. This may be the reason trusts are not as popular as wills, which are usually cheaper to set up. As a result, trusts are also often associated with HNWIs and the super elite,” she says.

Nevertheless, Sherry believes that trusts will become increasingly relevant to the general public when a large number of the country’s population joins the silver hair club.

As one’s physical and mental state deteriorate, and without children to rely on, who will take care of them and their money? Setting up a trust could be one of the solutions.

A rising trend in developed nations is end of life planning, which means conveying to loved ones and health professionals the beliefs, values and preference for the type of care and treatment a person wants in the last mile of his or her life, says Sherry.

“In some countries, like New Zealand, seven out of 10 people die in hospices, and it is becoming a choice for many people across the world. Hence, there is an increase in end of life or advance care planning that involves living wills, insurance, trusts and more,” she adds.

Technological advancements, coupled with changes to the modern day lifestyle, are pushing estate planning and trusts to the forefront of financial planning. For instance, a person may not only own traditional assets such as stocks, bonds and properties, but also digital assets like bitcoin. And instead of having children, one may have pets that will live on after he or she passes away.

All this gives rise to a client-centric approach in the world of estate planning, with trusts being a useful tool to fulfil some of these needs, says Sherry.

“A shift towards a more client-centric approach involves understanding the unique needs and goals of clients. Pet trusts, charitable giving and digital asset planning are becoming more popular,” she points out.

“Online bank accounts and cryptocurrencies require different treatment. Digital assets such as social media accounts, cloud storage and websites are increasing in financial and emotional value. Many consider these valuable assets to transfer to the next generation.”

While it is not obvious to some, the fast-growing environmental, social and governance (ESG) trend has a bearing on how one intends to pass on his or her wealth.

“Estate planning services may incorporate ESG considerations to align with the clients’ values. Offering specialised trust services, such as ESG or shariah-compliant trusts, can cater to the evolving preferences and values of clients,” says Sherry.

Cash trusts not regulated by the SC or Bank Negara

Meanwhile, industry players point out that cash trusts, which are supposed to provide investors with a lower-risk investment option for liquidity purposes, have morphed into various forms of high-risk investment products.

While there have been debates on the good and bad of high-risk cash trusts, these have without doubt created a controversy as a number of people have lost money by investing in them.

“Cash trusts have earned a dubious reputation. They are designed to provide a relatively low-risk investment option while maintaining liquidity. These trusts invest in short-term, highly liquid assets, such as cash deposits, certificates of deposits, treasury bills and money market instruments,” says Sherry.

“The primary objective is capital preservation and liquidity. Investors who are looking for a safe haven for their funds with minimal exposure to market fluctuations may consider cash trusts.

“In a legitimate financial context, a cash trust is a low-risk investment vehicle that primarily holds cash or cash-equivalent instruments. Nowadays, however, cash trusts are being associated with illegal schemes.”

A key risk to investing in cash trusts is that these products are not regulated by the Securities Commission Malaysia (SC) or Bank Negara Malaysia.

“Investor interest is therefore not safeguarded by the oversight of these regulatory institutions. The claims of double-digit returns in a low interest rate environment appears to be one reason to be wary,” she cautions.

On the other hand, trust companies in Malaysia are principally regulated by the Companies Commission of Malaysia, says MTB’s Nor Fazlina. Their product offerings are commonly driven by market forces.

Trust companies are also subject to the Trust Companies Act 1949, while products offered by these companies, or private trust businesses, are not specifically regulated or governed by any particular regulations.

“We wish to highlight that MTB does not offer cash trust as a trust product and our views expressed are based on what we understand from the market,” says Nor Fazlina. “Ordinarily, a private trust is set up by a person or settlor while he/she is still alive for estate planning purposes, such as for his/her own medical care in the event of incapacitation or to provide for his/her family members in the event of an unfortunate event.

“For cash trusts, we understand that a settlor transfers cash to the trustee as a trust asset. This trust asset, in turn, is invested in securities and other investment products during a given period, premised on the terms and conditions contained in the trust instrument.

“Just like any investment or financial products, investors should be mindful of the risks and seek professional and independent advice before considering cash trusts.”

Areca Capital’s Wong is of the view that a trust is set up for long-term financial or estate planning purposes. Investing in short-term, high-risk investment instruments through a cash trust defeats the main purpose of setting up a trust.

“Generally, trusts are supposed to be for the long term. If not, there must be an intention — for example, I want to fund my grandchildren’s education. It shouldn’t be done just for tomorrow or a year later,” he says.

Wong notes that there has been a lack of transparency and disclosure in cash trust products. Stemming from low financial knowledge among the general public, a number of investors have lost money in these products.

“There are many vulnerable investors who get their money stuck in certain schemes which they are not familiar with. They could be taking unnecessary risks unknowingly, such as ending up investing in preference shares,” he says.

“I’m not against cash trusts. But there is a lack of transparency.”