Presently, I noticed a growth in popularity of cash trust as an alternative vehicle to put in a sizable amount of cash among the affluent in Malaysia. Although it is promoted as an estate planning tool, many seem to find its promise to deliver a yearly return that is competitive rather attractive. Thus, it leads the public to be questioning if they should be investing in a cash trust.
So apparently, cash trust is now viewed more as an investment than a tool used for estate planning.
Is it supposed to be that way?
Well, in this article, I’ll share the basics of cash trust, its uses in planning estates and offer a discussion on its viability as an ‘investment vehicle’. Thus, here are 3 quick points that you should know about cash trust before setting yours up.
Point #1: What is a Cash Trust?
‘Ian, when you say cash trust, do you mean UBB cash trust?’
Well, the answer is nope. First, we would make a clear distinction between UBB and cash trust. UBB refers to UBB Amanah Bhd, which is a trust company that is operating in Malaysia. Meanwhile, cash trust is essentially a living trust which is set up to manage one’s excess cash.
Basically, here is how cash trust works:
There are five ingredients to setting up a cash trust:
First, the person who forms the trust is known as the settlor.
Second, the asset to be put into this trust is his cash and thus, the trust is known as a cash trust.
Third, the settlor could entrust an individual or a trust company to safeguard the cash in the trust. As such, this individual or the trust company would be the trustee.
Fourth, the settlor is able to instruct the trustee as to how his cash is to be managed and distributed with a trust deed.
Finally, the settlor can nominate his beneficiaries to the cash trust, which enables his beneficiaries (including himself) to inherit the cash if any one of the events such as death, disability, or illness happens in the future.
Point #2: What are the Differences between FDs and Cash Trust?
Let’s say, we have Mr. Tan.
Mr. Tan placed RM 500,000 in FDs and another RM 500,000 into his cash trust.
In the event of his death, Mr. Tan’s RM 500,000 in FDs will be frozen. Hence, Mr. Tan’s beneficiaries would need his will document to unlock his FDs. Generally, it could take up to 9-12 months to expedite the will document and have his FDs in the bank distributed to his beneficiaries, assuming that his will is not contested.
But, as for Mr. Tan’s RM 500,000 in cash trust, this sum is not frozen. His trustee will continue to manage this sum based on Mr. Tan’s trust deed. For instance, in his trust deed, Mr. Tan can instruct the trustee to distribute the money to all his beneficiaries immediately upon his death. Hence, this will eliminate the lengthy process of expediting the will document in order to retrieve this RM 500,000.
In addition to this, there are many other estate planning features of a cash trust which is beyond the scope of this article.
As such, let’s move onto:
Point #3: How Does a Cash Trust Promise an Attractive Yearly Return?
Well, the answer lies in the trust deed of your cash trust.
As mentioned, the trust deed is like an instruction guide to administer the cash. You, as the settlor, would provide such instructions in your trust deed. Whereas your trustee is tasked to carry out such instructions, based on what is written in the trust deed. So, the trust deed is an important document in your cash trust.
Let me give you some examples:
Example 1:
Let’s say I want to set up a cash trust and place RM 500,000 into it. I intend it to be solely for estate planning purposes and do not have intentions of investing it for returns. Thus, as the settlor, I could instruct my trustee to place RM 500,000 into FDs for as long as I’m alive and healthy with a trust deed.
In this case, the trustee would have to carry out this instruction and park all RM 500,000 into FDs. Of which, the cash trust would earn interest income from FDs and the trustee could use it to offset any trust-related expenses.
Example 2:
Let’s say I intend to set up a cash trust and place RM 500,000 into it. But, unlike Example 1, I wish to have this money invested in Stock A, Stock B, Unit Trust AB, ETF C and Index Fund D respectively. Hence, as the settlor, I could include these wishes into my trust deed.
Likewise, the trustee would have to carry out these instructions as instructed in the trust deed. In this case, the profits of my cash trust shall be derived from all the investments listed above. However, if these investments failed and incurred losses, I cannot blame the trustee for these losses because the trustee is tasked and responsible in following the instructions in my trust deed.
So, what about UBB cash trust?
Also, what about its other competitors such as AmanahRaya’s Cash Trust?
Well, the answer lies in your trust deed. Understandably, these trust companies offer templated trust deeds where they would list down the instructions, which include how and where your cash is to be invested if you are healthy and alive. I would say that it is important to read and study these trust deeds carefully.
What are the underlying assets that the trustee is allowed to invest in?
How would these assets generate recurring income?
What are the key risks involved?
Here is the thing. Let’s assume that you’ve entrusted a trust company, be it UBB or AmanahRaya or any other trust companies in Malaysia to set up a cash trust. Subsequently, they incurred losses from investing in the underlying assets listed in the templated trust deed.
I believe it is not possible for you to blame any of the above trust companies for it is ultimately you, who gave any of them your consent to invest in these assets or vehicles. Remember: You are the settlor. The trust companies are just merely trustees. You are still ultimately responsible for the outcome of your cash trust.
Conclusion:
Cash trust is essentially a living trust set up to manage and distribute cash more efficiently. It doesn’t necessarily mean a cash trust product marketed by UBB or AmanahRaya or any other trust companies in Malaysia. I believe it is prudent to approach cash trust from the angle of estate planning instead of an investment.
Hence, it is best to speak to your own estate planner first to determine if a cash trust is needed and suitable to your own situation or otherwise.