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.

A cash trust is essentially a living trust set up to manage one’s money and distribute it to your named beneficiaries in the event of your death or an emergency. This generally involves five components:

1. The settlor, the person who forms the trust;
2. The asset put into this trust, namely cash;
3. The trustee, an individual or trust company responsible for safeguarding the cash;
4. The trust deed, instructing the trustee how the cash is to be managed and distributed; and
5. The beneficiaries, nominated to inherit the cash in the event of the settlor’s death, illness or disability.

What’s the difference between cash trust and a fixed deposit (FD) account?

Let’s use the example of one Mr Tan, who has RM500,000 in FD accounts and another RM500,000 in a cash trust.

In the event of his death, the amount in his FDs will be frozen, and his beneficiaries require his will to unlock the accounts. It could take up to 12 months to expedite the document and have the amount in the bank distributed, assuming the will is not contested.

The sum in the cash trust, on the other hand, is not frozen. His trustee will continue to manage the sum based on Mr Tan’s trust deed. He could, for example, have instructed the trustee to distribute the money to all his beneficiaries immediately upon his death. This would be a much speedier process.

How does a cash trust promise an attractive yearly return?

The answer lies in the trust deed and the instructions provided by the settlor.

Imagine you set up a trust and placed RM500,000 into it, intending for it to be solely for estate-planning and distribution purposes with no intention of investing it for returns. You could instruct your trustee, through the deed, to place the amount into FD accounts for as long as you are alive and healthy.

The trust would earn interest from the FDs, which could be used to offset related expenses and/or be distributed among your beneficiaries according to the terms of your deed.

Now, let’s say you set up a trust with RM500,000 but wish to have this money invested into stocks A and B, unit trust AB, ETF C, and index fund D. You could include these instructions in your trust deed.

In this case, the profits of your trust would be derived from these investments. But if losses are incurred, the trustee is not responsible as he or she was following the instructions in the deed.

What about services such as UBB and AmanahRaya?

A cash trust is a living trust that shouldn’t be confused with products marketed by UBB, AmanahRaya, or any other trust company in Malaysia.

Trust companies are typically tasked with the administration, management, and eventual transfer of assets to beneficiaries. They act as a custodian for trusts, estates, custodial arrangements, asset management, stock transfer, and beneficial ownership registration.

The trusts are managed for profit, which the companies take out of the assets annually or upon transfer to the beneficial third party.

If you decide to go with a trust company, it is important to study and fully understand the terms of the arrangement. You may stipulate in your trust deed that your money be used for investment, but remember, in the event of any losses, the trust company is not responsible as they are merely carrying out your directives.

This article first appeared in KCLau.com. Ian Tai is a financial content writer, dividend investor, and author of over 450 articles on finance featured in KCLau.com in Malaysia, and ‘Fifth Person’, ‘Value Invest Asia’ and ‘Small Cap Asia’ in Singapore. He is a regular host and presenter of a weekly financial webinar in KCLau.com.