What is a Trust Deed in Malaysia? Are Will trusts a good idea? Why would a person want to set up a trust? What is purpose of a trust?
What is a trust?
A trust is a relationship (not a legal entity by itself) in which one party (the settlor) transfers property (immovable, individual, tangible or intangible) and the other party (the trustee/s) who holds it for the benefit of a third party (the beneficiaries).
Thereafter, the two parties involved in the trust are:
1. Trustee - may be an individual or company appointed by a trust document, or, where necessary, an individual or company appointed by the court. Trustees can be experts or non-experts. The trustee is the legal owner of the trust property, and responsible for managing the trust business such as investing the trust assets, accounting for transactions related to the trust assets, reporting to the beneficiary, and submitting the tax return on behalf of the trust. Therefore, the trustee is responsible to the beneficiaries. With respect to taxation, the trustee is the trust representative.
2. Beneficiary - the fair owner of the trust property. Any legal person, including a living person, charitable organization, other trust institution or legal business, may be the beneficiary. The trustee himself can be the beneficiary. According to the terms of the trust, the beneficiary will receive the income and / or the property itself at a specified time.
Source of income
A trust body is considered to receive income from sources of income such as business, rent, interest, dividends and other income. It can also be a partner in a partnership and its share of partnership income is taxable.
When and how will a trust be made?
A trust is made when a trust deed or will is executed to create an express trust or testamentary trust, respectively.
The terms of the trust are written in the trust deed and include:
• What property will be transferred to the trust;
• Who the beneficiaries are; and
• The detailed powers and duties of the trustees - investment powers, the power to vary the interests of the beneficiaries, the power to appoint new trustees, and so on.
Express trust
With express trust, the trust deed defines the terms of trust as follows:
• Which properties will be transferred to the trust
• Who are the beneficiaries
• Trustee powers and obligations including investment rights, the power to change the interests of beneficiaries, and the power to appoint new trustees etc.
Illustration 1
Mrs. Welsey (the settlor) transferred a rental property to a trust she created for her two nephews, Lucky and Luckie. The trustee holds the property for Lucky and Luckie’s benefits. The trust deed sets out as follows:
• The trustee has the right to invest the trust fund in his or her best judgment
• The trustee will receive the trustee remuneration of RM6,000 annually
• Lucky and Luckie are to receive an annuity of RM12,000 when they attain the age of 18
• The trustee may pay the beneficiaries for their education
• Remaining funds are to be accumulated, and
• The rental property and cumulative trust monies should be distributed to Lucky and Luckie when the younger of them attains 25 years of age.
Testamentary trust
Testamentary trust is created if there is an interim period between the following:
• Date when the administration of the deceased's property is completed - that is, the residuary estate is determined (or confirmed), and
• Date of real estate assets and money are distributed to beneficiaries and legatees.
Illustration 2
Mr Welty passed away testate (i.e. with a will) on 1 February 2019. The executor (specified in the will) collected all the assets of the deceased's estate and settled all debts. He confirmed the residue of the deceased's estate and completed the administration effectively by 31 October 2019.
Mr Welty’s will stipulated that his properties and accumulated estate monies will only be distributed to his three children after the death of his widow. In the meantime, the widow will receive a lifetime annuity of RM25,000 annually. 60% of the dividend income from the estate of the deceased would be distributed evenly to the three children, and the remaining 40% will be accumulated until the widow's death.
In the above circumstances, the testamentary trust was effectively established on 1 November 2019. The executor then takes on the role of trustee, and the trust beneficiaries are the widow and her three children.
From 1 November 2019, the trust will subsist until the trust properties and monies are distributed to the three children after the widow's death.
Discretionary trusts
This is the portion of the trust income in which the trustee is free to determine when and how much will be distributed to which beneficiary. Discretionary trusts are treated in the same way as other trusts.
Trust for accumulation
This refers to the portion of the trust income accumulated until the conditions for the final distribution to the beneficiary are met. Therefore, when calculating income which can be distributed, it is necessary to exclude the accumulated trust income.
Mixed trusts
It is possible and usual that trusts exhibit mixed elements of annuities (fixed amounts), discretionary payments and amounts or fractions subject to accumulation. These are mixed trusts.
If you would like to know more, please contact Bestar.