Lately, I have met up with Grandpa Wong.
Grandpa Wong is a 65-year old retiree living in Subang Jaya. As we had our latte at a local coffeehouse, Grandpa Wong conversed about his intention to prepare a sizable education fund for little Willy, his 1-year old grandson. He and Maggie, his wife, are searching for ideas to do so.
He mentioned. Prior to our meeting, he has spoken to a couple of life insurance agents. Of which, they proposed several endowment policies as tools for him to prepare an education fund for little Willy. Casually, Grandpa Wong asked me for my thoughts on these endowment policies since I am a mother to two children.
So, here is how I replied:
I Use a Cash Trust to Prepare for My Kids’ Education Funds
‘Cash Trust?’, Grandpa Wong uttered.
He had a little spark in his eyes. He had raised his right hand to support and rub his chin. He tilted his head a little and I can tell that Grandpa Wong is interested as he was positioning himself to find out more and ask questions about it.
At that moment, I repeated, ‘Yes, cash trust. I use it to prepare for my children’s education fund.’
Intrigued, Grandpa Wong asked, ‘How does it work?’
And so, I began to explain what is a cash trust and how it could be used to build a sizable education fund for little Willy.
What is a Cash Trust?
Essentially, a cash trust is a living trust that is set up to administer cash.
Here is how it works.
It starts with Grandpa Wong, preparing a box. Inside the box, it would contain:
a. Grandpa Wong’s cash.
b. Grandpa Wong’s instructions to administer his cash.
So, let’s say, Grandpa Wong puts in RM 500,000 into his cash trust. He elects his grandson as the beneficiary of his cash trust. Thus, in the scenario when:
#1: Grandpa Wong Remains Healthy and Alive
Grandpa Wong could instruct his trustee to invest his money placed in the trust on behalf of him. This is so that Grandpa Wong would earn some profits and so, keeping his money productive. The amount of profits he could earn will depend on the choices of investment vehicles that Grandpa Wong chooses to invest. He can always state his choices in the trust deed of his own trust.
18 years later, if Grandpa Wong is alive and little Willy is ready for university, he could choose to close the cash trust and pay for Willy’s university fees with the cash proceeds.
#2: Grandpa Wong Passes Away
If little Willy is a minor (below 18 years old) when it happens, the trustee would continue to keep Grandpa Wong’s money in his cash trust. The cash trust would continue to earn profits from its investments until little Willy hits 18 years old.
When Willy reaches 18, the trustee would distribute the cash proceeds to Willy. The beneficiary can receive the money within seven days from Grandpa Wong’s passing, which is faster than payouts from life insurance policies and a will.
But What About Endowment Policies?
Grandpa Wong listened attentively.
I can tell he is interested with the thought of having a cash trust for little Willy. I know that Grandpa Wong is in the mode of digesting all the information shared to him and he is comparing it with having endowment policies.
I took a breather and had a sip of latte.
Then, Grandpa Wong questioned, ‘So, can you sum up what are the differences between a cash trust and an endowment policy?’
Well, to me, at the back of my mind, it is not quite possible to compare the two as their features are quite different. I believe it is more practical for one to get a financial product based on his or her objectives. Hence, for Grandpa Wong, it is clear that his objective is to prepare a sizable education fund for Willy and thus, I listed down some generic features as follow:
a. Life Insurance Coverage
Is having a life insurance coverage for Willy a key priority for Grandpa Wong? As such, if the answer is no, then, this feature offered by an endowment policy is a redundant one.
b. Commitment Period
As stated, the timeframe of how long Grandpa Wong chooses to put the cash in his cash trust is dependent on his trust deed.
So, in the case for Grandpa Wong, cash trust is ideal if he is mentally prepared to leave or park his money in his trust for years without touching it.
An endowment policy requires a longer commitment from Grandpa Wong. If he chooses to cancel the policy at the early stages (1-5 years), the recoverable sum would be a fraction of the amount of premiums he paid.
c. The Returns
It would not be fair to make comparisons on their projected returns here. So, in the case for Grandpa Wong, he is free to do his analysis after receiving relevant information and materials from his trusted advisors.
An hour went by.
I had an enjoyable conversation with Grandpa Wong.
He thanked me for the information and promised to give a thought about it.
Grandpa Wong’s Final Verdict
Fortunately, Grandpa Wong came to a conclusion and decided that cash trust is more suitable a vehicle for him to prepare for little Willy’s education funds.
It is a decision that could greatly bless Willy but also to his child (Willy’s parent) as his child is relieved of a burden to prepare for his child’s education funds.
How I wish that my parents could also set up a cash trust for my children.
Just kidding. Hahaha.
So, is setting up a cash trust suitable for you?
Well, the best is to find out if this is suitable for you through having coffee with a professional estate planner who specialises in trust related services. You may start by filling up the details below to book a 30-minute consultation session so that you can brainstorm ideas on if this is for you and how you could set yours up:
