There are two types of trust:
- Testamentary Trust
- Living Trust
Today, many believe they have a ‘trust’ as they form a testamentary trust, when they write a will. While a testamentary trust certainly has its purposes, it is very common for most to not realise its limitations as follows:
1. It’s effective only upon death.
This is because a testamentary trust is set up within a will. In the event of major life events (dementia, coma, mental disability … etc), when one requires cash in meeting medical, nursing, life, debt and other commitments, the will document and testamentary trust is not effective as the person remains alive.
2. No creditor protection (upon death)
Two scenarios:
First, you could retain RM 1 million in a testamentary trust within your will. And so, upon death, your RM 1 million will be frozen. The will’s executor would start his duties by obtaining the Grant of Probate (GP) from the High Court. Next, the will’s executor would:
- Collect the RM 1 million from your bank accounts.
- Settle off all your outstanding debts (creditors) and taxes.
- Transfer the balance into your testamentary trust for safekeeping.
Second, you can retain RM 1 million in a living trust. Upon death, this cash shall not be frozen as its legal ownership has been transferred to the living trust. And so, the RM 1 million can be retained or distributed to the trust’s beneficiaries in accordance with the trust deed. Hence, the elements of creditor protection will be higher as compared to a testamentary trust.
3. No Immediate Distribution (upon death)
Upon death, the process to transfer estates into a testamentary trust could take 12-18 months or more. So, if you like your beneficiaries to inherit cash via a will or a testamentary trust, they will have to wait as the distribution is not instant / immediate.
But, if you want your beneficiaries to inherit cash immediately upon life events: death, coma, dementia … etc, it is practical to set up a living trust and make the wishes clear in the trust deed. If any of the above occurs, your trustee will then distribute the sum of money to your beneficiaries or your guardian / yourself so that they could be used to settle immediate financial commitments.
4. Lacks Privacy and Confidentiality
Upon death, a will document is read out and made known to all beneficiaries. It lacks privacy and confidentiality. Any beneficiary who is unhappy could possibly challenge the will’s legitimacy in court and thus, drag the will execution process as a whole. So, there is a possibility of “family dispute”.
If you set up a living trust, the contents of the trust deed is kept private. So, this would prevent the above situation from arising.
Short Summary:
So here, I’ll make a short list of their differences:
Is a Living Trust Better?
The answer is nope as both tools are complimentary in estate planning.
Each tool has its attributes and purposes. Hence, an experienced estate planner is one who utilises the best attributes of these tools to formulate a specific plan that can preserve one’s financial wealth effectively. You could begin by filling up your details below to book yourself a 30- minute consultation session valued at RM 500.
My promise to you is: “You shall walk away with at least one key idea to secure your family’s financial future.”
