If you ever watched teen high school movies, you might have heard the word “trust fund kids” thrown around. These are usually the obnoxious kids who come to school in a limousine, dress fancy, and even throw parties for the school.
“Family trust” is another phrase Malaysians hear a lot whenever there’s a rich family squabble, such as the Genting clan’s extended family dispute over who owns what. Contrary to popular belief, trusts are not something only for the rich to use. In today’s world, common folk usually use trusts for wills, charities, and even insurance. We’ll cover those more technical aspects next time and keep this piece at a basic level for now. But did you know we also use trusts in our everyday life?
Trusts have been around for a very long time
Okay, you weren’t that far off the mark if you thought that trusts were for rich people. Trusts were used by landowners in the past to make sure their property passed down properly to their heirs. Trusts have been used since the time of the Crusades, and its simpler forms have been used even before that. Setting up a trust was the perfect way to make sure your property would pass to your next of kin (like if you weren’t sure if you were going to come back alive).
Interesting note: this is how our wills and insurance policies work - you need to appoint a “trustee” who will administer your property and your insurance payout to your “nominees” (next of kin) after you pass away.
It was also a way for Franciscan monks to benefit from property without having it under their name (and thus breaking their vow of poverty). Before you point a finger at religious people abusing the law, you should know that trusts were also used by people to cheat and avoid paying their creditors and feudal lords - just FYI.
You might be wondering at this point - why can’t the creditors come after you for the money? Here’s an example to illustrate:
Let’s say you just got declared a bankrupt. You have 2 houses under your name, which your creditors want to force-sell to get their money back. You might decide to put those 2 houses into a trust held by your spouse.
Here’s where the crux is - to form the trust, the 2 houses must be transferred from your name to your spouse’s name. So when your creditors come after you, it looks like you have no property. Your creditors are left empty-handed, and you still get to live in your house. Just like magic right?
No, not since the law was reformed. The area of law that governs trusts will consider the intention of the settlor (Midland Bank v Wyatt). So if the trust was made to provide for your children, then your creditors won’t be able to touch the houses. But if you created the trust to “hide” your property from creditors, then the trust is a sham and your creditors can sell the houses to cover your debts.
You actually use trusts in your everyday life
A trust requires 4 things:
The Settlor - the initial owner
The Trustee - the person who manages the trust
The Property - the thing to be used for the beneficiary
The Beneficiary - the person entitled to the benefit of the property
How these elements work can be seen in the examples below.
You pass RM50 to your friend Vijay, telling him to help you return it to Sandra.
You and some friends pool money together for someone’s birthday. Henry takes the money and goes to buy the gift.
You and your sister contribute money to buy a car together. It’s in your name so you’re holding it for the both of you.
You donate money to a charity for them to help a certain group of people.
Yep, this law is the reason why if Vijay or Henry run away with the money, you can report them to the police for theft. Your sister can also sue you for her share of the car if you try to sell it off.
There are some technicalities that used to make trusts go wrong in the distant past, but basically the problem was that you had to really trust the trustee - because they could do whatever they wanted with the property, and there was nothing you could do about it.
These days we still have the problem, but the beneficiary has the right to sue for the property.
Trusts can be useful to everyone
That was a basic overview of how trusts work and hopefully you now see the trusts you create daily in a new light – make sure you create them with people you actually trust (pun intended) to avoid legal issues. Do note that trusts are a huge area of law and can be applied in a lot of situations from family to employment and even finance - stories for another time.
Trust can be used by anyone as security or to make family settlements, whether or not you own a lot of property. Most people use trusts to settle inheritance, which is why having a will is important and can save your family a squabble over your property. You could also set up a trust with your rental properties so that you can provide for generations to come, while making sure your descendants can’t kill the goose that lays golden eggs - by selling off the properties. (they are not allowed to)
If you need to create a trust, it can be very technical and complex to make sure everything is in order, so be sure to engage a lawyer who can take care of the details for you.