THE global economic downturn and financial turbulence has given rise to an overall climate of uncertainty. It is likely that many are having sleepless nights worrying about their hard-earned wealth vanishing into thin air or eroding or worst still, falling into the wrong hands.
One way to prevent that from happening, and it is getting more popular, is by setting up private trusts. Trusts are commonly used for family wealth preservation and estate planning.
OSK Trustees Bhd, one of the leading players in the trust business, has seen a 61% jump in revenue for private trusts last year from 2007.
A trust exists whenever a person known as the trustee, holds the legal ownership of a property, not for his own benefit, but for another person known as the beneficiary.
The trustee holds the legal title to the trust property, but the beneficiary enjoys most of the rights of an owner.
For example, where the trust property is shares of a company, it is the beneficiary who will ultimately receive and spend the dividends.
OSK Trustees chief operating officer and executive director Ong Eu Jin says many people are still not aware of the importance of having a trust.
“Some people tend to transfer one’s personal assets to family members or to “trusted persons” for safe keeping. This can be a problem if these “guardians of wealth” intend to misuse it or dispose of the assets as they wish since they are considered the legal owners, he adds.
A trust, on the other hand, does not give the beneficiaries of the trust full control as absolute control only comes with legal ownership, Ong says.
As they are not the legal owners, the beneficiaries cannot sell the assets, he adds. The trustee will manage the trust assets and distribute the income derived from the trust assets in accordance with the trust deed, which is the legal document creating the trust and containing the wishes of the creator of the trust.
As such, he notes that the beneficiaries will enjoy income from the trust assets but yet be unable to dispose of the assets.
A trust is also an important estate planning tool. Its two primary objectives in terms of estate planning are to unlock the frozen assets of one’s estate in the shortest possible time and without incurring unnecessary costs; and to ensure that the assets will be passed on to the persons of his choice, says Ong.
Ong, however, cautions that a trust is not a vehicle created with the outright purpose of putting a person’s assets out of the reach of his creditors.
After all, a trust is void if its objective is illegal, immoral or against public policy including to facilitate or encourage a breach of law or to cheat one’s creditors, he says.
According to him, an increasing number of people are now using life insurance to fund their trusts, hence providing a wider audience to enjoy the benefits of trusts.
The gloomy economic picture is also putting brakes on consumer spending as many of them are jittery and tend to keep their purses “tight”.
Great Vision Advisory Group head of tax and financial planning Chua Tia Guan says even during difficult times, people can still spend provided they have an emergency fund and a proper budget.
“Generally, from a prudent personal financial management perspective, a person should have at least three to six months’ emergency funds in case of any eventuality.
“This practice is particularly important during these uncertain times where pay cuts and retrenchments are highly possible. Those who do not have any emergency funds and proper budgets are advised to plan their spending cautiously,” he says.
He adds that it will be useful to draw up a personal budget, taking into account the expected cash inflow with possible reduction in income.
“Prioritising one’s expenses is equally important in personal budgeting so that unnecessary expenditure can be deferred or avoided totally.
“If a proper budget has been drawn up, then there is no reason for consumers not to spend even during difficult times,” Chua says.
He also advocates the dollar cost averaging method for people looking to invest in the current volatile market.
This method involves slowly picking up certain selected stocks over a period of time where the average cost of purchase is “low”.
“Having said that, do your homework first before investing. An investor should have the financial ability to hold the investment for at least two to three years before it yields result, provided you have the right pick,” he says.