Protective Trust
• Spendthrift trust is a trust that is created for the benefit of a person
(often unable to control his/her spending) that gives an independent
trustee full authority to make decisions as to how the trust funds may
be spent for the benefit of the beneficiary.
• A spendthrift trust is a type of trust that regulates a beneficiary’s
access to the funds or assets held within the trust account. It’s an
important estate planning tool that can help guarantee beneficiaries
are taken care of, while simultaneously ensuring grantor’s assets are
distributed according to his specific terms.
Pillars/requirements :
Spendthrift trusts can be revocable or irrevocable and include the same
key elements as other types of trusts, including:
A grantor who establishes the trust (estate’s owner);
A trustee who manages the trust;
A beneficiary or beneficiaries who receive the assets held in the trust
*However, spendthrift trusts operate a bit differently than other trusts.
How does a spendthrift trust work?
• A spendthrift trust works like any other trust.
• The grantor establishes the trust, funds it with property (or assets),
selects a trustee who will be responsible for managing the assets, and
names a beneficiary or beneficiaries who will receive the trust’s
assets.
• What sets a spendthrift trust apart from other types of trusts is the
inclusion of a spendthrift clause or spendthrift provision.
What is a spendthrift clause/provision?
• A spendthrift clause is special wording that essentially establishes the
“trust” itself as the owner of the assets that it contains.
• This clause establishes the asset disbursement schedule that prevents
the beneficiary from receiving all of the assets at once.
• A spendthrift clause may also protect trust income and principal from
the claims of a beneficiary's creditors.
Spendthrift trusts can be especially useful if a
beneficiary is:
Example:
• young and has not developed responsible financial habits;
• disabled and in need of lifelong support or income;
• Has a track record of impulsive or reckless spending;
• Has a large amount of debt or may incur significant debt;
• Is at risk of divorce or is actively involved in divorce proceedings.
• Is at risk of being sued;
• Is at risk of being scammed/falling victim to fraud/easily fooled or defrauded.
• Not mature enough to make wise spending choices;
Benefits of spendthrift trust
1. The biggest benefit of a spendthrift trust is that the beneficiary
cannot access all of an inheritance at once, so you (grantor) have
less worry that they could waste it through poor financial decisions.
2. With the proper design, a spendthrift trust can become a lifelong
source of income for your heir. Another appealing aspect of a
spendthrift trust is that the assets are protected from creditors.
3. it can protect your (grantor) assets from a potentially unreliable
beneficiary. It safeguards your estate without taking the
beneficiary’s inheritance from them.
4.By using a spendthrift trust, you (grantor) can still leave that money
to your beneficiary while portioning it out to encourage healthy
financial habits. Grantor and trustee then work together to schedule
releases of money at a cadence that feels manageable to you and your
beneficiary.
5.In addition to asset protection, spendthrift trusts can help protect the
beneficiaries from creditors. Because the assets included in a
spendthrift trust are owned by the trust and managed by the trustee,
they aren’t considered a part of your beneficiary’s assets.
Exception/limitation;
• Nonetheless, some creditors may compel payment out of the trust,
particularly those who supply the beneficiary with "necessaries"
(usually food and shelter, but sometimes clothing and transportation,
if these are not extravagant). Most jurisdictions also permit the
invasion of spendthrift trust assets to satisfy awards of child support
and alimony.
How to Create a Spendthrift Trust?
• Grantor must include a specific spendthrift provision;
“Except as otherwise provided in this trust agreement, all principal or
income that is payable, or will become payable, to the beneficiary of any
trust created by this agreement shall not be subject to anticipation,
assignment, pledge, sale, or transfer in any manner. No beneficiary shall
have the power to anticipate or encumber any such interest. No such
interest, while in the possession of the trustee, shall be liable for, or subject
to, the debts, contracts, obligations, liabilities, or torts of any beneficiary.
Such interests shall also be free from any claim, control, or interference of
the spouse of a married beneficiary, or the parent of a beneficiary.”
Example 2:
“
Edward wants to leave his granddaughter, Amanda, $50,000 when he dies.
Although Amanda is a sweet and loving granddaughter, she’s only in her
early twenties and has a notorious history of reckless spending. To prevent
Amanda from squandering her inheritance, Edward decides to create a
spendthrift trust that allows Amanda to draw up to $1,000 monthly from the
account. This lets her treat herself to some luxuries without immediately
spending her whole inheritance”.
Insurance Trust
• I have purchased Insurance Policies and have nominated my spouse and children to be nominees. But what if an unforeseen event
was to happen to my spouse and me at the same time and my children are still minors? Or what if the unforeseen event happens to
my entire family at the same time?”
• “I have a special needs child and who is to take care of my child after my lifetime?
• “I am growing my business. I have taken a lot of mortgages for my properties and business. I understand that after my demise, my
assets are all going to be frozen until Grant of Probate or Letters of Administration is obtained. How are the loans to be paid?”
• Life insurance is an integral part of Financial Planning for your loved ones if an unforeseen event was to occur. However, Nomination
of your Life insurance is not sufficient to provide security to your loved ones. By setting up Insurance Trusts:
• You may provide sufficient security to your loved ones
• Proceeds from Insurance policy can be managed according to your wishes
• Trustees can use the Insurance Policies proceeds to pay for debts and mortgages before the Grant of Probate or Letters of
Administration is obtained
• Example 3:
“Miriam is 95 years old and wants to leave her entire estate, worth
$450,000, to her beloved great-nephew, Kyle. Although Kyle is mature
and responsible, Miriam doesn’t want to give him access to his
inheritance all at once. Kyle is still carrying massive medical debt from
a major emergency surgery that he’s fighting with his health insurance
company to cover. With it unlikely that the insurance company will
ever pay out, and creditors constantly hounding Kyle, Miriam decides
to create a spendthrift trust that gives Kyle a monthly allowance of
$3,000. This will give Kyle enough to make his life more comfortable as
he recuperates, but it will also protect the bulk of the estate from
creditors, because whatever remains in the trust is considered a trust
asset and not Kyle’s personal property to garnish”.
Introduction to Commercial Trust
• Trusts are used extensively in the commercial world despite the legal concepts
being originally developed as a private family arrangement.
• Several main areas where trusts are used in a commercial context:
where client or customer money is held, for example in insurance
arrangements or insolvency circumstances;
where there is dispute or potential dispute, for example where security is
being taken or in major litigation;
where there is an employee incentive arrangement, which includes all types
of employee benefit trusts including pensions; and
in various collective investment structures, for example unit trusts and
property investment trusts.
Investment trusts
• Trusts are the basis of nearly all forms of collective investment, unless
a company is used. This includes unit trusts of all types, and various
property investment structures from the joint ownership of property
between just two people to a property trust with several thousand
investors.
Off Shore Trust
• An offshore trust is a legal entity setup abroad into which you can
pass ownership and control of your assets. The assets are then
managed by a trustee in the interests of the beneficiaries.
• Holding assets offshore is a great way to add privacy from nosey
parties that are seeking to cause you harm or loss. Offshore Trusts can
provide greater confidentiality, efficient tax planning and assets
protection.
Real Estate Investment Trust
A REIT or real estate investment trust, is a company that owns,
operates or finances income-producing real estate. Modeled after mutual funds,
REITs historically have provided investors with regular income streams,
diversification, and long-term capital appreciation. Most REITs are public
companies that trade on major stock exchanges.
• In Malaysia for example;
The Bursa Malaysia has 18 REIT listed with five Islamic REITS
(shariah compliant – according to Islamic investment compliance).
Unit Trusts
• Unit trusts are collective investment schemes that allow investors with similar investment
objectives to pool their funds together.
• These funds will be invested by professional
fund managers in a portfolio of securities
according to the fund’s
objective and investment
strategy.
• EPF Members Investment Scheme
Shariah-based Unit Trusts
Shariah-compliant collective investment schemes in which investors pool their funds together to
invest in a diversified portfolio of assets.
The Framework of Shariah-based Unit Trusts:
