This article first appeared in Forum, The Edge Malaysia Weekly on December 11, 2023 - December 17, 2023

A settlor of a living trust can set aside and entrust a sum of cash to its trustee with instructions to deploy the cash as capital to accrue income, dividends or other forms of earnings over a specified term. In Malaysia, this form of living trust over cash is usually referred to as a cash trust. The characteristics of a cash trust include the following:

• Short-term maturity period, typically two to five years;

• The trust deed will state the estimated yearly dividends that your assets can earn while they are in the trust;

• While the asset is transferred to the trustee under the terms of the trust, the returns on the asset are payable to the settlor if he so instructs; and

• The private trust company can pool the assets of investors and manage and invest the pooled assets in various investments, including capital market products, but they must act only in accordance with the terms of the trust deed and the settlor’s instructions.

Once a settlor establishes a cash trust, he/she relinquishes control of the cash entrusted, in favour of the trust, which is to be managed by a trustee for the benefit of the beneficiaries. The trust deed will have express terms and conditions setting out the parameters and criteria to guide the trustee, as the legal holder of the entrusted cash. A cash trust is useful for a settlor who wants to avoid the risk of a loss in value on the cash saved or to preserve the value of such monies for a duration to deal with changes in economic conditions, pay for expenses relating to education, bereavement and other purposes. The trustee has fiduciary duties to fulfil and honour the instructions of the settlor under the trust.

The Securities Commission Malaysia (SC) recently produced a video explaining cash trusts and what a settlor and beneficiaries need to know before placing assets in such trusts. This video is instructive for those contemplating investing in a cash trust.

Any investments of the trust capital of a cash trust by a trustee in any income-generating products to grow its value are a mere tool for the realisation of the settlor’s wishes for the benefit of the trust and the beneficiaries. It is important that at all times such an “investment” by the trustee is of the capital of the trust. Such investments, which are subject to a trust, must be distinguished from the investments made by the custodians or asset managers of funds entrusted to them to specifically enhance the value of the cash invested. Such investments of the assets by a custodian or asset manager are not subject to a trust.

If there is any mismanagement of the capital of the cash trust, the remedy for the beneficiaries against the trust company is through the Trust Companies Act (TCA), which governs trust companies. On the other hand, any mismanagement of assets/funds or investment managed by a custodian or asset manager that are not subject to a trust can be the subject of actions by the SC under its broad jurisdiction over fraudulent conduct of funds or assets of investors.

Private trust companies are regulated under the TCA. The trust companies must be licensed by the Companies Commission of Malaysia (SSM). They must submit annual reports to SSM, including information on the balance sheet of the company, a statement of the liability to the public in its trustee capacity and the investments and holdings of the company in the trust account. They are also subject to inspection of their accounts and procedures as provided for under the TCA. Trust companies must also be adequately insured. There are onerous responsibilities and repercussions on the directors of the trust companies should there be any failure to comply with the provisions of the TCA or the terms of the trust deed. The directors of the trust company will be personally liable if there is a breach of regulations/terms of the trusts created.

Any person contemplating appointing a trust company with a mandate to manage, invest and grow the value of the assets held in trust may want to consider the following factors:

• Reputation and experience: Research the reputation and track record of the company. Look for firms with a track record of providing trust services and experience in managing trusts, expertise in estate planning and administration and knowledge of applicable laws and regulations. Look for certifications, professional affiliations and client testimonials of the management team to gauge their credibility;

• Expertise and services offered: Assess the range of services offered and the professionals involved in managing the trust company. Ensure the trust company has the expertise to handle your specific requirements. Consider the types of assets they have experience in managing, such as real estate, investments or business interests;

• Trustee independence and objectivity: Confirm that the trust company has a clear policy regarding conflicts of interest and will always prioritise the interests of the beneficiaries above other parties;

• Financial stability: Check the financial stability of the trust company. You want to ensure that they have the resources and longevity to manage your trust over the long term. Review their financial statements, inquire about their assets under management and assess their financial strength ratings;

• Fees and costs: Understand the fee structure and costs associated with the trustee company’s services. Request a clear breakdown of their fees, including administrative, asset management or transactional charges;

• Professional network: Consider the trustee company’s professional network and resources. Their directors should be established in their related industries and people of integrity and credibility. The company should have access to legal, tax and financial experts who can provide guidance and support in complex matters related to the trust; and

• Regulatory compliance: Verify that the trust company operates within the legal and regulatory framework. For Malaysia, the trust company should be incorporated under the Companies Act of 2016 and registered under the TCA. The public can also check SC’s investors alert list to verify whether a trust company is on this “blacklist”.

By carefully evaluating these factors, you can choose a trust company that aligns with your needs and objectives while providing the expertise and experience to manage the assets of your trust effectively.

On June 9, 2023, Minister of Law and Institutional Reforms Datuk Seri Azalina Othman Said stated that the government was “in the process of amending the Trustees (Incorporation) Act 1952 (1952 Act) to improve the management and governance of corporate trustees, so that they are more orderly and efficient, in addition to preventing the entities from being misused for the purpose of money laundering, financing terrorism or fraud”.

Although trust companies are regulated under the TCA and not the 1952 Act, it is hoped that the proposed law reform by the government will enhance the overall governance and integrity of the trust industry for wealth protection and management in Malaysia. Trust companies that are managed well and have their clients’ interests at the core of their business should welcome such law reforms.

Chew Seng Kok is a director of ZICO Trust (M) Bhd and a consultant to Zaid Ibrahim & Co. Sunita S Sothi is a partner of Zaid Ibrahim & Co who advises on real estate and trust matters.

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