In estate planning, trusts serve as invaluable tools for individuals to manage and distribute their assets effectively. Two common types of trusts used in Malaysia are revocable and irrevocable living trusts. Understanding the differences between these two structures is crucial for anyone considering estate planning.
What is a living trust?
Before diving into the specifics of revocable and irrevocable trusts, it is important to understand what a living trust is. A living trust is a legal entity created during an individual’s lifetime to hold and manage their assets. The person who creates the trust, known as the settlor, transfers ownership of their assets into the trust, appointing a trustee to manage those assets on behalf of the beneficiaries named in the trust document. The settlor can also be the beneficiary of the trust.
Revocable trusts
A revocable living trust offers flexibility and control to the settlor. One of its primary advantages is that it can be modified or revoked at any time during the settlor’s lifetime. This means the settlor retains full control over the assets placed in the trust and can make changes to the trust document as circumstances dictate. Additionally, revocable trusts allow for seamless management and distribution of assets in the event of the settlor’s incapacity or death, avoiding the need for probate, which can be time-consuming and expensive.
In Malaysia, revocable living trusts are commonly used to facilitate efficient asset management and succession planning. They provide privacy as trust documents are not public record, unlike wills which are subject to probate proceedings and become part of the public record.
Irrevocable trusts
Unlike revocable trusts, irrevocable living trusts cannot be modified or revoked once established. Once assets are transferred into an irrevocable trust, the settlor relinquishes control over those assets, and they are managed by the appointed trustee for the benefit of the named beneficiaries.
Irrevocable trusts offer certain advantages, such as asset protection and tax planning benefits. Assets held in an irrevocable trust are typically shielded from creditors and may also be excluded from the settlor’s taxable estate.
Considerations for choosing between revocable and irrevocable trusts
When deciding between a revocable and irrevocable living trust, individuals should carefully consider their specific circumstances and goals. Some factors to consider include:
1. Flexibility vs Control
Revocable trusts offer flexibility and control to the settlor, allowing for changes to be made as needed. Irrevocable trusts provide asset protection and tax benefits but come with the trade-off of relinquishing control over the assets.
2. Asset protection
Irrevocable trusts provide a higher level of asset protection since the assets are no longer considered part of the settlor’s estate and are shielded from creditors. Nonetheless, there are certain conditions that render the settlement invalid. In these cases, the Director General of Insolvency can seize the assets in the trust.
Conclusion
Revocable and irrevocable living trusts are valuable estate planning tools in Malaysia, each offering distinct advantages and considerations. Whether you opt for a revocable or irrevocable trust depends on your individual circumstances, goals, and preferences. Consulting with a knowledgeable estate planning attorney or financial advisor is crucial to ensure you make informed decisions that align with your objectives and provide for the efficient management and distribution of your assets. However, there will be costs involved with the trust, during the creation stage and also the trustee fee for managing the trust. Thus, it all depends on whether you think the benefits of a trust are worth the price.
How can a financial planner help you?
As trust is a tool in estate planning, we should also cover the other areas of estate planning such as will writing. We will see if the creation of a trust is the best for you, or if there are other better alternatives. If you decide to create a trust, I can recommend a corporate trustee to you.
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Disclaimer: This post is for informational purpose only. You should use judgment and conduct due diligence before taking any action or implementing any plan suggested or recommended in this article.
