Setting Up a Trust in Malaysia: Benefits, Types and Legal Requirements

A trust is a legal arrangement in which a person (the settlor) transfers assets to another person or entity (the trustee) to hold and manage for the benefit of specified persons (the beneficiaries). Trusts are versatile instruments that serve a variety of purposes, including estate planning, asset protection, charitable giving and business succession. In Malaysia, trusts are governed by common law principles, the Trustees Act 1949 and, for certain types of trusts, specific statutory frameworks. This guide explains the different types of trusts available in Malaysia, their benefits and the legal requirements for setting up a trust.

Types of Trusts in Malaysia

Malaysian law recognises several types of trusts, each suited to different purposes:

• Private trust: Created for the benefit of specific individuals or a class of individuals, such as family members. Private trusts are the most common type used for estate planning in Malaysia.
• Purpose trust: Created for a specific purpose rather than for named beneficiaries. Purpose trusts must be for a lawful purpose and must not be contrary to public policy.
• Charitable trust: Established for charitable purposes such as the relief of poverty, advancement of education or religion, or other purposes beneficial to the community. Charitable trusts enjoy certain tax advantages.
• Declaration of trust: Where the settlor declares that they hold certain assets on trust for the beneficiaries, rather than transferring the assets to a separate trustee.
• Living trust (inter vivos trust): Created during the settlor's lifetime, as opposed to a testamentary trust which takes effect upon death.

Benefits of Setting Up a Trust

Trusts offer several significant advantages for individuals and families in Malaysia:

• Asset protection: Assets held in trust are legally owned by the trustee and may be protected from the settlor's creditors, provided the trust was not created to defraud creditors.
• Estate planning: A trust allows for the orderly distribution of assets to beneficiaries without the need for probate or letters of administration, saving time and costs.
• Continuity: Unlike a will, which only takes effect upon death, a living trust can provide for the management of assets during the settlor's lifetime and continue after death.
• Privacy: Unlike probate, which is a public process, the terms of a trust are generally private and not disclosed to the public.
• Protection of minors: A trust can ensure that assets are managed for the benefit of minor children until they reach a specified age.
• Business succession: Business owners can use trusts to ensure the smooth transfer of business interests to the next generation.

Legal Requirements for a Valid Trust

For a trust to be valid in Malaysia, the following requirements must be met:

• Three certainties: The settlor must intend to create a trust (certainty of intention), the trust property must be clearly identified (certainty of subject matter) and the beneficiaries must be clearly identified or ascertainable (certainty of objects).
• Constitution of the trust: The settlor must transfer the trust property to the trustee or declare themselves as trustee. Where the trust property includes immovable property, the transfer must comply with the formalities required by the National Land Code 1965.
• Trust deed: While not strictly required by law, a written trust deed is essential for practical purposes. The trust deed sets out the terms of the trust, the powers and duties of the trustee and the rights of the beneficiaries.
• Trustee capacity: The trustee must have legal capacity to hold and manage the trust property. A trustee can be an individual or a corporation, such as a trust company.

Duties of Trustees

Trustees in Malaysia are subject to a range of duties, including the duty to act in good faith and in the best interests of the beneficiaries, the duty to invest trust assets prudently (governed by the Trustees Act 1949), the duty to keep proper accounts and records, the duty not to profit from the trust and the duty to treat all beneficiaries fairly. Breach of trust can result in personal liability for losses to the trust estate. Professional trustees, including trust companies, are held to a higher standard of care and expertise.

Trust vs Will: Which Is Right for You?

While both trusts and wills are used for estate planning, they serve different purposes and are not mutually exclusive. A will takes effect only upon death and must go through probate, while a living trust takes effect immediately upon creation and avoids probate. A will is generally simpler and less expensive to set up, but a trust offers greater flexibility and privacy. Many individuals use a combination of both: a living trust for the management and distribution of major assets during their lifetime and upon death, and a will (known as a pour-over will) to cover any assets not already in the trust.

How Messrs S K Song Can Help

The trust, wills and estates team at Messrs S K Song provides comprehensive trust services, including the drafting of trust deeds, advice on the most appropriate trust structure for your needs, trust administration and the resolution of trust disputes. We work closely with our clients to develop tailored estate planning solutions that protect their assets and provide for their families. Contact our Johor Bahru office for a consultation.