Must I be a billionaire to set up a trust fund?

Family or child trust fund concept. PHOTO | SHUTTERSTOCK

For most of us, the topic of death is a grim one, and for good reason. No one wants to think of the possibility that they may not be here tomorrow to achieve their goals.

And arguably every parent’s goal is to ensure that their children are safe, cared for and most importantly, that they have in place what they need to thrive.

If this sounds like you, then a trust fund should probably be at the forefront of your planning.

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Most people wonder; How much should my net worth read for me to set up a trust fund? Isn’t this a preserve of the rich and famous?

This could not be further from the truth. One can set up a trust fund even when they are alive and put away some funds for their next of kin, no matter how little.

A pooled trust fund, as some entities offer, also ensures that you benefit from economies of scale in both investments and expenses. Let us delve right into it.

So, how may you do this?

Well, estate planning is the answer. A basic estate plan addresses what happens to your property and your children when you pass on. But estate plans can go even further.

They can also plan for your incapacitation, such as the occurrence of an accident or you fall ill and can no longer take care of your own affairs.

Broadly, estate planning can be executed in a variety of ways. The most common of these are wills and trusts. Each has its own pros and cons, depending on your financial plan, but when it comes to the well-being of your children trusts display superiority to wills. Here is why.

The chief advantage of trusts over wills is the avoidance of probate. Probate means that there is a court case that deals with deciding if a will exists and is valid; figuring out who is the decedent’s heirs or beneficiaries; figuring out how much the decedent’s property is worth; taking care of the decedent’s financial responsibilities; and transferring the decedent’s property to the heirs or beneficiaries.

In a probate case, an executor (if there is a will) or an administrator (if there is no will) is appointed by the court as personal representative to collect the assets, pay the debts and expenses, and then distribute the remainder of the estate to the beneficiaries (those who have the legal right to inherit), all under the supervision of the court.

The entire case can take between nine months to 1 and a half years, maybe even longer.

In the case of trusts, the terms are defined beforehand. Who sets the terms of the trust depends on whether the trust is formed by you or by a guardian appointed by you.

Whichever the case, the person(s) who set up the trust is called a settlor. The other important player in a trust is the trustee.

A trustee is a person who takes responsibility for managing money or assets that have been set aside in a trust for the benefit of someone else.

As a trustee, one must use the money or assets in the trust only for the beneficiary’s benefit. Everything a trustee does must be done in the beneficiary’s best interests.

Exactly what they can and can’t do is usually set out in detail in the trust agreement. The trustee then appoints all other relevant service providers, be they individuals or corporations, to serve the trust in their various specialist capacities.

An example of these professionals includes administrators, asset managers, custodians, and lawyers. A trust essentially exists to ensure your wishes are executed to a tee when you are gone all the while protecting your beneficiaries from external forces such as greedy relatives, creditors, and the like.

As you delve deeper into trusts, you will find that there are individual trusts and umbrella trusts. Umbrella trusts in most cases are run by professional organisations where trustees and all service providers are part of a professional caste with a track record.

You will find that such arrangements are beneficial and less prone to interference by external forces or self-interest.

Another advantage of these arrangements is that they leverage economies of scale, both in terms of fees and investment opportunities, ensuring a cheaper mode of investment for your beneficiaries and better returns due to the wider array of investment opportunities available.

There are various ways to ensure you have a trust fund for your children. If you are lucky enough to have the entirety of the amount needed to ensure your children are well taken care of, then by all means form one now and put the money away.

However, if you are like me, you are better off joining an umbrella trust fund and building up this nest egg for them.

Important to note is, should you be employed, then chances are you have comprehensive, group life cover. Ensure that conversations are had with appointed guardians and in writing to your human resource department by way of the updated nomination of beneficiary forms and the like.

The intention should be to set aside as much of this lumpsum payment for your children. The younger they are, the bigger the portion to set aside.

There are various other ways to handle your investments after one passes away. The most common way is the use of Wills.

A will allows you to direct how your belongings—such as bank balances, property, or prized possessions—should be distributed.

If you have a business or investments, your will can specify who will receive those assets and when.

A will also allow you to direct assets to charities of your choice. Similarly, if you wish to leave assets to an institution or an organization, a will can assure that your wishes are carried out.

While wills generally address the bulk of your assets, some aren’t covered by their instructions. Those omissions include payouts from the testator’s life insurance policy.

Since the policy has specified beneficiaries, those individuals will receive the proceeds. The same will likely apply to any investment accounts that are designated as “transfer on death.”

Other alternatives include family companies, family offices, family constitutions, private trust companies and assigning power of attorney.

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Each of these options has various levels of complexity and requirements depending on the nature of the assets under consideration.

The writer is a consultant on retirement solutions. He can be reached via [email protected]