Personal Finance

How to establish and manage trust funds

financial planning
Good financial planning ensures children benefit from family resources. PHOTO | FOTOSEARCH 

Over time the need for trust funds has become increasingly popular and in demand occasioned by the unfortunate occurrence of death or other events that might arise.

The trust concept is not new. It was started centuries ago in kingdoms and monarchies. In cases where minors were primed to inherit the throne, a regent — a person appointed to administer a state because the monarch is a minor, would be appointed.

The issue would arise if the relatives would disagree on the regent, thereby inviting disagreements among families and some relatives would even use such chances for their selfish gain.

The concept is still clear, minors would not be allowed to rule the kingdom until they came of age.

They were presumed to be incapable of making sound decisions including when to go to war, how to solve disputes, bring about justice and otherwise choices expected of a king.

That is still the same today. Children are practically incapable of making choices on how to use money and other forms of assets left for them by their parents or guardians.

Trust funds are great vehicles that ensure the purpose for which the assets were set is met and can take up any form of assets such as real estate, livestock, cash, stocks, pension and other valuables bequeathed to a minor as is declared in a formal will.

However, in pension schemes, the nomination of beneficiary forms act as a guide for use by the trustees since pension funds do not form part of the estate of the deceased.

Trustees of pension funds, therefore, have a fiduciary responsibility of ensuring that the funds they hold in trust are well utilised in accordance with their mandates as setting up in the scheme trust deed and rules.

Despite this, it becomes confusing when a member of the scheme passes on and has left minors behind.

Although trustees have discretionary rights on how to have the funds distributed especially where the deceased may have omitted some dependents knowingly or otherwise, it would be best to ensure that the funds are distributed according to wishes of the deceased.

In case there are minors, the funds should be set aside as a trust to meet obligations that range from upkeep to school fees in favour of the minor.

To a great extent, this eases the burden on the guardian or the surviving spouse who now has to raise the children alone.

But once the children come of age, then, with the approval of the trustees, the remaining funds can be released to them directly.

Trustees of an already existing scheme can opt to set up a trust fund or a scheme which can have a pool of trusts being managed professionally by a team of service providers such as a fund manager and a custodian who is a bank if necessary.

This ensures transparency in the day to day transactions of the fund.

These service providers shall also report to trustees on the scheme’s performance and other functions as per their mandates.

However, bearing in mind the costs needed to set up a trust and to maintain it, trustees can opt for already existing trust funds in the market, unless it is completely necessary to do so. A pool of trust funds will help in cost saving while maximising on returns.

Although trustees can opt to continue managing these funds on behalf of the minor, having the funds managed in an established trust fund that houses a pool of schemes is often easier as directly managing the same can be fairly demanding.

This has to be done through the consent of the guardian with the sole purpose of helping them better understand the decision and why it is easier.

Well set up trust funds ensures that fees are paid on time, money is continually invested and good returns realised.

In order to curb misuse of funds, trustees ensure that information such as school fee structures and upkeep justification is provided.

This is usually meant to curb the risk of improper funds utilisation resulting in depletion of the assets that are supposed to last for a long time.

Lastly, trustees need to have members of their schemes update their nomination of a beneficiary in the event that major life changes occur such as divorce, marriage, adoption, birth and even death of a nominated beneficiary.

Once a member joins a scheme or exits their forms should be updated to ensure that the trustees have correct information about the member all the time.

JOY KAREKO, Pension consultant at Enwealth Financial Services Ltd.