"I want to gift some of my investments in mutual funds to a friend’s daughters. My relationship manager tells me there is no need to worry about creating a separate trust for them. He says the best thing to do is to gift them the proceeds of the investments when they mature. I think he is not thinking right. Can you please advise as to what I need to do?"

This is an interesting question as it is not often that people are so generous. It does raise a number of issues that should be considered. Your relationship manager could well be right, but he obviously hasn’t taken to the time to explain to you his reasoning and the best way to give the mutual funds if you still wish to do so.

Firstly let us consider the gifting of the mutual funds. Are you happy to give the funds to your friend’s daughters and let them have complete control of the funds? This could mean that while they are very happy to receive the gift in the form of mutual funds, they can actually sell the funds straight away if they wish and spend the proceeds now, rather than using the funds for the purpose you had intended such as towards a university education or a deposit on a house. If they are under the age of 18 then you will not be able to put the funds directly into the children’s names, they will have to be held for their benefit by a guardian, but again you will lose control of the funds.

To allow you to maintain control of the mutual funds, but give them to your friend’s daughters, you were quite right to think that a trust would be the best option. With the right type of trust, you can achieve both objectives. There are two main types of trust - a Bare trust or Discretionary trust.
The Bare or Absolute trust is the most straight forward type of trust. This is a trust in which the beneficiary, in this case the friend’s daughters, have a right to both income and capital and can request payment into their own name at any time. They are also entitled to take actual ownership and control of the trust property. Although there are trustees, they are effectively just nominees and must act according to the beneficiary's instructions. So with this trust you are giving up control as well as the assets.
The Discretionary trust is a trust where the beneficiaries to the trust fund are not fixed, but are determined by the criteria set out in the trust document by the settlor, which would be the person giving the mutual funds. Discretionary trusts can be said to be discretionary in two respects. Firstly, the trustees usually have a power to select who receives a payment of income from the trust, and secondly, they can select the amount of trust assets that each beneficiary receives.
This type of trust could be more useful as it allows you as the settlor, or person who sets up the trust, to be a trustee as well and so have control of the mutual funds and when the benefits are paid out.

So we have established the two main types of trust, but why might your relationship manager be wary of them? I believe the main reason would be cost. The fees to establish and maintain a discretionary trust can be expensive.  The costs could easily add up to a few thousand dollars, and unless you were planning to gift a sizable amount to your friend’s daughters, may be more than the initial gift that you are planning to make. If this is not the case, and you are happy to pay to establish the trust, it may be that the mutual funds that you wish to transfer are not able to be transferred or are held within a product that also cannot be transferred. If it is possible to transfer there may be penalties to do so that would affect the value of the assets and make it an unattractive option.

The question mentions waiting for the funds to mature, which would indicate to me that there are likely to be early encashment charges. That could be why the relationship manager is recommending waiting for the funds to mature and then transferring them.

If this is the case, and you do not want to pay the penalty, but you would still like the funds to be transferred I would recommend keeping the mutual funds in your name now, but to add a clause to your will so that in the event of your death the funds will pass according to your wishes.

One final consideration is tax. Assuming that you are a UAE resident and the funds are held here, there will be no capital gains tax to pay on transfer, but is worth checking into if they are not held here. Also if you are trying to reduce your estate for inheritance tax purposes then the best way to arrange your investments should be looked at in more detail.

As always we at Acuma welcome your questions and enquiries directly so please do not hesitate to contact us if you would like to discuss this or any other issue in more detail.