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An inexpensive alternative exists. Leong Sze Hian

Annual fees too high in Special Needs Trust Fund

This letter was first published at TODAYonline
 

Leong Sze Hian

Starting September 2009, parents of intellectually disabled children can set up a trust for their children, with the newly formed Special Needs Trust Company.

The projected return on trust funds is three plus per cent per annum, as the funds would be put in low risk income producing investments.

The up-front fees payable for investing the trust funds are 6 per cent for the first $5,000, 4.75 per cent for the next $2,000, 3.75 per cent for the next $3,000, 2.5 per cent for the next $10,000, and 2 per cent for subsequent amounts.

The fees charged on the interest earned is 5 per cent for the first $1,000, 4 per cent for the next $1,000, 3 per cent for the next $1,000, and 2 per cent for subsequent amounts.

In addition to the above fees, there is also a set-up fee of $1,500, annual pre-activation fee of $250, one-time activation fee of $400, and annual post activation fee of $400.

Parents have been informed that the minimum amount to start is $10,000.

For $10,000, the up-front fees payable for investing is $507.50, annual fee on interest earned (assuming 3.5 per cent interest) is $17.50, set-up fee is $1,500, and annual pre-activation fee is $250.

Does this mean that it may take more than 12 years for the compound rate of return of 3.5 per cent to re-cover the total fees of $5,217.50? ($1,500 set-up + $250 x 12 years pre-activation + $507.50 up-front + $17.50 x 12 years interest fee)

Similarly, for an amount of $50,000, it may take more than two years to re-cover the total fees of $3,517.50.

Once the trust is activated, the annual fees will be $480 ($400 post-activation and $80 fee on interest earned).

This means that about 27 per cent of the annual interest earned of $1,750 (3.5 per cent of $50,000) may go to paying the annual fees.

After paying the various fees from the projected annual interest of three plus per cent, the net return may hardly be able to beat inflation.

This scheme is also meant for lower and middle-income parents who may not be able to afford or have access to private trust services.

With the amendment of the insurance act this year, parents may also like to consider an alternative, primarily from a costs perspectively, that is from September 2009, parents can set-up or possibly use an existing investing-linked account, an irrevocable trust naming the children as beneficiaries and appointing trustees.

Such a trust arrangement is free, and does not incur any set-up, activation or pre/post activation fees.

In view of the above, I would like to suggest that the scheme and its charges be reviewed, as I understand that this new scheme is the outcome of years of proposals, deliberations, and calls from parents, to help address their concerns of pre-deceasing their intellectually disabled children.