It was announced on 14 June 2013 that Ministry of Social and Family Development have begun subsidizing the cost of setting up a trust with Special Needs Trust Company (SNTC). This is very good news especially for caregivers who cannot afford setting up trust with private trust companies. The following is a summary of the subsidy:
Before Subsidy S$
Subsidy by MSF S$
After Subsidy S$
|One-time setup fees||1500||0.9||150|
|Annual Pre-Activation Fees||250||1||0|
|One-time Activation Fees||400||0.9||40|
|Annual Post-Activation Fees||400||0.9||40|
The following are some tips to parents who have children with special needs:
First, is it really necessary to have a trust setup for their special kids? There are kids who are of very high function and they may be able to take care of themselves. But there are also many who are unable to take care of themselves. Some will live like any other normal persons. In Singapore the life expectancy for a normal person is above 80 years old.
Second, if you would to pass away, how much money is required to support your dependent assuming normal life expectancy? Assuming a $2000 per month in expenditure over 50 years, it is $1.2m without taking into account of inflation and assuming zero return. Some people already have this amount – which is their property. Many Singaporeans are asset rich but cash poor. For those who really do not have this amount either in cash or property, they can make up the shortfall by buying a term insurance.
Third, setting up the trust with Special Needs Trust Company is the easy part afterall the trust deed is mostly standardized and their staff are so friendly. However, the part that requires some planning is on how to fund the trust. The following are three main ways to fund the trust:
- Lifetime giving. In this method, you put money into the trust while you are still alive. The advantage of this method is that your money start working hard for you because the money is placed with the Public Trustee which earns a much higher interest than the fixed deposit in the bank (well, at least that is true at this time of writing).
- Testamentary giving. In this method, your assets will be transfer to the trust only upon your demise. Again, there are many methods of how to do this: Insurance Nomination (of which there are two: under Insurance Act Section 49L or 49M); CPF Nomination and via your Will. It is not possible to make an absolute assignment of insurance policy to SNTC as it is not their practice to do so. Note that the assets have to be liquidated before being transfer to the trust.
- A combination of lifetime and testamentary giving.
Fourth, if you have other grown up children, you may not want to transfer all your assets to the trust upon your demise because you may want to leave some assets to your other children. In this case, you’ll need to a balance the need of all your children. Many parents do not wish to sell their property upon their demise unless it is absolutely needed. The reason is because if the property is sold, where would the other children stay? This may not be an issue if all other children are working adults but it is an issue if some of your children are still minors. One solution is to state it in the Will to delay the sale of the property until the youngest child reaches certain age (e.g. 25 years old). Once the youngest child reaches certain age, the property can be sold and proceeds injected into the trust. It is absolutely important that the trust must have already been setup prior to the writing of the will.
But to many parents, this may sounds a complicated process. Having done a number of similar cases, I suggest the following 3-steps “timetable”:
- Make an appointment with the SNTC and get the trust setup. In the past, people may have hesitated to do this step because the setup fee was $1,500. Now that the setup fee is only $150, the ‘barrier’ of entry has come down significantly. Although the trust is irrevocable, you can make future changes to the residual beneficiaries (i.e. where the monies go to if the special person dies either during your lifetime or after your lifetime) and the content of the Letter of Intent (it’s a document providing the guidelines to the trustee). You should not spend more than 1 month for this step. The government is providing 100% subsidy for the annual pre-activation fee. Therefore, there is no need to worry about paying recurring charges to SNTC for setting up the trust early.
- The second step is to identify the source of funding for the trust. If your cash flow is healthy, I suggest regularly ‘topping-up’ the trust perhaps using your year-end bonuses. Use the power of compounding to your advantage. For instance, if you put $10,000 every year (inflation adjusted say 4% increase annually) into the trust and assuming 2% pa in net of fees returns, the fund will grow to $730,338 after 30 years. Any remaining shortfall can be met through testamentary giving. On the other hand, if you keep your money in the bank earning almost zero interest, the amount you would save after 30 years is just $560,849. The difference is a whopping $169,489 of ‘free-lunch’. The monies with SNTC are invested with the Public Trustee in which the monies are guaranteed by the Singapore government. It is practically risk-free.But what happens if your healthy cash flow ‘stops’ due to your own illnesses and even death? What if you are not earning enough to regularly top-up the trust? In either case, the answer is to ensure the sole breadwinner of the household is sufficiently insured. Therefore, you need to get an ethical and competent financial adviser to help you to perform a financial needs analysis and recommend a suitable insurance. This is known as Type 1 or Type 2 financial advice. When you seek advice, insist of either a Type 1 or Type 2 advice. The default is Type 3 advice in which the adviser just sells you a product without the obligation to find out about your needs. Under Type 3 advice, you cannot sue the adviser for recommending an unsuitable product because Type 3 only requires the adviser to have explained to you the factual workings of the product.This second step should not take you more than 1 month.
- The third step is to ensure your testamentary giving (if any) will be done accordingly. This involves some or all of the following: CPF Nominations, Insurance Nominations and Wills. This step may require some handholding because of the technicality involved. For CPF Nomination, you may have to seek help from the CPF Board for advice. Similarly, for Insurance Nomination, you may have to approach your financial advisers who sold you the original policies. As for Wills, you have to get legal advice to draft out your Will properly to ensure it meets your requirement. You also need to ensure everything is in ‘sync’ with each other. For example, CPF Board has no idea how your Will is written; the lawyer who drafts the Will cannot advice you on the particular insurance policy bought; the financial adviser who did the insurance policy may not be qualified to advice on Wills and CPF Nomination, etc. Alternatively, it is always possible to engage professional estate planers to get everything done ‘under one roof’ so that you do not need to liaise and coordinate with so many parties. These days, everything can be outsourced!For this third step, give yourself 4 months if you are going liaise with the different parties by yourself. If you are engaging a professional estate planner to do everything for you, you just need one month.
Hence, the timetable you should cater for is 3 to 6 months. Follow this 3-steps timetable and you would have accomplished a great deal for your special child! After completing all 3 steps, one of my client said to me, “I am so relief that everything is settled!”
This article first appeared on www.cpf.gov.sg