Last Updated on 22, May 2015
Recently, 4 young children - ages from three to 13 - lost both of their parents in just two months. The deaths of both of their parents were unrelated.
According to the articles 4 kids lose mum to cancer, dad in crash and She's 13, and mum and dad to siblings, their mother Madam Wang Shu Rong died of colon cancer when she was just 29 years old. Two months later, their father Lim Guang Chin died in a vehicle accident. He was just 34 years old.
This is an indeed a tragic event to the family. Nobody wants that to happen and normally this will not happen. Unfortunately it appears that deceased couple did not leave behind a Will because their relatives had to decide among themselves as to work out an arrangement to take care of the kids. If they had written their Wills, these arrangements would already have been decided. There will be no need for relatives to discuss on how to go about doing it. But the question is this: what kind of ‘arrangement’ can a Will do? For a Will to be useful (most people write Wills that are valid but not very useful), it should have the following features:
- A Will should deal with the issue of appointing guardian(s). This guardian is the caregiver who will love the kids as his or her own. The guardian will discipline the kids like her own kids. The guardian will feed and nourish the kids mentally and emotionally until they grow up. Legally, the job of the guardian ends when the child turns 21.
- The other important aspect is the appointment of trustee(s). This trustee is the person or company who shall hold the deceased's assets until the children become adults. This money is to be used wisely for the children’s maintenance, education, medical fees, etc. The guardian should not be expected to pay for all the expenses for raising up the child. It is the job of the trustee to pay for all these on-going expenses.
- The guardian and trustees should not be the same person due to the conflict of interest.
- In the Will, there must be a testamentary trust. In this testamentary trust are clear sets of instructions that the trustee must follow. A simple Will which cost $500 and below will not have a testamentary trust. This means the trustee has no instructions on how to manage the children’s money. This kind of Will is valid but not useful at all.
- If the trustee does not follow the instructions under the testamentary trust, the beneficiaries can sue the trustee. But that is only in theory because if all the money is gone, the children will not have money to hire lawyers to sue. So in practice, children have no means to sue the trustees. Therefore, it is important to appoint trusted trustees.
- Finally, make sure there are sufficient assets in the estate otherwise the guardian will have to pay for all the on-going expenses for raising the children. This can be easily solved by buying a cheap term insurance. This brings me to the next point that insurance planning is of utmost importance. Unfortunately, the insurance industry has such a notorious reputation of mis-selling insurances that there was even a point in time (a year ago to be precise) that MAS wanted to ban commissions!
The question is this: Why most people does not bother to have a proper Will and buy a proper insurance?
- Most common objection is that a Will and insurance cost money. Both do not provide you with any kind of returns. Pure insurance like term insurance has no money back. A Will appears to be just a piece of paper and there is no gold coating on it. In fact, it is printed on ordinary piece of paper. My response to this objection is that Will and insurance are risk management tools. To hedge your risk, you need to pay a premium. On the other hand, investment is to expose oneself to risk so as to earn a potentially higher return. Put it this way, insurance and Will are like put options. You pay a premium for these put options. If nothing happens, your put options expire worthless. But when underlying security crash, you exercise your put options to limit your downside. Actually insurance is more closely related to a credit default swap but I will not bore you with the details.
- Most people think that insurance and Will is for older people. This is untrue as death and illnesses can strike a person anytime regardless of age. While it is true that statistics like mortality tables tell us that the older you are the higher the probability of dying, the consequences of death is not the same for all age groups. Take for instance, a person with children and mortgage would result in a more devastating situation if he should die prematurely as compared to an older person whose children are already adults. For the geeks, I want to introduce a new concept invented by Wilfred Ling called the Expected Liability or E(L) for short. Liability means financial liabilities (e.g. mortgages and car loans) and implied liability (e.g. the need to support minors for the next 20 years etc). For a young person with a family, the total liability can be at least easily be more than $1.7 million (= 2 kids x 24000 per year x 25 years + 500K mortgage = 1.7 million). Let’s say the probability of death for a 35 years old in that year is 1% (I just made this up). So the E(L) = 0.01 x 1700000 = $17,000. On the other hand, a person who is 65 years old may have a higher probability of death at 20% (I made this up also) and a total liability of ZERO because there is no loan and no implied liability. So E(L) = 0. If you look at the relative amount, the young person has an expected liability that is 17000 / 0 – 1 = ∞ compared to the older man. Some people say that the E(L) at age 35 is only $17,000 and so no big deal. Think again. In the investment jargon we are most afraid of the Black Swan. When the Black Swan strikes, you will be totally devastated. Put it this way, if death do not occur at age 35, nothing happens. If death happens at age 35, the consequence is completely devastating because there will be a large loss of $1.7 million. As you can see that this large amount has to be borne by the surviving family members. By arranging for a credit default swap, this amount will have to be paid by the counterparty instead. Since this is a swap, the swap fix-pay party has to pay the premium of E(L) which is $17,000.
Ok, I made up most of the figures but you should understand the principle I am trying to put across otherwise please see me and I’ll explain to you.
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