Dead man was asked to pay up income tax 18 years later, trustee stunned

(Two letters referred by this article are appended at IMSavvy link HERE )

There was a case recently in which IRAS requested payment and penalty for income tax owned by a dead man. What’s intriguing is that the man was already dead for 18 years. Fortunately, the family members had documentary proof stored in their storeroom that the tax was already paid just one year after the man died (think: the family actually stored this document for 17 years!). IRAS apologised for the mistake in Straits Times forum page. So what’s going on and how to learn from this?

When a person dies, the Personal Representative must pay off all debts before distributing the estate. The estate is the collective assets left behind by the dead person. If there was no Will, the Administrator is responsible that all debts are paid before distribution. To ensure the Administrator does its job, two sureties (guarantors) each having net assets equal or more than the estate are required for estate above $250,000 or if there are beneficiaries who are still minors. If there was any negligent on the part of the Administrator, the sureties are responsible for the financial lost. If there was a Will, the appointed Executor is responsible to use the estate and pay of all debts. No sureties are required. However, if all Executors are not able to act (due to being disabled, dead, missing or simply resign), the procedure will be exactly like as if there was no Will and hence it is called application for Letter of Administrations with Will Annexed. The procedure is the same as if there was no Will except the distribution will follow the Will.

The burden to ensure all debts are paid lies on the Trustee of the estate, which is either the Executor or the Administrator. It is very possible to have creditors come knocking at the door even after 18 years! Like for this recent case, it was the tax man that came knocking at the door after 18 years to ask for tax owned. If the Trustee is unable to proof that the debt was already paid, the Trustee becomes financially liable to pay off this debt. Of course, the Trustee can clawback from the beneficiaries but this is going to be extremely tedious especially if there are more than 1 beneficiaries.

Most people do not realise what this means to their family. Most people have not written their Will. As a result, they assume someone in the family will be the Administrator. For married couple, it is always assumed that the surviving spouse will be the one (although this is not guaranteed). As a result, they will place an undue burden on their spouse to manage the estate such as paying off all debts. But as it can be seen by this IRAS example that this burden can last for nearly two decades! I am not sure whether is it wise to leave behind a yoke to be carried by your wife or husband for this long! Not to mention the necessity to store documents in the storeroom for two decades.

For those who have written their Wills, I have seen Wills being written to the detriment of their Executors. They would often appoint a financially and legally challenged Executor. Usually this will also be their own spouse and family members. Again, these Executors will need to carry the burden probably for the rest of their lives such as constantly worry whether all debts have been paid and the need to store documentary proof for 18 years in the storeroom. Very often, Wills written by young couples create implicit trust without them even been advised what this really means to the Executor. An implicit trust is created such as when a beneficiary is still a minor. In this case, the Executor becomes the Trustee of this asset until the beneficiary reaches legal age. The duly of the Trustee is significant because he or she has the fiduciary to ensure the assets are managed to the interest of beneficiaries otherwise the Trustee is financially liable for losses. There are solutions to this but it is not within the scope of this article.

Since the burden is so great on the Administrator and the Executor, estate planning is something which people cannot ignore. Ignoring the need of estate planning is equivalent of saying that you are happy with your wife or children to carry the yoke of being constantly worried for debts of the estate. I am not sure how it feels like to be invoiced by the Inland Revenue Authority of Singapore after 18 years. I think the compounding effect of the penalty imposed will probably give anyone an immediate heart attack!

As for this case, IRAS mentioned that a mistake probably occurred when the cashier order meant to settle the tax arrears of the estate was instead credited to the trustee’s own income tax account. I am not sure what’s going on here but it reminds me of one thing. It is extremely important for a trustee to keep a solid record of accounts to ensure that the assets of the estate does not mixed with the trustee’s own estate. Since it cannot be guaranteed that other third parties will not mix it up, the onus is on the trustee to perform a perfect record keeping.

In Singapore’s context, my empirical estimate is that 99% of the Singapore residents have not done estate planning. For those who have written their Wills, they wrote nonsensical Wills that are not worth the papers printed on. These Wills may be valid but practically nonsense Also, it is a common misconception that estate planning is all about writing a Will. Writing a Will is just one of the tool and yet 99% of who used this tool wrote nonsense. Actually, the best people who can do estate planning are financial planners because estate planning is one of the pillars in financial planning. Unfortunately, estate planning does not involve selling a product and hence there is no commission for doing a thorough estate planning. To the disgrace of the industry, it is a well known fact that estate planning has been abused and used as a tool to sell expensive and unsuitable insurance products.

If you want to do estate planning, make sure the estate planner isn’t going to sell you another useless product. What you need is an estate plan, not product.

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