Estate planning is critically important for a family person especially those who have young children.
An estate plan determines the manner in which your assets are to be distributed on death of either spouses. Since the probably of death is 100%, estate planning is not optional. If you don’t plan, the State has a default plan for you which are pampered with flaws:
* If your children become orphans, someone has to be a guardian for them. A guardian is one who takes cares of your children both emotionally and physically. Who is this guardian? There is a concern here because you do not know who this potential stranger is. Can you be sure your daughter and son will not be taken advantage of?
* Children who are still minors are not allow nor capable of holding financial assets. So a trustee is required to be appointed to hold on their behalf. Again, if they are orphaned, who is this trustee? Will this potential stranger squander their money away?
* If you have bought a life insurance for your young child, it will be in a form of third party insurance policy. Do you know that if you – as the policyholder – would to pass on, that insurance policy’s ownership does not automatically go to the life assured (i.e. your child)?
* Your estate size can be very large especially if both husband and wife dies together. Consider a typical example of a couple who bought a HDB flat worth $400,000 financed by a bank loan of $360,000. By CPF rules, the Home Protection Scheme (HPS) or a similar mortgage insurance must be purchased as well. The size of the estate can be computed as follows:
Valuation of the HDB flat = $400,000
Less bank loan $360,000
Add Mortgage insurance (e.g. HPS) $360,000
Add Life insurance of wife $100,000
Add Life insurance of husband $100,000
Add company’s group employment benefit of wife $100,000
Add company’s group employment benefit of husband $100,000
Add CPF balances of wife $50,000
Add CPF balances of husband $50,000
Add Savings & Fixed Deposits $50,000
Add unit trusts and other investments $50,000
Size of the estate of the family unit = $1,000,000.
Do you know what? I have used figures that are quite typical of a Singapore family earning reasonable pay. It turns out that the estate size is already $1,000,000. If you have children and both parents pass on, your children get to inherit the entire million. The issues I can see are:
* There will be many people with vested interest who will be very keen to lay hands on this money.
* Your children are significantly at risk of being taken advantage due to the large sum of money.
Some people say that estate planning is only for the rich. Well, that is true and false. It is not true because an estate plan consists of making sure you appoint a trusted guardian and trustee. It is also true that if one does not have any wealth, there is less urgency to have an estate plan. However, many people are “poor” when they are alive but become quite rich when they are dead. In the above illustrations, I’ve shown that the size of an estate is far from small. If you think that million dollar estate is small, I am sure many people will be most keen to have a share of that pie!
The tools used in estate planning are: Wills, CPF Nominations, Insurance nominations and Trusts. However, these are merely tools. It will be the most serious mistake to use these tools without planning.
Thus, estate planning focuses on PLANNING before the tools are executed. Some of these tools don’t even take 5 minutes of your time to execute. But planning itself can be a road block if you do not know how to go about doing it. We are able to help you do an estate plan for a fee.
Estate planning is one of the major pillars under Comprehensive Financial Planning. For an overview of Comprehensive Financial Planning, you may wish to sign up for the “Tips on Financial Planning over 30 days”
The above article appeared in CPF Board's IM$avvy / IMSavvy website here: www.cpf.gov.sg
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