Last Updated on 19, February 2016
Madam Toh Ai Lan died in 2012 leaving a sum of money through her will to Special Needs Trust Company (SNTC). SNTC was to use this money to support the deceased’s daughter who suffers from Down Syndrome. In other words, Mdm Toh’s daughter is the ultimate beneficiary.
Unfortunately the Executor did not transfer the entire sum to SNTC. SNTC decided to sue the Executor for the outstanding sum of $111,117 and a declaration that the Executor breached his duties as executor of the will.
There are many lessons that can be learnt from this. This is especially so for parents with young children and vulnerable dependents. The following are my comments:
Can your executor be trusted?
The executor of your will is actually the ‘weakest’ link. An executor who cannot be trusted should not be named as such. There is no ‘external auditor’ to check that the executor has done his job.
Hence, only appoint executors who can be trusted. One way is to appoint joint executors to diversify your risk. Another way is to appoint professional executors who are subject to external audits.
Is your Executor competent?
I am sure Mdm Toh’s executor – who is also her brother - is a trustworthy person but it appears he could be incompetent. If the allegation is true with regard to him not able to account for the various sums deposited and withdrawn from the estate’s account, it implies he was not meticulous in keeping records.
Your executors should be the kind of person who is detailed and able to document all transactions from the estate. What you can do is to ask your executor whether has he or she done any personal financial planning for himself. If the answer is no, it implies that the executor is unlikely to be familiar with financial matters. What’s worse is the that executor may not be even aware of the kind of personal assets he has. When he becomes the executor, your executor may unintentionally mix the deceased’s and his own personal asset together.
Is the estate really worth that much?
Perhaps Mdm Toh’s estate was not worth that much. It was reported that SNTC supposed to receive $400,000 from her estate. But the question is whether was her estate worth that much?
Let’s say you bequeath $400,000 to X. Your only asset is your HDB worth $600,000 but there is a mortgage loan of $300,000. The estate is worth less than $300,000 after netting off legal and property agent’s fee for selling the property. X will never get the full amount of $400,000.
Hence, it is important for you to do have a financial plan to determine exactly how much your estate is worth. As your estate can decrease especially if you stop working, this financial planning exercise has to be reviewed periodically.
For those who find that they do not have sufficient assets in their estate, they will have to buy insurance to make up the shortfall. Unfortunately, most people buy insurance for savings and investments. Few actually buy insurance for estate creation because pure insurance for estate creation pays very little in commissions. This is evidenced by the fact that as at 30 September 2015, the life insurance industry paid out a total of S$4.51 billion to policyholders and beneficiaries. Of this amount, S$3.94 billion was for policies that matured and the remaining S$565 million was for death, critical illness or disability claims. In other words, only 0.565/3.94 = 14.3% of the payout was due to ‘true’ insured events. The remaining payout of 86% was for investments and savings.
A competent financial adviser is supposed to be able to perform a needs analysis to determine how much insurance is required but it seems this skill is a rarity.
Is the Trustee Competent?
A trustee is needed if there are beneficiaries who are not capable of handling lump sum inheritance e.g. young children and those with significant mental impairment.
A trust can be setup during your life time or after you die (also known as testamentary trust). Regardless of how it was setup, the competency and the trustworthiness of the trustee is as important as that of the executor. For this particular case, Special Needs Trust Company is a professionally run trust company specialises in special needs. So they are able to take legal action on behalf of the beneficiary.
Hence, it is important that you appoint competent and trusted trustees if you have young children or have dependents with significant mental impairment. You can appoint a few persons as joint trustees for diversification of risk. Alternatively you can appoint professional trustees licensed by MAS. Fees charged by professional trustees are high. (SNTC’s fees are 90% subsidised by government though. See Very Large Government Subsidy for Special Needs Trust Company ). But actually the issue of fees can be easily handled by ensuring the insurance you buy has an extra buffer of say another $100,000 to pay for all these fees. The marginal cost of extra $100,000 for a term insurance is insignificant. That is why under needs analysis, it is necessary to provide for estate and legal cost.
Funding of the Trust
A trust that has no money is as good as nothing. A trust can be funded as follows:
- Life time asset transfer by the settlor (i.e. the person who setup the trust).
- CPF Nomination.
- By Will.
- By Insurance Nomination.
When a person dies, the fastest way which funds can be transferred to the trust is through CPF Nomination and insurance nomination. This is because a will is subject to Probate. In fact, the only way to transfer CPF monies to the trust is by using CPF Nomination as the balances in the CPF is not subject to the will. [To add to the confusion, CPF investments under the CPFIS is subjected to the will but not to the CPF Nomination.] However, CPF Nomination and Insurance Nomination method can only be done for trust that was already setup (also known as living trust). It is not possible to do a CPF Nomination and Insurance Nomination to a testamentary trust.
For those who want to setup a living trust, it must be due to a very important and strong reason. In my personal opinion, if the living trust was setup for such an important purpose, it may not be safe to use the will to fund the trust because the will has many weak links such as:
- Incompetent executors
- Potential for fraud by the executors
- Unknown delay to obtain the Grant of Probate.
- The risk of executors in making the wrong investment decisions if assets have to be sold.
I suggest using Insurance Nomination to fund the living trust. These days, insurance policies come with all shape and sizes. For example:
- If you buy a large term insurance, you can make a nomination to the trust.
- If you buy a single premium endowment for personal savings, you can also make a nomination to the trust.
- If you buy a retirement product such as an annuity, you can also make a nomination to the trust. While you are alive, you still get the regular payout for your retirement.
- Finally, for those who simply has a lot of cash on hand, you can also just top-up to a single premium ILP and make a nomination to the trust. Those who are conservative in their risk appetite can just invest in low risk funds.
Importance of Professional Financial Planning
Estate planning is part of financial planning. It is important that people seeks professional advice on this subject. I am aware that a lot of people do their own financial plan (known as 'DIY'). But they may not be aware that many public information is false.
Take for example, a financial consultant sought my advice and highlighted to me that in page 13 of the booklet “Your Guide to the Nomination of Insurance Nominees 2015” by Life Insurance Association state that a revocable nomination is revoked by the Will. The impression given is that such revocation can be easily done by the Will. The statement in the booklet is of course very misleading. What it does not say is that a Will can only revoke a revocable nomination if a certain procedure is followed. The procedure is found under the Insurance Act Section 49M(7)(b) and Insurance Act (Chapter 142) Insurance Nomination (Nomination of Beneficiaries) Regulations 2009 section 5(3) and 5(5). To revoke a recoverable nomination using a Will is complicated and costly. In practice, nobody will attempt to do that and in fact should not even do that. This is especially so when there is a simple way to revoke a revocable nomination at no cost.
For those who are interested in financial planning should seek professional financial planning now.
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