I got a call from my colleague just now who was approached by a family to advise them on estate duty issue as one of the member of the family has just passed away. Apparently this person held $3million worth of US shares in which the family did not know. Now that he is dead, the family was shocked to discover that they have to pay a hefty estate duty tax of more than a million to the US government!!
From my research HERE, 2009’s estate duty rate is 45% of the amount in excess of US$60,000. So the family members have to cough out $1.3 million. Goodness, how long does it take to work just to save this amount of money?
While readers may say that the family will still inherit a large $1.6 million after tax, I seriously doubt the beneficiaries will find it amusing to pay $1.3 million of taxes for no good reason. Worst still, they have to pay to the foreign government, not local government.
There is one similarity between financial planning and medical science and there is one difference between both.
Financial planners and medical practitioners advocate “preventive” medicine such as having good diet and exercise. Financial planners’ “preventive” medicine is prudent comprehensive financial planning.
Because medical science has become so advance that many illnesses and diseases are curable. For financial planning, there is no “cure” when financial disaster strikes. In other words, when a family needs to pay that $1.3 million in estate duty, they have to pay. There is no other way. If a family inherits more debts than assets, they have to sell their only home. There is no other way too. No financial planner can do anything or provide any solution after the “fact.” Maybe we can protest at Hong Lim and join the opposition parties to get sympathy but it is doubtful that can raise enough cash to settle the debts.
Financial planning only works if it is done before the “fact” or crisis. When the “fact” has arrived, the outcome is solely dependent on how good the plan was. If there was no plan, you are going to war with no plan, no soldier, no weapon – purely naked.
Now that the family needs to pay $1.3 million, I told my colleague how important it is to do some financial planning for his clients. The cost to his clients to do such planning is probably just a few thousand dollars. This is better than paying Uncle Sam more than a million.
Sometime a family still has to pay more than $1 million even if they did not invest in US shares. Take for an example of a sole bread winner who has 3 dependents each costing $1000 per month. In additional, a housing loan outstanding of $500,000. If these are dependents for 20 years and assuming inflation equal interest rate, upon death of the sole bread winner there will be a liability of 20*3*1000*12 + 500,000= $1,220,000. This is the amount the family needs to “pay”. If the sole breadwinner isn’t dead but is half vegetable, the amount escalates to an unimaginable figure because a half dead person is more expensive than a fully dead person.
Remember, financial planning only works under “preventive” mode. After a financial crisis has stricken, the outcome is solely dependent on the plan. If there was no plan, you go to the war naked.
Why is it that most people don’t bother to plan? Here are some obstacles:
- Many people don’t plan because they are immature and have not grown up to discover what is meant by responsibility towards their own family. Actually I felt that a person who is immature shouldn’t even start a family.
- Secondly, people think financial planning is expensive. We are talking about preventing the family from paying millions of dollars in liabilities verses a few thousands of dollars in planning fee. Any primary school children can distinguish which figure is larger.
- It is not easy to find a planner who is willing to give unbiased planning service. To earn something, they need to sell a product. Therefore, the planning will skew towards getting the client buy a product. Clients find this unacceptable and hence they cannot plan not because they don’t want to but because many financial planners just cannot be trusted. At the beginning of this year, I receive an Email Direct Marketing (aka spam mail) advertising for a course on a certain aspect of financial planning. Initially I thought that the course seems interesting but when I read the mailer closely, it list out 4 testimonies from previous attendees:
“An attendee closed a 5-figure regular premium case using ideas taught on the first day.”
“A junior agency manager closed 2 regular premium cases ($12K to $18K) after the course”
“A financial planner increased a case size from $2K annual premium to nearly $35K regular premium”
“An idea learned in class gave a financial planner a $60K+ premium case.”
I was so put-off with the mailer that I click “Spam”. From then onwards, such mailing from the training school automatically goes to my gmail’s spam box. I am so happy now that gmail's spam filter is so powerful.
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