What is estate planning?
Estate planning means identifying the best methods for the holding of assets, the transfer and distribution of the estate.
- Holding of assets: Who shall hold these assets temporarily or permanently? Is such an individual trustworthy, financially savvy, diligent, emotionally competent and possess the expertise to manage these assets? Is such an individual required to seek consent from all vested interest parties through their renunciation of their rights to be one or is this individual already empowered to do so? If no such person can be found, who should this role be outsource to?
- The transfer of assets: When will the transfer take places? Prior to death (Lifetime Transfer) or after death? If it is after death, is it immediate in lump sum or over a period of time based on certain conditions and events (testamentary trust)? What is the efficiency rate of transfer? How much assets will be leaked to creditors, tax authorities, legal fees, court fees and unnecessarily capital investment lost? Will assets be force-sold at distressed price or at best market price?
- Distribution of the estate: What are the assets that will be given to beneficiaries? How much in cash? Where will be source of funds? Are beneficiaries obligated to settle the debt of assets held as collateral or will the entire estate require to settle such collateralized debt? Are beneficiaries capable of handling these assets? Are beneficiaries too young, immature or simply too naïve?
What is an “estate”?
When a person dies, all his assets are collectively called the “estate.” However, not all assets in the estate are distributed in the same manner.
For personal owned assets like saving accounts, fixed deposits, unit trusts, shares and properties, SRS balances, investment made via CPFIS, these assets are distributed according to the Intestate Succession Act (if there was no Will) and the Wills Act (if there was a Will).
For CPF Balances, these are distributed according to CPF Nomination (if there was one) and the Intestate Succession Act (if there was no CPF Nomination). This part of the estate is not subjected to any Will even if there was one.
For insurance nomination such as those nominated under Section 73 of CLPA, Co-operative Act, Section 49L / 49M of Insurance Act, these insurance policies are distributed according to the nominated beneficiaries regardless whether was there a Will or not. Note that for third party policies and if there was no vesting chosen, the policy will form part of the estate subjected to Intestate Succession Act (if there was no Will) and the Wills Act (if there was a Will).
What are the tools used for estate planning?
The tools used for estate planning are: Wills, Living Trusts, Testamentary Trust, Lifetime Transfers, Corporate Structures, Buy-Sell Agreements, Insurance Wrappers (or sometime called Portfolio Bonds) and Lasting Power of Attorney (under Mental Capacity Act 2008).
Please note that these are tools. Tools are meant to solve a problem and it is a means, not an end. If tools are used incorrectly, it can be detrimental.
Can you describe how Will writing is done?
The issue of a will turning out to be invalid is not new. The press often reports these cases. For instance, recently a lawyer by the name of Johnny Cheo Chai Beng was sued by 18 beneficiaries because the will he prepared turn out to be invalid. But what never appear in the press is that many valid wills are not suitable resulting in similar outcome as an invalid will. I decide to write to the press. The following letter to the Straits Times was published on 14 July 2014:
IN A recent case, a lawyer was found to be at fault for an invalid will (“Lawyer’s fault that will is invalid: Court“; July 4).
This is not the first time a will has been found to be invalid, and it won’t be the last.
What remains unspoken is that many wills that are valid may not have been suitably constructed.
For example, it is not suitable to appoint as trustee someone who is busy working abroad, especially if the beneficiaries are minors, as such a trustee would be too busy to attend to the beneficiaries’ financial needs.
There is a lack of awareness that writing a will is a two-stage process. The first stage is a planning phase best done by a competent estate planner.
This involves fact finding, analysis and recommendation, which would involve a proposal on how the estate is to be distributed and the selection of the appropriate legal instruments.
A will is one of many available legal instruments.
An estate planner is usually a financial adviser because a large part of estate planning involves money matters. However, not all financial advisers are estate planners.
The second stage is the implementation phase.
This is best done by legally trained professionals to draft the will in accordance with the estate plan.
Most people who want to write a will normally skip the first phase and go straight to the second phase, only to discover that they need to give precise instructions to their solicitors.
This is similar to constructing a building without a blueprint.
Many people have not written their wills mainly because they cannot give precise instructions as they have not gone through the planning phase.
What is a junk Will?
When comes to Will writing, some people either do a DIY Will or get a lawyer to do it. Most of the time the Will is either invalid or is valid but practically useless. Why? A Will is merely a tool. If the tool is used wrongly, it is a rubbish tool. An analogy is like buying an insurance product:
If you ask an insurance salesperson for specific product advice, the insurance person can give product advice and help you transact it. However, it does not mean that the insurance product is suitable. You may have bought an insurance product that is exactly what you wanted but whether is it suitable is quite another story. That’s why countless people have bought junk insurance products that are as good as no insurance. This happens because the insurance salesperson did not conduct a financial needs analysis and make a recommendation. Similarly, when it is the Will writing, countless people have made Wills that are either not recognized by law or legally correct but practically rubbish. I shall give two real life examples of how and why this happened.
My client A approached lawyer B to write a Will. Client A instructed lawyer B that she would like her assets to go to a few people and one of them is her brother. In the Will, nothing was mentioned about giving to her children. Privately, Client A told her brother that the monies to be given to him is actually meant to be given to her children who are all still young and unable to own assets currently. This arrangement was not mentioned in the Will. When client A told me this, I immediately realized that she had committed two mistakes. The first mistake is that her intention was not documented in the Will. She only wanted her brother to act as a trustee for her children. She should have mention it in her Will through a testamentary trust that her children are to inherit some monies with her brother to be appointed as a trustee until her children are of legal age. The “private” arrangement is dangerous because her brother has no legal obligation to hand over the money. Second problem is that since she did not provide anything for her children in the Will, this is against the law. Parents must make provision for unmarried daughters and sons below aged 21. By not providing for her children in her Will, her Will can be challenged and contested. Of course, her children will have to contest her Will of which at the end of the day the lawyers will get all their fees and that there will be nothing much left in the estate. What exactly when wrong in the entire process of Will writing? Two things must happen which resulted in a practically useless Will. These are (1) the testator (client A) was not knowledgeable enough to analyse her entire situation and (2) lawyer B did not conduct a full fact finding analysis to study her situation and provide a recommendation. If the lawyer had asked more facts, he would have uncovered that she has children and thus advised her that her wishes will be challenged because legislation makes it compulsory to provide for her two minor children. As I had known her for sometime already, it was easy for me to give her the advice. But a stranger like lawyer B has no time to conduct a full fact find. For a full fact find analysis, the Will would not have cost a few hundred of dollars! It probably would cost thousands of dollars! As the saying cost, pay peanuts and get monkeys. Isn’t it the same as buying insurance? Get free or cheapo advice and you get junk insurance.
The second case is Client X. Client X told his lawyer J that he wants to give his assets to his two children in equal proportion. This is quite a simple Will and so it cannot be wrong right? Wrong! The lawyer assumed that the children are minors and thus drafted the Will to mention that all assets of X is to be given to “all surviving children of X”. Well, sounds good except that X’s children are all grown up with families on their own. The phrase gifts “to all surviving children in equal share” means that if one child predeceased the testator, the gift will be distributed to the remaining surviving children. This makes sense if all children are minors since minors do not have any dependents. But since X’s children are all grown up with their own families, the lawyer should have consulted X whether does he wants to have his grandchildren inherit should one of his own children predecease him. In fact, it isn’t fair that all assets only go to the surviving children when it is the predeceased child’s family that needs the asset most. Why does this happen? Again because of two reasons: (1) the testator (client X) was not knowledgeable enough to analyse his entire situation and (2) the lawyer did not conduct a full fact finding analysis to study his situation and provide a recommendation. So it is identical to buying a junk insurance product.
However, I must admit that both lawyers charged rock bottom prices. One charged $150 and another charged $120. These are below market rates. I really feel that in this world, paying peanuts seriously will get you monkeys. So if you want to get a Will done, for goodness sake don’t bring home a monkey!
So should you get the most expensive Will? No of course not. Some junk insurance cost 42% more expensive than others but it is still junk. Even if a Will cost $100,000 it is still junk if it is really junk. A junk Will is junk regardless of the price tag. I think it is more important to ask yourself whether the Will writer is willing to conduct a full fact finding analysis and provide a suitable recommendation. Frankly speaking, I doubt any lawyers have the time to conduct a full fact find. If they do, be prepared that their fees will cost you your entire estate!
For further reading, you may wish to read this related article on Advanced Estate Planning.
What is the difference between a simple Will and a comprehensive Will?
The main difference between a simple and a comprehensive Will is that the latter contains a testamentary trust. The following is an outline example of a comprehensive Will for a married person with children who are still minors. A simple Will will not have the items indicated by the asterix *. Please note that this is only for illustration – it is NOT a recommendation. For more information about testamentary trust, see How to use a testamentary trust?
- Testator: Mr. John Ang
- Executor: Ms Marry Lim (spouse)
- Final & Substitute Executor: Professional Trustee*
- Guardian for children if spouse also pass away: Ms Ang May May
- *Allowance for guardian: $500 inflation adjusted per month until the youngest child reaches 21.
- Distribution for specific bequest:
|Beneficiaries||Amount or item|
|Ms Chan Ma Man||$50,000|
|The respective life assured||Third party life insurance policies|
- Residual estate:
|Ms Marry Lim (spouse)||100%|
|First substitute: Surviving children in equal share (transfer to testamentary trusts)||100%|
|*Second substitute: Surviving father, mother in equal share||100%|
|*Third substitute: Charity||100%|
- “Children” to include en ventre sa mere*.
- *Moveable Testamentary Trust –
- Purpose: to hold moveable assets in trust on behalf of the children. Trust only setup if spouse predecease and there are surviving children.
- Trustee: Professional Trustee
- Powers of Trustee: Sell Trust Assets, make investments. Appoint licensed financial adviser for advice.
- Full discretion for Trustee to use trust assets for the maintenance, education and medical expenses of the beneficiaries.
- Birthday gift of $100 inflation adjusted every year for each child.
- Trust ends when youngest child reaches 30 years old.
- Beneficiaries at end of trust life: Follow residual estate.
- *Immovable Testamentary Trust –
- Purpose: To hold and manage existing and future acquired private property for children to stay. Trust setup only if spouse passes way and there are surviving children
- Trustee: Corporate Trustee
- Powers of Trustee: Rent/Lease properties, Insure Fire insurance, cannot sell.
- Trust ends when youngest child reaches 30 years old.
- Rental income from properties to go to Moveable Testamentary after payment for Property Tax, Repair and Maintenance of trust properties
- Beneficiaries at end of trust life: Follow residual estate.
What are Living Trust, Testamentary Trust and Implicit Trust?
A Living Trust is a trust setup when the settlor (the person who setup the trust) is still alive. A testamentary trust is a trust setup by a Will and after the testator dies. Note that a testamentary trust is only setup after the Grant of Probate and when all debts are paid by the Executor. If the estate is insolvent after all debts are paid, the testamentary trust is as good as an empty shell. Therefore, if protection from creditors’ claim is important, a living irrevocable trust is required. Both testamentary trust and living trust are known as expressed trust.
An implicit trust is created when for example monies are given to minors. Since minors cannot legally own assets, an implicit trust is created. Many Wills written create such implicit trust. Implicit trust is not bad by itself but those who DIY their own Will or engage incompetent Will writers and lawyers may not fully understood the implication of creating an implicit trust.
Do note that transfer of property to a living trust incurs a hefty 3% stamp duty (at this point of writing). On the other hand, transfer of property to a testamentary trust only incurs $10 stamp duty.
How to use a testamentary trust?
The most common usage of testamentary trust are:
Example 1: To hold the residential property of the testator so that dependents can stay in the house until they are financial independent or dies. This is to prevent the property from being sold prematurely. The property can be sold and proceed given to stated beneficiaries when the trust ends.
Example 2: Instead of giving a lump sum to beneficiaries, a testamentary trust can be used to give them a monthly allowance over a period of time. This is a popular method because beneficiaries may be too immature or gullible to receive a lump sum benefit. Giving them a lump sum introduces the risk of being a target of scams, get-quick-rich schemes and unethical financial salespersons. If the testator so desires, he can also insist that the trustee appoint an investment adviser to advice how the assets should be managed so as to help grow the assets more effectively.
Example 3: A testamentary trust can be used to control how monies are distributed based on certain preset conditions. For example, the testator can specify that a certain lump sum of say $100,000 to the child’s education if they managed to go to a recognized university (not just any university). Another way is to give a monthly allowance based on say 20% of the children’s own monthly income. In this way, the trust motivates and creates an incentive for them to work hard.
Example 4: With the introduction of casinos at the country’s door step, there is a danger of beneficiaries squandering their inheritance at the gambling den. A testamentary trust can be setup to provide maintenance and allowance for the beneficiaries based on a discretionary basis. Unlike a fixed monthly allowance, the trustee has to exercise discretion.
An individual trustee can manage a testamentary trust. However, the time and effect to maintain such a trust over a long period of time usually make it impractical for individuals to do it. Therefore, a testamentary trust is only practical if a corporate trustee is appointed as the trustee especially if the testamentary trust last for an extended period. In Singapore, a trust is permitted to be setup for 100 years. However, there are ways to “get-around” this limitation and thus extending the live of a trust perpetually.
Is testamentary trust really necessary?
A testamentary trust is an express trust that is written into a Will but will only be setup after the testator dies and when the Grant of Probate is granted. If the estate is insolvent after all debts are paid, the testamentary trust cannot be setup.
Majority of the Wills written are already creating implicit trust. For example, if you give $X to your children who are still minors, this money has to be held by the Executor/Trustee until they are of legal age. Thus, an implicit trust is created. Take for another example if you give $Y to your elderly parents but if they are already suffering say from severe dementia, they are not able to hold the assets. Hence, the Executor/Trustee has to hold on their behalf and thus an implicit trust is created. Many simple Wills that people use will have the tendency to create numerous implicit trusts. To me, having an implicit trust created – while technically is not wrong – is practically unwise. As a financial practitioner, my opinion is that this increases the risk of monies being mismanaged because the Executor/Trustee does not have any guideline as to how to manage such implicit trust. The worst case scenario could happen is to see the Executor/Trustee squandering the money away or having to be cheated by unethical financial salesperson to buy into another Lehman Brother Minibond. Now that there is a casino next door, the Executor/Trustee could try his luck to “invest” some monies on the gambling den – with YOUR money meant for your young children.
To counter the creation of implicit trusts – unintentionally or intentionally – it is better to explicitly spelt out the exact guidelines which the trustee must follow under a testamentary trust. And for goodness sake, never appoint a human being to be a trustee. That human could simply just ignore the entire testamentary trust and still be able to gamble it away at the casino next door.
How can I ensure that the Trustee of a trust does its “job”?
As Trustee holds significant responsibility, it is important that the settlor is satisfied that Trustee is able to fulfill its responsibilities. Some important considerations are:
- Is the Trustee a regulated entity by the Monetary Authority of Singapore or is the Trustee located in some offshore island with unfamiliar laws? Using a locally regulated Trustee is very useful as the settlor and beneficiaries would not want to fly to a remote island to deal with the trustee in the event of conflict.
- Does the Trustee has any conflict interest? For example, if the Trustee is also the investment adviser, there is a conflict of interest as the Trustee also earns commissions and trailers for placing trust assets into financial products.
To safeguard the interest of the beneficiaries, the settlor can consider doing the following:
- Appoint a Protector of the Trust. Also appoint successor Protectors as well. The power of the Protector is to ability to replace the Trustee with another one.
- Mandate that the Trustee seeks the advice of an independent investment adviser with regard to how the assets are to be managed. The investment adviser should not be related to the Trustee and the Trustee should not be receiving any “kickbacks” from the investment adviser.
- Insists that the investment adviser to the Trustee writes an Investment Policy Statement (IPS) so as to avoid any misunderstanding and dispute.
- If there are special consideration such as the trust having a beneficiary who is physically impaired, it is important to ensure that the Trustee has the expert skill to cater for such situation.
- It is important to know what are the Trustee’s restrictions. For example, if the Trustee cannot hold properties, the settlor has to be prepared for all properties to be sold and thus subjecting to market risk.
Who can be a Trustee and who regulates them?
A Trustee can be an individual or a trust company. It is better not to entrust your assets to individual trustees because such an individual can die (and you could end up having your assets commingled with his or her) or embezzle the money to the detriment of the beneficiaries.
It is better to look for a trust company regulated by Monetary Authority of Singapore. In Singapore, all trust companies must be regulated by the MAS.
Frankly speaking, nobody and no company can be fully trusted. Having a regulator to be a watchdog is the best you can do.
Is setting up a trust only for the rich? I get the impression it is for the high networth
Of course not! But it is true that it is very difficult to find a trust company willing to take in small business although I know of one that is willing to take in a trust size as small as $1000! However, I will only be able to introduce the trust company to clients who did they financial planning with me as I have no wish to make any recommendations unless I have done a comprehensive due diligent.
Most financial advisers do not know anything about trust and so they do not recommend it. Even if they do know about it, they will not recommend it because the commissions for setting a trust pales in comparison to selling say an ILP that can generate a commission of more than $12,000 upfront. The commission for setting up a trust is relatively smaller compared with an ILP and is not worth the time explaining. Many not-so-rich individuals have been denied of suitable products and services all because of that silly commission. I am not rich at all but my wife & I do have a rather complex testamentary trust and it did not cause me to go bankrupt.
Should I wait until I am old to do estate planning?
Implied in the question is that you will not die now and hence not necessary to do estate planning. If you are 100% sure you will not die at young age, it means that insurance premiums at such young age should be $0. However, if you check around the market – all insurance companies charges a non- zero premium for insuring the young. Why? It is because there is always a finite probability of death.
By the way, most dying persons do not know they are dying until they die. Read this post: HERE.
What is Special Needs Planning?
All parents with children with special needs (or PSNs – Persons With Special Needs) are burdened by two things:
- The huge financial resources to support their children on a long-term basis. Assuming the PSN require $5000 per month in living expenses, medical, special school, special education and cost of care giver – the total amount required for a 1 year old child is 5000 x 12 x 82 = $4.92 million assuming an average mortality of 82 years old and not taking into account of inflation. As it can be seen, the financial burden is astronomical.
- The second problem face by parents is not able to take care of PSNs when parents themselves become disabled and deceased.
These two unique problems are issues that ordinary financial planners are unable to solve because it defies the common assumptions that children do not require their parents’ financial support when they grow up. Unfortunately, children who are PSNs never ‘grow up’ as they cannot support themselves financially and emotionally.
Wilfred Ling offers financial planning for parents whose children suffer from severe form of mental disabilities. This is a unique special needs planning service which we believe is the first and only in Singapore. The following is what we will do for parents who engage us to help them:
- Review the family’s insurance policies to ensure that they are not paying more than they should. This is important because every cent counts for a family with such high financial responsibility;
- Help to get PSNs insured for illnesses unrelated to their existing condition. Most insurers would refuse to insure PSNs but there are some who are willing to insure medical conditions that are unrelated to their existing conditions.
- Calculate with high precision the amount of estate required to support the family.
- Arrange for high term insurance to create the necessary estate to support PSNs financially. Term insurance is the only way to create such high estate at a low cost although it is not available from the usual insurance advisers due to the low or lack of commissions.
- Plan and optimize the estate transfer flows so as to ensure existing family members without special needs are also taken care of.
- Arrange to have the parents’ Wills with testamentary trusts done, setting up of an *inter vivo trust, insurance nominations and CPF Nominations keeping in mind the trade off between subjecting assets to Probate and bypassing Probate.
Optionally, assist parents to get their Lasting Power of Attorney done and to appoint Deputy and successor Deputy for their children.
*Due to the required specialization for PSNs, we will work with Special Needs Trust Company (SNTC) to setup an inter vivo trust. SNTC is the only non-profit trust company in Singapore set up to provide trust services for the benefit of persons with special needs. SNTC is jointly supported by the Ministry of Community Development, Youth and Sports (MCYS) and National Council of Social Service (NCSS).
Feel free to view the following 100 mins video recording of a seminar on “Introductory Talk on Estate Planning for Persons with Special Needs” to Association of Persons with Special Needs (APSN).
What is the process of a person who dies testate / intestate?
A person who dies without a Will is known as dying intestate. The Personal Representative will have to apply to obtain the Letters of Administration (LA). Note that for a person who dies with a Will but with no Executor (e.g. dies, resign, disabled, missing), the process is the same for obtaining the LA but it is called Letters of Administration with Will Annexed.
The process of LA as follows:
1. Personal Representative obtain death certificate;
2. All lawful beneficiaries under intestacy choose Administrator(s);
3. All other lawful beneficiaries in writing waive the right to be Administrators;
4. Administrator(s) find 2 sureties to guarantee gross estate value for Administration Bond;
5. Administrator applies for Letters of Administration with list of assets in court;
6. Letters of Administration obtained after 1 year;
7. Administrator pays all debts and distributes remaining assets according to Intestate Succession Act. For LA with Will Annexed, the assets will be distributed according to the Will.
If a person dies with a Will, it is known as dying testate. The Executor will have to apply for Grant of Probate (GP). The process as follows:
1. Obtain death certificate;
2. Executor applies for Probate with list of assets in court;
3. Probate obtained within a few months;
4. Executor pays all debts and distributes assets according to the Will.
As it can be seen that a person dying testate is less hassle compared with dying intestate. If a Will was written, there is no need for beneficiaries to select Administrators and neither do they need to waive their rights to be one. This potentially can be a source of family conflict due to vested interest. In additional, the need to provide 2 sureties can be practically impossible. Sureties are required if there are beneficiaries who are minors and/or if the estate size exceed $250,000. For young family with small children, this means that the surviving spouse must find two sureties with asset equal to the gross estate each. This imposed a huge burden on the surviving spouse as it is not possible to find such sureties who have everything to lose and nothing to gain. For those who are older and whose children have grown up, the gross estate is definitely higher than $250,000 due to property because Singaporeans are typically asset rich but cash poor. Hence, the need to find two sureties is applicable.
For those who writes a Will but whose Executors are not available to render their service, the process is equally as troublesome as those dying intestate although the distribution of assets will eventually be in accordance to the Will. Hence, it is important to have substitute Executors who are likely to be alive, locatable and willing to perform the job. An Executor can resign from the job as appointing them as Executor in the Will does not contractually bind them to render this service. My recommendation is that the main Executor can be a trusted family member but have a Trust company to be the substitute Executor since a company never dies. The advantage of doing this is that:
1. If in the event, the death of the testator is too overwhelming, the main Executor can resign and permit the substitute Executor to perform the job;
2. If in the event the main Executor dies or disabled, the substitute Executor will automatically be the Executor.
Is estate planning expensive?
Put it this way, if you don’t do estate planning the price of not doing it can be the cost of your entire estate. See the post on Man lost almost his entire HDB property to siblings due to poor financial planning.
Is a guardian required in a Will?
It is optional. But it is good to have a guardian appointed in the Will if your children become orphans. The default guardian is the child’s biological parent (if still alive).
I am undecided in the disposition of property with regard to the estate planning
If you want to do estate planning, you can distribute your assets based on needs-based analysis:
- You should have already done a survivor-needs analysis which identify the amount each dependents should have. This analysis is done as part of the Protection Planning. Thus, each of these dependents must have at minimum this amount of money.
- Since dependents must have a roof over their head, you should ensure that the residential property is held in a testamentary trust. If you are holding a joint-tenant with your spouse, the house will automatically go to spouse. However, if spouse is already predeceased you, you become the sole owner and thus you must ensure the house is catered for in the Will. I would suggest holding the house in a testamentary trust so that your dependents can stay in it until they have grown up. Remember to appoint a trusted trustee for the house otherwise there is no guarantee that trustee will liquidate and run away with the sale proceeds. If you cannot find a trusted trustee, you can always appoint a corporate trustee.
- If there are any (a) children who are disabled (b) sons below aged 21 (c) unmarried daughters, you must make provision for them otherwise the Will can be contested. Also your spouse should also inherit some monies from you otherwise it can be contested too.
- If there is nothing much left to distribute, you stop here and start contacting the Will writer. If you still have some assets left, you will need to have a residual clause otherwise the Will will be partially intestate. In the residual clause, you can put your dependents. It is important to have substitute beneficiaries. Worst case scenario you can put charity or the name of your financial adviser!
If I write a Will, I don’t know who to appoint as Executor
Answer: If you don’t have a Will, someone will become the Administrator who also have huge powers. Potentially the Administrator can be your creditor or an enemy. Instead of leaving to chance, why don’t you appoint an Executor in your Will who is neither your creditor nor your enemy? If you cannot find anyone, you can always appoint a professional corporate trustee to be the Executor.
Is estate planning only for the rich?
No. The poor also need estate planning. Regardless whether you are poor or rich, you have responsibilities which you cannot avoid even if you are dead. For example, who is going to take care of your children and your parents? Also, an immediate estate can be created easily using insurance. If you think you are “poor”, that means you are either underinsured or bought junk insurance.
If I have more liabilities than assets, can I do estate planning?
Answer: Yes and no. Estate planning is the final stage of comprehensive financial planning. Protection planning on the other hands is meant to ensure your estate is solvent. If you are insolvent, all your estate goes to your creditors unless prior protection planning was done.
Why I need to have a Will when I have no beneficiary to give when I die?
Answer: You are selfish, self-centered and only think about yourself. There are many people in the world who are destitute. You can always give it to them as beneficiary of your estate.
Why the distribution according to Intestate Succession Act may not be useful?
For those with dies with no Will, assets are distributed according to Intestate Succession Act. If you like how the assets are distributed according to Intestate Succession Act, you are in trouble because the Intestate Succession Act hardly does anything for you other than to ruin your family. Why?
The Intestate Succession Act only take cares of how your assets are distributed into percentages. But the problems are:
- Some of your assets have no market value. How to distribute according to percentages?
- Your third party policies have no market value. How to distribute in percentages?
- Implied in the Intestate Succession Act is that your residential property could be sold and distributed. Your property would have to be force-sold at a distressed price.
- There is no provision as to who should be your Personal Representative. For Intestate Succession Act, the Administrator is your Personal Representative. You are giving your Administrator a big headache because he or she needs the consents of all persons entitled to be the Administrator and have their rights renounced in writing.
- The Administrator holds huge powers. How much will the Administrator get? Theoretically it is in accordance to the Intestate Succession Act but practically it may be 100% of your entire estate because the Administrator can just take the assets and leave the country.
- The Intestate Succession Act does not make provision for the guardian of your minor children. While the guardian is always the biological parent of your children, what happens if your spouse is already dead? Can you be sure that this unknown guardian will not take advantage of your children?
Why can’t I do estate planning myself (DIY estate planning)?
Frankly speaking you are already doing some sort of DIY estate planning yourself. When you hold joint accounts with your spouse, you are already doing estate planning. When you buy a house jointly with your wife, you are already doing some estate planning. When you buy insurance to provide for your dependents’ needs, you are already doing estate planning. The problem is that this way of doing estate planning is based on random and ad-hoc manner which could be wrong.
To do estate planning yourself, you’ll need to be familiar with Insurance Act, Intestate Succession Act, Wills Act, CPF Act, Guardianship of Infants Act, Trustees Act and Inheritance (Family Provision) Act.
Many do estate planning in a rather primitive way. For example, they think that by having a joint-account with their spouse, assets can be transferred to their spouse seamlessly. This is the wrong way of doing estate planning due to two reasons: The joint-account may not be in joint-tenancy (one bank in Singapore practices tenancy-in-common for their joint bank account) and secondly – what happens if two parties have a common accident?
What is the difference between joint-tenants and tenancy-in-common?
For assets held as joint-tenants, upon the demise of one party, the surviving party inherits the entire asset automatically and thus becoming the sole owner of this asset. Assets held as joint-tenants do not form part of the estate.
For tenancy-in-common, upon the demise of one party, the surviving party do not inherit the demised party’s share of the asset. Also the share of the demise party goes to the estate.
It is very common for husband and wife to hold joint bank accounts. However, it is unclear whether such joint bank accounts are joint-tenants or tenancy-in-common because there is often no such choice when the account is opened. Normally the joint account type is either “Joint OR” or “Joint AND”. However, this is related to how the account is to be operated when both parties are still alive. It is a different scenario when one party has died. One particular bank in Singapore practices tenancy-in-common for its joint-accounts for saving deposits. Most people learn the hard way to find it out. It is better to get in writing from the bank whether such joint-accounts are tenancy-in-common or joint-tenancy. The manner which you ask the bank is important because bank staff may not even know the difference between both. If you wish to ask the bank, it is better to ask in this way: “For this joint account, if one party dies, will the bank allow the surviving account holder to withdraw the entire money without Letters of Administrations or Grand of Probate?” Also, get all answers in writing.
Why Estate Planning is Essential for a Family Unit?
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