I want to tell a story of how a person lost his entire HDB flat due to poor financial planning. No, it isn’t another property agent who rented his HDB illegally. The purpose of this blog article is to highlight the importance of financial planning but it is not meant to make fun of any persons. The story goes like this:
- Mr. Cheong (his real name) bought a HDB flat under joint-tenants with his mother in 1983. Mr. Cheong paid the downpayment, mortgages, conservancy charges, utilities bills and property tax.
- In 1986, Mr. Cheong was allocated a new HDB flat in Serangoon North Avenue.
- However, HDB rules only permit a person to only owned one HDB flat. Thus, Mr. Cheong transferred his ownership of the previous flat to his mother and thus making her the sole owner of the flat.
- Mr. Cheong paid all the costs and expenses relating to the transfer, and the transfer was effected in June 1986. Mr. Cheong asserted that he merely wanted to provide a place for his mother to live during her lifetime and that it was not his intention that the flat would be transferred to his mother as a gift. After the he had moved out of the flat, he continued to pay all the outgoings of the flat while his mother was staying there.
- His mother passed away intestate (without a Will) on 19 August 1995.
- In October 1997, Mr. Cheong wanted to sell the flat but could not because one of the siblings was still staying there. In the meantime, Mr. Cheong continues to pay for all outgoings of the flat until March 1998 in which the matter was brought to the court to ascertain the ownership of the flat.
- To cut the long story short, after a lengthy court battle and an appeal, it was ruled that Mr. Cheong did not own the HDB flat and that the flat shall be distributed according to Intestate Succession Act. The main reason why this was so was because the HDB Act prohibit the HDB flat to be held in trust unless there was prior approval. Mr. Cheong had wanted his mother to hold in trust on his behalf since he was not permitted to own two HDB flats. Since he did not seek HDB approval, the trust was not effective.
The court expressed sympathy towards Mr. Cheong as it was mentioned by the court of appeal that “This is a family dispute. The respondent had done a lot for the family, eg providing a home for the mother, and at one time for the first and third appellants, and the flat was acquired solely by his own effort. None of the appellants had made any contribution towards the acquisition; but, they would soon be getting a piece of the windfall."
Almost on a monthly basis, I would encounter cases of poor financial planning. Some of my clients’ financial loses can be as great as losing their entire property. Sometime, it is due to purchasing unsuitable products resulting in large losses on a long term basis and other times are investment decisions that are speculative in nature. I have asked my clients to allow me to write about their stories but most of the time they will not permit me because they just feel too embarrassed. If they have been mis-sold to purchase a product, none of them is willing to take legal action against the financial advisers who sold them the product. This is probably because no one is willing to face the public scrutiny. I feel heart broken whenever I see the financial mess these clients got into. Normally this would result in them not able to retire ever or they have to postpone their retirement to age 70 or 80. Other times, they have to forsake their dream of living in a private property as they simply could no longer afford it. The worst part of it is these clients are just ordinary people. They are neither extremely poor nor are they extremely wealthy. They are just like you and me trying to have a decent living.
Hence, to highlight the importance of financial planning, I have to use real stories like this one that are available from public records. The story of Mr. Cheong is not fictitious. You can read the court of appeal ruling at this webpage: http://www.singaporelaw.sg/rss/judg/8737.html. This story teaches us a few things about financial planning:
1. It is not easy for the lay person to understand governmental rules and technical jargons.
There are numerous rules involved in our society. To me, HDB and CPF rules are getting too complex for the lay person. Almost every year, there will be new HDB and CPF rules. For Mr. Cheong, he was caught unaware that HDB prohibits the HDB flat to be held in a trust unless prior approval was sought. In fact, I do not think he realized the true meaning of “trust” when he transferred the property to his mother. Many people – including you - do not seek professional advice and as a result are caught unaware of the endless number of rules.
2. Always plan for the unlikely.
In my opinion, it is not likely Mr. Cheong had thought of the consequences if his mother dies. In fact, his greatest nightmares started when his mother actually passed away. Most of us are like him. All of us think our mother, father, spouse and even ourselves will always be healthy, sane, employed and living.
I am particularly disturbed by majority of parents of young children who have a “don’t care” attitude. Sometime ago, I had a client who only wanted to buy medical insurance for his new born baby but neither him nor his wife were willing to insure themselves because they felt that the baby was more important. I found such attitude to be childish and obviously they were not ready for parenthood. They didn’t realized that if they don’t take care of themselves, how are they going to take care of their precious baby?
Another “don’t care” attitude is that 99% (my estimate) of parents in Singapore have not made any provisions for their young children if the former would to become incapacitated or to die. According to a press release dated 12 February 2010, the Life Insurance Association (LIA) statistics show that the average sum assured per regular premium policy was merely $55,572 as in fourth quarter of 2009. Seriously, how long can a $55K payout last?
Among the extremely few who insured themselves sufficiently, none (I repeat NONE) of my clients I met had made proper provision to ensure their insurances and assets are distributed in a practically useful way. Take for example, can anyone figure out how is a 1-year-own child going to inherit the payout from the parent’s $1m term insurance? How about that $100,000 CPF monies? Can a 5-year-old inherit that amount? Just to be sure you know what I am trying to drive at, the most common recommendations of just making a life insurance nomination to children do NOT work in reality because they do not address the practical issues I mentioned. There is a big difference between to be legally correct and practically useful. It is legally sound to nominate your children as beneficiaries to your life insurance policies under 49L or 49M of the Insurance Act. But will this be practically useful?
In terms of property, how about the question on how is a 3-year-old child going to inherit it? Who is going to pay for the property tax? The 3-year-old toddler hardly knows how to do math and I seriously don’t think he knows how to sign a cheque to pay IRAS!
Most parents would just either not think about it or they would say that “someone” will take care of everything. Yes, indeed that “someone” could be the creditor or a relative who prefers to help himself with the assets and cash. Such parents who refuse to make plans are immature and shouldn’t even start a family in the first place.
3. Do not know whom to seek financial advice.
If Mr. Cheong had thought of the consequent of his mother passing away, would he know what to do to ensure his interest is protected? I speculate that Mr. Cheong is unlikely to know what to do or to whom he can seek help from. What then should he had done and how much would it cost?
Frankly speaking, the simplest method is to ensure Mr. Cheong’s mother wrote a Will bequeathing the entire flat to him. How much would this have cost? Probably less than $300. If you are reading this, you would have thought to yourself – wow easy solution! Unfortunately it is not as easy as you think. The solution appears to be easy but Mr. Cheong is highly unlikely to receive such advice even if he had wanted to seek prior to transferring his ownership to his mother entirely. Why?
Assumed that Mr. Cheong sought advice from a “professional” adviser, the adviser has to conduct a thorough analysis of Mr. Cheong’s financial situation after a detailed fact finding exercise. It is only through detailed analysis would the adviser discover problems with the trust arrangement he had with his mother. The recommendation could be as simple as writing a Will. Many people often value advice provided by financial planners based on the recommended solutions. For this particular case study, the value of the advice is just $300 if it is judged based on the recommended solution of writing a Will. However, we know from the court ruling that such an advice is worth hundreds of thousands of dollars because a simple Will could have saved Mr. Cheong from losing his property to his siblings.
Most financial advisers in the industry could never demonstrate the value of their advice because they are limited toproduct sales. All they do is to recommend products. Many independent financial advisers (IFAs) got themselves trapped by doing endless product comparisons for their clients. But in reality, the value they need to provide isn’t about product comparisons – it is about how to uncover and solve clients’ problems. Why do they spend countless hours in product sales and comparisons? It is because a product sale is required to generate a commission. Without a product sale, the adviser will never be compensated regardless whether the advice given was good or bad. In fact, it is quite a sad situation for many financial advisers because regardless of how good they are in advisory skill, end of the day it is ALL about getting the customer to buy a product. How could the intellectual skill of a professional be based solely on the product? Similarly, those with superb selling skills are rewarded with high commissions, public recognitions and overseas holiday incentives. Is this fair?
The conclusion is this. Be prepared to learn about technicalities and jargons. Learn to plan for the unlikely and do not be lazy. Seek professional advice from those who can provide high value for you and not another silly product sale.
If you want to know more about the difference between value and price of an advice, you can read this related magazine article here: The Difference between value and price
This article also appeared on CPF's IMSavvy / IM$avvy website:http://www.cpf.gov.sg/imsavvy/blog_post.asp?postid=570731262-98-7011682390
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