Till death do us part
Estate planning is crucial so our loved ones are not burdened if something happens to us.
BY: James Huan
Financial planning is about understanding the many investment decisions that we make, and then bringing them together to fit in appropriately with the goals and responsibilities we have in mind. Such goals and responsibilities may however frequently not just be financial. Our plans should therefore not end there. Estate planning is about properly structuring our plans and making sure they all fit together to ensure that our loved ones are properly provided for if the worst should happen to us.
What happens when we pass away
During our lifetime, we accumulate four basic types of assets. The first, the “business asset”, might comprise a sole proprietorship, a share in a partnership or shares in a private limited company. The second, our “personal assets”, include monies in the bank, our investments, our collection of stamps and coins, etc. The third are the “insurances” that are paid out upon our death. And the last asset will be our Central Provident Fund, which can form quite a sizeable proportion of what we own.
We all hope and assume that these assets will pass on to our loved ones quickly and efficiently when we pass away. In reality, the process may be complicated and prolonged. Your assets may not end up with those you had in mind, and even if they do, they may not be in the proportion you imagined it to be.
Let us imagine that when we pass away, all our assets flow into a funnel, which we will call the “estate”. The idea is for our assets to flow down to our intended beneficiaries. Before that can happen, a good deal of money may however “leak away”.
The administration of an estate will inevitably incur various fees and expenses, such as probate fees that come with applying to the courts for the necessary legal papers. There will also be legal and accounting fees involved in putting your estate in proper order for due administration and distribution.
Any outstanding debts such as personal loans, unpaid taxes and credit card bills will also have to be paid before your estate reaches your beneficiaries. If you’ve given any personal guarantees, such guarantees are not automatically discharged and your estate continues to be liable until a replacement guarantor is found and your estate properly discharged. Any such guarantee called on your estate in the meantime will reduce the size of your estate accordingly. If prior to passing away, you own a struggling business, your estate may also suffer the liquidation losses that may be incurred in winding up your business.
Medical expenses can also be a drain on the estate if not properly planned for, especially if the medical crisis suffered before death is a prolonged one. This is unfortunately one area that many fail to properly plan for, which is made all the more worrying by the trend of increasing medical costs. In October 2000, the Health Ministry highlighted that local healthcare costs will treble in 30 years’ time. Even then, this may be a “gross underestimation” as improvements in medical technology continue to lead to increased life expectancy.
With all the possible “leakages” above, will we leave anything worthwhile behind for our loved ones? And even then, will they be able to carry on living with the same standard of living they were previously used to? And will the correct people receive our legacy as we intend it to be?
Three areas of planning
When we talk about estate planning, it really goes much further than just writing a Will. The following are the three areas we need to look at when we consider our own estate plan:
1. Asset preservation – The first is “asset preservation”, which looks at the various ways to minimise the leakages as mentioned above. Where medical expenses are concerned, we should review our policies to ensure that we have the correct type of medical plans in place. This takes care of the medical bills if we ever need to be hospitalised. Although we all have some form of insurances, many of us do not actually have the appropriate medical insurances, or wrongly assume we have. This often comes as a rude shock when you attempt to make a claim, which is a pity considering that medical insurances are actually very affordable.
Our medical insurance plans should be structured in such a way as to protect us throughout our lifetime. This is especially important if the sickness is a prolonged one prior to death, so that our legacy will not be dwindled away.
If you have given any personal guarantees, you should consider how such guarantees can be discharged upon death. If you have given such guarantees in your capacity as a director of a business, you can charge a fee for agreeing to do so and then buying appropriate insurances with the fee to address this contingency obligation.
2. Wealth creation – After plugging the gaps above, we will need to ask: “If I were to pass away today, will I leave sufficient cash and assets to provide for my estate expenses as well as my goals and responsibilities for my loved ones?”
The estate expenses have been mentioned above. The goals and responsibilities that we may have for our loved ones on the other hand, will include the following. Will there be sufficient income for your dependents to carry on with the same lifestyle without having to downgrade? Will there be sufficient assets for your children to pursue a tertiary education in the future? Will there be enough for you to leave behind a meaningful legacy?
If not, you will then need help to calculate the “shortfall” you may have in your estate and put in place the correct type of insurances to immediately cater for this shortfall on your unexpected demise. Term insurances are probably the most appropriate for this as you can provide for your shortfall with very affordable insurance premiums.
Make sure that your investments work for you, and make sure that they will eventually work for your loved ones as well.
3. Wealth distribution – After considering the above two areas, we can now consider how your assets should be distributed. This is where your Will finally comes in. (FOR MORE INFORMATION ON WILLS, THERE IS ANOTHER DETAILED WILL STORY UNDER FINANCE)
Like it or not, each of us already has a Will in place. If you have a Will written, that Will applies upon death. If you do not, then your estate will be distributed under the Intestate Succession Act. Under intestacy laws, there is a line of priority of family members or relatives who may inherit your assets. So if you do not wish for the intestacy laws to decide how your assets are to be distributed, you should have a Will written. In fact, everyone should have a Will written as it covers so much more than just the distribution of assets. Having a Will helps to ensure that the assets can be released to the beneficiaries as quickly and efficiently as possible. Further, you decide and nominate in the Will the “executors” who will help administer your estate, as well as who should be the guardians of any minor children. If these issues are properly addressed within the Will, they need not be raised with the courts subsequently, which saves time and money.
But before you go on to appoint these people in your Will, make sure you inform and obtain the consent of your executors and brief them on their expected roles and responsibilities so that they will be ready to attend to your estate and your children. Delays to the administration of estates can frequently be caused by unwilling and unprepared executors.
The same goes for your minor children. All of us have our own unique family background and you will want to ensure that your choice of guardians will properly look after the welfare of your children. As far as possible, you may not want the courts having to make the choice for you and end up appointing someone not of your choice, simply because the appointed person is a family member.
Do note that if you are Muslim, the distribution of your estate will instead be governed under Syariah laws and the relevant legislation (in Singapore, this will be the Administration of Muslim Law Act). Even if you do make a Will, you can only will up to one-third of your estate generally, and only to beneficiaries who will not already be a beneficiary under Syariah laws. Notwithstanding this, it may still help for you to make a Will to specify whom your executors should be, as well as the guardians for your young children, for the advantages mentioned above.
One other thing you should take time preparing is a list of all the assets you may own, and to keep it updated thereafter. The reason for this is very simple and practical. It is frequently difficult enough for us to keep track of what we have while alive. Can you imagine how difficult it will be for our executors after we are gone? Through no fault of the executors, your assets may be left unclaimed because of this. Having an asset list helps avoid this. This is especially important if there are overseas assets.
In conclusion, having a proper estate plan is so very important, more so for your loved ones than for yourself. Many do go through quite a bit of hassle when the estate is in a mess. You may not hear many of such stories, but the few that get highlighted in the newpapers show that the hassle they experience is indeed real. Your family does not have to go through the same thing. As you continue to invest and plan for yourself, consider again all that has been highlighted and make sure they fit nicely together with your goals and responsibilities. You have your own reasons to be investing your hard earned money, so make sure those reasons are fulfilled regardless of the situation and circumstances.
James Huan is the head of legal and estate succession at Providend Ltd. He is also a trainer at Providend Centre of Financial Education (PCFE), which brings financial knowledge to people of all life stages and from all walks of life. Visit us atwww.provident-cfe.com or e-mail us at email@example.com.
(PHOTO CREDIT: HOME © Jenny Woodworth | Dreamstime.com)