Estate Planning The Finale of Retirement Planning

Why Estate Planning is important

My earliest impression of estate planning happened to my godmother when my godfather died due to cancer of the nose when I was a young boy of about 11. He passed on at the peak of his career, in his early 40s, where he owned a used car dealership. My godmother had just given birth to their third child.
Thankfully, my godfather had in the prior year bought some life insurance policies and it was these policies and the sale of the auto dealership that allowed my godmother to finance all three daughters foreign colleges,
despite never having to work a day for money. Through the prudent use of the legacy funds and avoiding various “request for money” from relatives and “hot investments” from friends, she managed to successfully traverse through the numerous potential pitfalls that could have jeopardized her family’s financial future.

Providing the assets for all the various financial concerns of my loved ones are obviously important but there are also other potential issues that might arise that a good estate plan can address. Having a clear idea who my likely
beneficiaries are is also significant. How I would want my assets to be held and how the benefits are to be utilized are also key points to consider. Finally, ensuring that potential issues for conflicts are resolved would go a long way in ensuring peace in the family long after I am gone.
As a new father, I have also begun to put some thoughts to how my family can be provided for in the event of my premature demise, like my godfather. Given that I have taken on large liabilities in the form of mortgages, ensuring that my wife has a roof over her head, that my daughter’s education would be provided for and that my mum would have sufficient food on the table becomes all the more important.

Bank accounts, stocks and shares, insurance, investments, unit trusts, properties, company shares and foreign assets are some of the common assets left behind for the beneficiaries.
One key point for consideration is the liquidity of the assets to cover for
expenditure when the estate is under either probate (with a will) or administration (under intestate laws). This is because the probate or the administration period typically takes anywhere from between 3-6 months for simple estates to over years for the more complex cases.
One key advantage of using insurance as a legacy tool is payment in accordance with the applicable death benefits prescribed, without the production of any probate or letters of administration to cover for unexpected expenditures. For my situation, I have 2 term policies, one paying a lump sum, which will go towards paying off my mortgage and another term plan paying my family a monthly income for the next
25 years should I walk out of the picture prematurely. For a $1million death coverage and monthly income of $3000 for 25 years, my annual premiums are less than $4,000 a year.

Another type of solution that has quickly become very popular amongst the more affluent clients is the Universal Life policy. This is where clients can simply put aside a lump sum to quickly multiply the estate they leave behind for their loved ones. They can also make use of the premium-financing feature where the policy is pledged to the bank to secure financing for the premiums for the policy.

In this way, the leverage factor can be more than doubled compared to a pure cash only policy. However, leverage can sometimes be a double-edged sword, as the interest that one has to pay can add up quickly.
Whether these solutions are suitable for you would best be discussed with your financial adviser representative.

By utilization it refers to when the funds are to be used by the beneficiaries.
It could be for their immediate needs, for emergency purposes, delayed or
for long term use. Typically, a will disposes of a testator’s estate upon his demise, which would be better able to address the immediate needs of the family. On the other hand, a trust is sometimes created to ensure that the funds are properly administered for the long-term use of the funds.
A testamentary trust can also be created within a will to provide for benefits to be distributed in the long term. According to Investopedia, “A testamentary trust goes into effect upon an individual’s death and is commonly used when someone wants to leave assets to a beneficiary, but doesn’t want the beneficiary to receive those assets until a specified time. Testamentary trusts are irrevocable.”

A common example of a testamentary trust is when a parent sets limits as to when the funds would vest to the beneficiaries. To ensure that the beneficiary do not squander the wealth, a client once did a will to provide for different percentages of the estate to be distributed when their son reach certain milestone ages. This would provide the son with funds to pursue his interests and still allows for a “second chance” should the
venture fails.

When it comes to estate planning, many of us automatically assume that it is all about having a will done up. Just like a master chef having different knives to cut, slice, dice and chop the various ingredients, there are many
instruments to effectively provide for one’s estate plan. Even though a will is widely used in estate planning, there are some limitations in its use which one should be aware of. For instance, the will cannot be used to provide instructions on the distribution of the testator’s Central Provident Fund (CPF). Instead, in this instance, a nomination is to be done.
Another example would be to create a trust in respect of a Housing and
Development Board (HDB) flat without prior approval from HDB.

In addition, nominations should also be done for each of the testator’s insurance policy as under the same insurance act highlighted above, a “proper claimant” can have quick access of up to $150,000 in insurance proceeds before the probate process is finalised. This is a double-edged sword as a proper claimant can refer to any of the deceased immediate family members who might or might not be the intended beneficiary. Hence, it is advisable to have the nomination for each policy done to avoid unhappiness and potential disputes.
A trust can also be used as part of the estate planning process. Unlike a will, which goes into effect when one passes on, a trust can continue to hold one’s assets when he passes CPF Nomination Form on. This ensures that the estate need not be distributed immediately but can be used to dictate one’s
wishes long after they are no longer around. A trust is extremely useful in instances where minors need to be taken care of. It can ensure that their rightful share of the estate that is due to them are properly safeguarded and prevent them from squandering their new-found wealth that should be put to better use.
Finally there is growing publicity from the Ministry of Health (MOH) highlighting the need for one to do Advance Care Planning. This is where one initiates the process of planning for their future health and personal care. Indeed, with an aging population, it is important that we share with
our loved ones our beliefs and values with regards to how we want or do not want to be taken care of. In this respect, there are two legal documents that one can effect to prepare for this.

The Advance Medical Directive (AMD) is a legal document stating that one does not wish to receive extraordinary life-sustaining treatment to prolong one’s life should he become terminall ill and unconscious, where death is imminent. The AMD can be made by any person, aged 21 years and above, and is not mentally disordered. The AMD form is a legal document which must be completed and signed in the presence of two witnesses before it is returned to the Registrar of AMDs. The patient’s doctor must be one of the two witnesses, while the other witness must be at least 21 years old. In addition, both witnesses must not have any vested interests in the patient’s death.
The other legal document is the Lasting Power of Attorney (LPA). This is where one appoints a donee to make financial or personal welfare decisions on his behalf when he no longer has the mental capacity to do
so (E.g, dealing with banks, CPF matters, where to be homed). With dementia becoming more commonplace in Singapore (Read Straits Times: One in 10 people over 60 have dementia, new Singapore study claims3),
this is quite necessary. The LPA allows one to protect his interests by indicating his personal choice of a proxy decision maker to make decisions and act on his behalf should one become vulnerable when he loses the mental capacity to make his own decisions one day.

In preparing an estate plan, it is important you speak to your financial adviser representative or a qualified lawyer or estate planner as they can highlight the potential gaps in your estate plan or the potential issues that might arise. For instance, I was referred to two widows recently who were left with quite a fair bit of inheritance when their husbands passed on. The challenge for these two widows was that their husbands have always been the ones managing the finances in the family and they do not have the knowledge nor the interest in financial Potential Issues matters. In the first instance, the widow was so stressed up by the large stock portfolio that her late husband has built up over the years that when she took over the estate, she sold off all the stocks immediately, some at a major loss. In the other instance, the widow invested quite a fair bit of her insurance benefits into unsuitable investment vehicles that her banker advised. She has been depressed from the sudden demise of her high flying husband in his late forties that she did not consider carefully the merits of the investment proposed and wanted to quickly “make my money work harder for me”. In the midst of so doing, she paid a hefty price and is still trying to slowly unwind the investment. Another client I met had wanted to leave his business to one of his three children. However, when queried, he admitted that none of his three children are keen on taking over the business as each has their own interest. He then suggested that perhaps he could sell off his business when he is no longer around or to arrange for his sister to help run the business for his family while he make her a joint owner at his demise. Whilst these are good potential solutions, I pointed out to him that in the absence of proper prior planning, no one would be willing to pay a fair price for his business when he suddenly walks out of the picture.
Similarly, even though he can designate his sister to run the business on his behalf, there are no safeguards for his family that the rightful share of profits would be distributed to them.
There are numerous instances of family members fighting over inheritances, which we read in the news almost on a regular basis. When we walk out of the picture one day, would we want see them in the news for all the wrong reason, or would we rather ensure that our loved ones are properly provided for? Speak to your financial adviser representative for advice on how to prevent potential issues from cropping up.

APEX Private Wealth Management (A group of advisers representing PIAS)
Alan Tang
Senior Financial Services Director
Mobile: 9679 9129
E-mail: alan.tang@proinvest.com.sg