What may come to your mind immediately is that this book is about Wills. You’re partly correct. We’ll, however, help you see that this is also partly a misconception. Estate planning is a lot more than just Wills. Having a Will is a good starting point though, and it is also an important part of the entire process. In fact, inside this book, you will find an entire chapter devoted to Wills.
We will show you what are the other important areas to consider. We’ll also suggest what you should bear in mind as you consider these issues. If you also own a business (whether the entire business or a part of it), you will be interested to know that the issues that relate to your business may potentially be more complicated. You are likely not to be aware of some of these issues, to begin with. We will be addressing these issues in much greater detail.
Picking up this book is a good start to ensuring that your estate plan will be properly reviewed and put in place. Many times, only a little more needs to be done in exchange for a whole lot more peace of mind, especially for the loved ones we will eventually leave behind. One thing you should remember – you are the only one who can decide on many of the issues we will be discussing in this book. So take time to plan. Though at times the issues can be difficult to deal with, there is no reason why the process cannot be enjoyable. Happy planning!
1. What is estate planning?
First of all, let’s find out what is an “estate”? We’ll be looking at this in greater detail in Chapter 2. For present purposes, however, it basically refers to all the cash, investments, insurance policies, residential and commercial properties and other assets that a person may own at the time of his death, wherever such assets may be located.
Estate planning requires each of us to think through, plan and take steps regarding our cash and other property – how they should be managed, who should get what, any unique circumstances and conditions to be aware of, etc. This may include making documents, such as a Will, to list out how this same cash and other property should be distributed following our death.
2. Estate planning for the individual
To put things in proper perspective, each of us will need to carefully consider three main areas:
- How to preserve the value of our estate by minimizing the leakages of cash and assets from our estate. This means that our estate will be kept intact and as much of the value as possible is maximized. We shall call this area “preservation”.
- How to make sure that our estate will be managed efficiently and effectively so that our assets will be released to our loved ones quickly and with minimum hassle. We shall call this area “distribution”.
- How to ensure that we leave behind enough cash and assets for our loved ones to maintain a certain standard of living, or even for charity. We shall call this area “creation”.
3. Succession planning for the business owner
If you are a business owner, the business that you own frequently constitutes a substantial part of your overall net-worth. Naturally, you may subconsciously be relying on its continued success (or sale to other parties) to provide either a lump sum or an income for your loved ones in the event you should, unfortunately, pass away. However, for the smaller and medium-sized enterprises, the value of the business is usually highly dependent on the owner being involved in the running of the business as a going concern. Various consequences may arise when the business owner suddenly passes away:
- Confidence of clients, suppliers, creditors and staff in the business is immediately affected. This may adversely affect the value of the business, especially if the business owner is key personnel and substantial owner of the business.
- The family of the deceased business owner takes over as the new owners of the business or of his share in the business. This can be a big concern if they have never been involved in the business and have no idea how to run it. The management of the business may therefore be affected. (Imagine if the family members of your partner suddenly become your new business partners. You will immediately see how disruptive and messy this can be.)
- To salvage the business or prevent it from deteriorating or even failing, the other owners (if any), may have to buy over the deceased owner’s share from his family members. The buyers may face difficulties in raising the necessary funds to purchase the share of the business. Negotiation for the sale may potentially end in conflict due to disagreements over the sale price.
- The family members of the deceased owner may end up with far less than the fair value of his share in the business as they are unlikely to be familiar with the business, to begin with. This will affect their future lifestyle and it will not be as the deceased owner had planned based on his estimated value of the business. (Remember that many business owners tend to estimate their business at a certain value and assume that this value can be realized and given to their family.)
Because of all the potential issues above, and more, that may both affect the business, the value of the business, as well as the family members of the business owner, a proper business succession plan should always be considered and put in place. A proper estate succession plan should consider and ensure the following:
- That the owner’s share of the business will pass on smoothly to certain identified people with minimal disruption to the operations and value of the business. The terms of this would have been thrashed out while the business owner was still alive so that there will subsequently be no confusion. The funding mechanisms will also have been put in place by then.
- More importantly, from the estate planning perspective, the value of his business will be maximised and his family will be left with an amount close to what he may have estimated his business to be. Their lifestyle can then be maintained and not adversely affected.
Look out for Part 9 for a more detailed discussion on this.
We do not charge a fee at the first consultation meeting. If you would like an honest second opinion on your current estate plan, investment portfolio, financial and/or retirement plan, make an appointment with us today.