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 frequently not just be financial. It is natural and tempting to only focus on investments as that seems to be the most exciting part of planning. Our plans, however, should 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
Let’s begin by exploring what happens upon death… During our lifetime, we accumulate 4 basic types of assets. The first, the “Business Asset”, might come in the form of 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, our Mercedes in the car park. The third asset type is the “Insurances” that is paid out upon our death which often means we are worth more when we are dead than when we are alive. The last asset type will be our Central Provident Fund, which can form quite a sizeable proportion of what we own. But what will happen to all these assets when we die? We all hope and assume that they will pass on to our loved ones quickly and efficiently. In reality, the process may be complicated and prolonged. Not all your assets may be passed on to your loved ones, and even those that do, might not be passed on to the people you had in mind.
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 through the funnel to our intended beneficiaries. But before that can happen, a good deal of money may be “siphoned off”.
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 our estate reaches our beneficiaries. Take note that 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. Back in October 2000, the Health Ministry highlighted that local health-care 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
It should hopefully be clear by now that when we consider estate planning, it goes much further than just writing a Will (which seems to be the main and only thing that comes to mind when people talk about estate planning). The following are the 3 areas we need to look at when we consider our own estate plan.
1. Asset Preservation
The first area to consider is “Asset Preservation”, which is looking at the various means to minimize the leakages as mentioned above.
As far as medical expenses are concerned, we should review our policies to ensure that we have the correct and appropriate type of medical plans in place. This will take care of the medical bills if we ever need to be hospitalized. Although we are likely to have some form of insurances, many do not have the appropriate medical insurances, or wrongly assume they have. This often comes as a rude shock when they 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 against the medical expenses during our lifetime, as well as immediately prior to death. This is especially important if the sickness is a prolonged one so that our legacy will not dwindle away.
If you have given any personal guarantees, you need to consider how such guarantees can be discharged upon death. Where you have given such guarantees to a financial institution in return for credit facilities being granted to a business (usually in your capacity as a director of the 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 then need to ask ourselves “If I were to pass away today, would I leave behind sufficient cash and assets to provide for my estate expenses as well as my goals and responsibilities for my loved ones?”
The estate expenses will include the leakages that we’ve considered 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 tertiary education in the future? Will there be enough for you to leave behind a meaningful legacy?
You may note that I had mentioned: “cash and assets” and not just “assets” above. The reason for this may not be clear immediately. But think about it and you will realize that after you are gone, your family will need cash to meet their short-term needs as well as pay for the various last expenses. Many do not realize that if not properly structured, our cash can be frozen until the probate process is complete. This can be quite a lengthy process, especially if the estate is messy. Make sure sufficient cash is readily available to avoid these unnecessary issues. Consider also the emotional stress that your family will already be going through. Do they really need to be grappling with these unnecessary issues?
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. As much as Wills seems to be the only thing that comes to mind in estate planning, it is only one stage of our overall estate plan.
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 our assets. At the top of the list will be our closest family members, such as our spouse and children. After this, the list broadens to include others such as parents, grandparents, siblings, uncles and aunties and even nephews and nieces. In the unlikely event that there are no relatives, the assets will then go to the government.
So if you are not inclined to the intestacy laws to decide how your assets are to be distributed, you should then 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 can 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 should the unfortunate occur, they will be emotionally and physically ready to attend to your estate and your children. Delays can frequently be caused by unwilling and unprepared executors, so by getting them prepared, you will at least know if they are ready and willing to help. If not, you at least have the opportunity to ask someone else who is willing before it is too late. The last thing you want is for your estate to be frozen for an extended period of time simply because the executors whom you appointed are not willing and ready to attend to your estate.
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, whether family or friends, end up looking after the welfare of your children. As far as possible, you do not want the courts having to second guess who would have been your choice of guardians and end up appointing someone whom you would not have chosen, simply because the appointed person is a family member.
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 fully keep track of the assets we own 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.
Having a proper estate plan that is well thought through is very important, more so for your loved ones than for yourself as you will then be resting in peace. Many do go through quite a bit of hassle when the estate is in a mess. You may not hear many of such stories being shared, but the few that get highlighted in the papers do 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.
As your investments work for you, make sure that they eventually work for your loved ones as well.
This is an original article written by James Huan, former Head of Legal and Compliance at Providend, Singapore’s Fee-only Wealth Advisory Firm.
For more related resources, check out:
1. Retirement Planning Part 4: Where does your CPF money go to when you die?
2. Financial Planning for Merdeka Generation Part 6: Estate Distribution
3. What Goes Through Your Mind Right Before You Die?
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