Estate planning is a process of ensuring that your loved ones are taken care of financially as how you have envisioned for them.
Estate planning is not about planning for death, it provide answers to scenarios in your life such as : how you wish to be treated if get ill, if become disable and scenario after you pass away.
Are you worry over these concerns ?
- How can I pass on my business to my successor upon my demise ?
- Which estate distribution tools are available for me ?
- How often should I review my estate plan ?
- What can I do to have my estate distribute equitably to avoid family in-fighting ?
- How can I distribute my assets to my extra-marital lover ?
Thinking well to be wise: Planning well, wiser: Doing well wisest and best of all. Malcolm-Forbes
Estate Planning Considerations
1. What if your beneficiary facing divorce
If your beneficiary is facing a divorce, part of the inheritance may be subject to divorce claim. This means leakage of your estate to your beneficiary ex-spouse.
2. How you provide for your elder parents who cannot take care themselves
If your elderly parents cannot communicate well, you need to take extra precaution to ensure your elderly parents get their share of your inheritance.
3. What if your executor dies before you or facing bankruptcy
Take note for a natural person executor who face bankruptcy will not qualify to be the executor of your estate.
4 . How you provide for your children of previous marriage
How you can leave a fair portion of estate to your children of previous marriage as you can expect your current spouse will give priority to own children over yours. Think this matter carefully.
5. How you provide for your extra-marital lover
If you want to provide for your extra-marital lover through the will, and if you name your spouse as executor; your estate distribution intention might never happen.
6. How do you distribute your assets in fair and equitable manner
How can you plan wisely to distribute your properties or business shares equitably among the beneficiaries to avoid family in-fighting as the value of properties may be different.
Estate Planning Instrument- part 1
A Will is the legal document expressing the deceased wishes on how the assets are to be distributed.
The person who write the Will is called testator. With a Will, the executor is required to apply the Grant of Probate through the High Court to have the estate distributed. Without the Will, the person is said to die intestate, and an Administrator will be appointed by High Court.
Provide instruction on how estate is to be distributed upon demise with less administrative matters.
Conditions for a Valid Will
- The testator preferably above age 21 years old (in West Malaysia & Sarawak is 18 years, Sabah is 21 years old)
- The testator must be of “sound mind” and not under influence of others
- The will must be in writing, and signed by the testator at the bottom of every page and at the end of will in the presence of two witnesses.
Circumstances to revoke / invalidate a Will
Conversion to the Islamic faith:
Section 2(2) of the Wills Act 1959 states that the Act does not apply to wills of persons professing the religion of Islam. When a previously non-Muslim faith testator convert to the Islamic faith, the will made previously shall be void.
Declaration in writing of an intention to revoke the will
If the testator makes a written statement about the intention to revoke the will and signed by the testator in the presence of two witnesses. The will is considered void.
If the testator intentionally destroyed the will by burning, tearing it. The will is void.
Marriage will revoke a will made earlier by the testator unless it was expressed in the will that it was made in contemplation of marriage. However, divorce does not revoke or void a Will.
A new will super cedes an existing or previous will.
2. Living Trust
A living trust (or inter-vivos trust) is a contract that holds title to and controls the person financial assets on behalf of the beneficiaries. In a trust, the assets are transferred to the legal owner which is a trustee. All the person plans, wishes and desires and written in a trust deed which the trustee is mandated to act upon.
One difference between a will and a living trust is time of effect. A will takes effect only upon your demise. A living trust takes effect when the trust deed come into force after you have transferred assets to it.
To segregate the assets so it does not fall within part of the estate and avoid the lengthy probate process.
Trust is useful in a variety of situations :
assets can pass to your intended beneficiaries privately without probate, and it’s generally faster.
protect an inheritance from a beneficiary’s creditors and out of the reach of the Court
Special care for needy
care for children , needy or the mentally disabled
both income tax and capital gain tax, particularly when the main potential beneficiary may pay tax at the highest marginal rate.
Estate Planning Instrument- part 2
3. Durable Power of Attorney(DPOA)
A durable power of attorney is a written authorization to represent or act on another’s person behalf in private affairs, business, or some other legal matter. The person who give the authorization is the grantor or donor, while the person who is being authorized is the donee. This durable power of attorney lapses following the death of the grantor / donor.
A durable power of attorney allows a person you designate(the donee) to access and manage your financial affairs on your behalf. This is especially important when the following events are triggered :
- unavailability – when you are away in overseas
- incapacitation – when you being rendered medically incapacitated.
The donor can help maintain your financial affairs until you are back to homeland or recovered. In this manner, your family’s needs continue to be provided for.
Considerations while executing a Durable Power of Attorney
- Make sure the grantor and donee has clear understanding of the power and scope of authority, its limitation to act.
- Even accounting is not compulsory, it is important the donee maintain proper accounts record of all financial transactions.
- Select a trustworthy donee. Personal integrity is important to ensure the authority is not being misused or abused. If the donee is not acting in the grantor’s best interests, this could lead to serious damage to the grantor financial affairs.
4. Business Succession Arrangement
For business owners, the key concerns following their death, disability, illness or retirement is either to keep or to sell off their business, and there are many pertinent questions required to answer.
In case of business shares, the deceased partner ceases to be a member of the company upon death. It is the appointed personal representative for the deceased estate would have a legal right to the shares and the deceased portion of shares are transmitted to the personal representative by the operation of the law.
Under law of Malaysia, Section 163(1) of the Companies Act 1965 make clear provision and enable trustee, executors and administrators of the deceased estate to register as the share holder in such capacities. The personal representative shall then assume portion of shares ownership and the liabilities of the business.
If you are operating a limited liability company with one or more partners, it is highly advisable for you to structure a business buy-sell agreement such that upon the death of any partners, their share interest is automatically purchased by the other partners. This arrangement can ensure that deceased family members get the cash fast while the remaining partners can continue operating the business without interference from the personal representative of estate and deceased family members.
The funding of the business share purchase from the partners can be done through :
- own money from the partners
- life insurance proceeds
Life insurance is a cheaper solution and it can be purchased to cover these buy-sell agreements and provide necessary liquidity.
Business succession arrangement address the systematic transfer of the management and ownership of a business.
Considerations on Business Succession Arrangement
- Identify of the successors and provide essential development, training, and support.
- Coordination between the ownership and management of the business is important.
- Retention of key employees to ensure smooth hand over with essential experience, skills and knowledge.
- Timeline of the business transfer
- Cover the financial interest of existing shareholders, partners, successor to ensure no ambiguity.
Estate Planning Instrument- part 3
5. Life Insurance
Life insurance can play an important role in your estate plan. It is often your family first line of defence to support your family with liquidity upon your demise while all your other assets are frozen.
Life insurance can serve many purpose in estate planning, but not limited to :
- provide funds for the payment of estate settlement costs or debts repayment of the deceased
- provide income to the living parents at retirement.
- provide funds for the surviving spouse or children
- create or enhance an estate by providing money to heirs
- provide death proceeds equal to the size of the wealth lost in the form of costs, fees etc.
You can also place the life insurance in a Life Insurance Trust (LIT). By doing so, the trust is the legal owner of the policy and you are the insured. A key advantage of this arrangement is that you need not worry of the the nomination of the beneficiaries and yet the death benefit will not be included in your estate.
While using life insurance in estate planning, not only you need to determine the type and amount of coverage you need, but also what type of insurance best suits your estate planning goals. There are many different types of policies to consider. You may check out our insurance planning section.
The life insurance proceeds, which are free from tax, provide immediate cash and liquidity to settle many estate administration cost
Considerations while purchasing Life Insurance
Duration of coverage
if you want coverage till your demise within certain number years, then term insurance will work.
consider your premium payment capability after your retirement.
Purpose or function of the policy
is the policy to provide income for family, to settle debts or for business share transfer etc ?
Ownership of the policy
this is either own by yourself, your spouse or a corporation.
Beneficiary of the policy
do the beneficiaries have the competence or capacity to manage the proceeds frugally ?
Estate Planning Strategy
If your estate has many immovable assets like properties, how can you distribute them equally since the value of property is different ?
If you have a family business, most of the assets are tied up in illiquid business equity. How would you distribute the shares equitably between active and inactive family members or children in business ?
With advanced planning, estate planning strategies can facilitate not only an equal transfer, but an equitable transfer.A solution may be to create inheritance equalisation using life insurance.
Upon your demise, active family member/ children who are involved in the business can inherit the shares in the business, while the non-active member or children receive an equivalent inheritance from a combination of life insurance benefits and any other non-business assets.