Do I need estate planning?

DO I NEED ESTATE PLANNING? 

Many would say I am not very rich so why would I need to do estate planning? 

Others may say I have drawn up a will or created a trust so I have done my estate planning. Still others think that since my main assets are just my HDB flat and CPF monies, CPF nomination would suffice. 

Are the above true? 

The answer is YES and NO because it depends on several factors. 

Before I go into discussing the FACTORS involved, I suggest we align our understanding of estate planning. 

What is estate planning to you? 

Many would say that estate planning is preparing your wealth for distribution for the eventual; DEATH, which is correct.  

To me, a more specific definition would be;  

Estate planning is the act of preparing to give away WHATEVER you have, WHENEVER and HOWEVER you like, to WHOEVER you want, in an ORDERLY way, before one’s passing on. 

1. Financial/Tax aspect

What constitute the WHATEVER you have? 

This is your gross assets or wealth that you have accumulated during your lifetime and when upon your passing becomes your estate. 

In one’s wealth or estate, there are three MAIN ASSET CLASSES as follows: 

1. ASSETS which include real properties, stocks and shares, unit trust or mutual fund holdings, art collection and other valuables. 

1. BUSINESS which you are a business owner as a sole-progenitor, partner or shareholder of a private limited company. 

1. CASH which includes a. Cash or Cash Equivalent, b. CPF monies & c. Insurance proceeds. 

These 3 asset classes represent the financial aspect of estate planning.  

Issues which may arise from the financial aspect of a deceased estate is TAXATION. While it is true that Singapore has abolished estate duty since February 15, 2008, it has become increasingly common for a Singaporean to acquire assets like real properties, stocks and shares outside of Singapore.  

Hence, what are the tax implication? For example, US situated assets in excess of USD 60,000 estate duty ranges from 18% to 40%. 

Now you might be wondering if estate duty would significantly reduce the size of an asset which you have worked so hard to acquire? 

In certain countries, they practice not estate tax where money is taken out of the estate but inheritance tax where the beneficiaries have to pay the tax before an asset can be release for transfer. This becomes even more onerous. One such country is Japan. 

The other issues that may arise from the financial aspect of estate planning which issues can arise from the following:  

• VALUATION of the asset at death 

• How much is an asset worth at the time of death? 

Factors which may affect the valuation of an asset includes: 

• Market/economic downturn 
• Death of business owner, partner or director 

So how can I protect the value of my assets from significant reduction at death? 

• SOLVENCY of the asset at death 

• How much is left after selling the asset and paying off any loan on it? 

• LIQUIDITY of the asset at death  

• How easy is it to convert an asset into cash? 
• Will there be willing buyers ready when the asset is put up for sale? 

To summarize, the financial aspect of estate planning is to avoid the pitfall of how taxation, economic and market uncertainty may greatly reduce the value of an asset being pass on at death to an heir.  

As one wise saying goes… 

“The best investment decision you have made may be the worse estate planning decision you have made”. 

1. Legal aspect

What is the WHENEVER & HOWEVER you like? 

Factors: 

• A person’s DOMICILE when he passes on.  

• The concept of domicile can be understood as the country or nation which a person is or is deemed or presumed to be permanently RESIDENT at the time of death 
• It is a challenge to clearly determine a person’s domicile as it depends firstly on where the person is born (origin), secondly where a person’s legal dependents are residing (dependency) and thirdly where a person choose to reside when he as attains the age of majority (choice). 
• A person’s domicile greatly affects how his assets can be distributed. In principle, the law of the land determines how the assets can be distributed. Certain country laws practice forced heirship.  
• In addition, whether the asset is MOVABLE or IMMOVABLE will also determine which country tax laws will apply. 

• Movable assets are like stocks and shares, shareholdings of a corporation 
• Immovable assets are like real properties 

• One’s RELIGION also greatly influence how his assets will be distributed. As an example, Muslim asset distribution are governed by Shariah law in which two-thirds of a Muslim asset distribution is already pre-determined. Non-Muslim family members are not entitled any portion of an estate.  

Other factors include: 

• TYPE of STRUCTURE in which an asset is held 

• How will assets held under a trust or company structure be distributed?   
• How will joint bank accounts be distributed? 

• How will an HDB flat (usually joint tenancy) be distributed? 
• Are there nomination/s made for insurance policies? 

• If there was a nomination, when was it made? 
• How are nominations made under different insurance companies, especially before 1 September 2009, be treated? 
• If there was a nomination, was it a revocable or irrevocable nomination? 

• Are BENEFICIARIES QUALIFIED to receive inheritance? 

• Are the beneficiaries’ minors, mentally incapacitated or a bankrupt? 

• WRITTEN INSTRUCTIONS of distribution is LEGALLY ENFORCEABLE? 

• For example, is a Will witnessed by two adults above the age of 21? 

• Written notes signed by the benefactor not witnessed by two persons are not legally enforceable 

• Another example is: Is the person making a Will mentally sound at the time of signing the will? 

1. Social aspect

What is the WHOEVER you want? 

In short, whoever means who you want to benefit from your estate?  

It can be PEOPLE or ORGANIZATION/S or both whom you like to benefit from your estate. 

When people are beneficiaries one main issue which may arise is about the MATURITY of that beneficiary to manage wealth, a.k.a financial literacy or if the beneficiary is financially savvy?  

For instance, would any of your sons head straight to Lamborghini or Ferrari showroom when he receives a large inheritance? Would your daughters’ future husband be someone who would not squander her inheritance? Would the assets you left your wife be managed prudently?  

Even if the person you have appointed to inherit a particular asset is mature in handling the asset, the next question is if he is INTERESTED to inherit the asset? As an example, your second son is mature in handling finances. But is he interested to running your business?  

Other issues which may have to be considered under the social aspect of estate planning are  

• Quality of relationship 

• How is the relationship between the benefactor and beneficiary while the benefactor is alive 

• Fairness of distribution 
• Will the value of assets distributed be of equal among beneficiaries at  the time of a person’s death?  

• keeping things within the family  
• Would the care and control of an asset be kept within the family? 

• information confidentiality  

• Is there a need for information to be keep confidential from family members? 

Conclusion 

The foregoing discussion of the three broad aspects of estate planning namely,  

1. Financial/Tax aspect, if the value of an asset will be preserved? 

1. Legal aspect, if the asset will go to your intended heir? 

1. Social aspect, if your intended purpose of giving a particular asset will be met? 

is by no means exhaustive.  

But you would have gotten the sense of the wide and deep implications if one has not prepared a plan to give away WHATEVER you have, WHENEVER and HOWEVER you like, to WHOEVER you want, in an ORDERLY way, before one’s passing on. 

So, the answer to the question, “Do I Need Estate Planning” becomes clearer now. 

Do your loved ones a favor.  

While you have worked long and hard for your wealth to be pass on to your loved ones, avoid or minimize the the pitfalls causing complications, confusion and conflict between beneficiaries or heirs by doing your estate plan or wealth distribution plan and appropriate arrangements. 

Contributed by: Francis Hoan, Financial Advisory Director representing Financial Alliance Pte Ltd.  

Disclaimer: 

The author of this article does not have professional qualifications in the field of legal and tax accounting field. The content is developed based on research work. The views presented are purely from a financial planning practitioner’s perspective. For actual advice in the areas of legal, tax and estate duty implications, you should consult your lawyers and accountants. Any data presented is correct only at the time of writing.