Question:
Hi, my name is Bob. I’m an audit manager working in an international audit and taxation firm based in Petaling Jaya, where my salary is RM 10,000 per month. I have just moved into a luxurious condominium with Lin, my wife who is earning RM 5,000 per month from my employment as an executive in a local HR firm.
I’d bought the condominium for RM 800,000 where my outstanding mortgage is now at RM 720,000. I’m paying RM 4,000 a month in mortgage instalments and property-related expenses such as maintenance fees and sinking funds. I bought a 10-year MRTA policy that covers RM 200,000.
In addition to the MRTA policy, I have one existing life insurance policy where its sum assured is RM 50,000. I bought it when I was single some 10 years ago and had nominated my mother as the beneficiary of this policy. A year ago, I tried to buy a new life insurance policy but I was rejected by the life insurer due to some health-related reasons such as obesity, hypertension … etc.
Presently, my parents are depending on me for their living expenses for they are both retired and have used up a bulk of their savings and EPF monies to finance my postgraduate studies overseas and my wedding with Lin a few years ago. As such, I’ve nominated my parents as beneficiaries of my EPF monies so that I can continue to take care of their living expenses if I pass on prematurely.
As for Lin, if I pass on, I intend to leave behind my condominium to her. As such, my question is, ‘Should I write a will to do that?’
Answer:
If I’m Bob, the answer is yes. It is ideal to write a will to bequeath your property to Lin, your wife. That is a good start.
If Bob passes on prematurely, his condominium will be frozen and be part of his estates. Lin, his wife, will need to locate his will and contact the executor he has appointed in his will so that Bob’s will can be executed. The executor appointed will then apply for the Grant of Probate from the High Court, collect all of Bob’s estates, settle all of his outstanding debt and tax payments and finally, he could then distribute all of the estates to Bob’s beneficiaries in accordance to the will.
The entire process will take 1-2 years to be fully completed. This means, for Lin, it will take that amount of time to transfer the condominium’s ownership to her from Bob. The distribution process will take much longer if:
a. Lin could not locate Bob’s will.
b. Bob failed to appoint an executor in his will.
c. Bob’s executor is inexperienced or incapable of executing his will.
Meanwhile, as the property is stuck in the estate distribution process, who’ll be paying for the RM 4,000 a month in mortgage instalments and property related expenses? These are ongoing expenses as Bob’s MRTA policy does not cover his outstanding mortgage in full. Is Lin able to foot in the bill?
Financially, if she does not have a sizeable bank account, Lin would be placed in a predicament as:
a. Lin is making RM 5,000 a month as an executive in a HR firm.
b. Lin is not the beneficiary of Bob’s EPF monies
c. Lin is also not the beneficiary of Bob’s life insurance policy.
But, you may ask, ‘What if Bob has cash? Won’t it help?’
The answer is nope, especially if his monies are placed in his personal accounts. The monies will also form part of Bob’s estates if he passes on prematurely and thus, will be stuck in the estate distribution process. So, if Lin could not keep up with the mortgage instalments, his property could then be auctioned off by the bank and as a result, Lin will not inherit the condominium from Bob.
So, what then is an ideal solution for Bob and Lin?
Let’s say it takes around 2 years for the property ownership to be transferred to Lin. Bob wishes to prepare an emergency fund for Lin to pay for these expenses so that Lin does not have to worry about them over 2 years after Bob passes on prematurely. The amount works out to be RM 192,000 (RM 4,800 a month x 48 months).
Ideally, if Bob is healthy, it is better for him to form an insurance trust where he can buy a life insurance policy with a sum assured of RM 200,000 and assigns it to his insurance trust. If he passes on, the sum assured will be released from his insurer to his insurance trust and thus, allowing his trustee to continue to make these payments if he passes on prematurely.
But here, Bob is not in the best health condition, so, his alternative would be to set up a trust and place around RM 200,000 into it. The best thing about having a trust, in addition to a written will, is that the money put into the trust is capital safeguarded and separated from his individual assets. If Bob passes on, the monies will:
a. Not be frozen and form part of Bob’s estates as it is the trust’s money.
b. Protected from creditors.
c. Specifically used only for the purposes set out by Bob in his trust.
As such, having a living trust in addition to a will would greatly enhance Lin’s financial security in dealing with Bob’s properties if he passes on prematurely.
Conclusion:
In short, a will document alone is insufficient in ensuring a smooth transition in distributing your estates to your beneficiaries. Along the process of distributing your estates, your beneficiaries may need to pay for some expenses in order for the process to be carried on. Otherwise, the whole process could inevitably be delayed and dragged on for months or even years.
Hence, many have set up a living trust as an emergency fund. So, if you wish to explore further on the uses of a trust, you could fill in your details below to book yourself a 30-minute consultation session with our estate planning consultant to explore for ideas and strategies to do so.
