Picture this.
The Investor:
Meet Mike, a 60-year old real estate investor. He started his investment journey 30 years ago by purchasing an apartment in Subang Jaya. Since then, he bought a few more apartments and soon expanded into other kinds of real estate, such as condominiums, terrace houses and retail lots. In that 30-year period, most of his properties have appreciated in prices and hence, contributed significantly to the growth of his net worth. Today, he has 10 properties worth RM 7 million. As of now, Mike is collecting RM 35,000 in rental income per month.
Family Background:
Mike has 3 children namely Carl, Coby, and Cindy. Carl, his eldest, is 30 this year and he works as an architect. Coby is 25 years old and he is studying business in Australia. Meanwhile, Cindy, his daughter, is a 18-year old college student doing her foundation studies.
The Asset:
Recently, Mike acquired a RM 2 million shop lot in a new township. Mike rented out his shop lot for RM 7,000 a month to two tenants. He believes that his shop lot could appreciate in value over time as the township continues to develop. In his opinion, this shop lot is one of Mike’s trophy assets in his property portfolio.
The Objective:
Mike intends to keep his RM 2 million shop lot for at least 10 years. In the event of his passing, Mike prefers that his property be retained among his children for its appreciation for the next 10 years. He does not want this property to be sold off prematurely by his children.
Common Mistake 1:
Surprisingly, there are people like Mike who did not write a will, despite owning such a large estate. So, in the event of his passing, there will be ambiguity when it comes to who gets what and how much and more importantly, which of the 3 children shall be managing his estates and how would they do so? Therefore, as a means to add financial certainty, it is ideal for Mike to write himself a will.
Common Mistake 2:
Indeed, there are investors like Mike who are aware of the importance of a will. But, what most of them did was to write a clause such as ‘I wish to distribute all of my properties equally to all of my children.’ in their will documents. Sure, the clause is just a simple one-liner. But it still poses a great uncertainty on the how when it comes to managing this property by Mike’s children. For instance, upon receiving their property ownership, the 3 children can choose to dispose of this property prematurely and thus, causing Mike to not fulfill his intention.
How Should Mike Write His Will?
The answer is to have a testamentary trust in his will document, which is a trust established inside a will document and is effective upon Mike’s passing. For him specifically, Mike could set up a testamentary trust with steps as follows:
1. List out all properties that he wishes to retain in the future. Here, let’s say for Mike, one of these properties is his RM 2 million shop lot.
2. Instruct his preferred trustee to hold onto these properties, including the RM 2 million shop lot, throughout the trust period, let’s say for 10 years.
3. Name his children to be beneficiaries to collect rental income earned from all his properties, inclusive of his RM 2 million shop lot.
4. Instruct his trustee to distribute these properties to all his beneficiaries, after the trust period of 10 years.
Why Testamentary Trust in the Will?
As you can see, Mike could state his wishes in his Will on how his properties are to be managed upon his passing. This shall eliminate ambiguity because his Will would specify Mike’s instructions and his trustee appointed can refer to his Will to manage his shop lot accordingly. Hence, establishing a Testamentary Trust in a Will is a cost efficient method for property owners to do estate planning.
But Who Can Be Mike’s Trustee?
Could it be an individual person or a trust company?
The answer is any of the two above.
For instance, Mike could appoint Carl, his eldest, to be his trustee. As such, if he passes on, Carl shall collect the title of the shop lot as a trustee. He is entrusted to manage the property, collect its rent and distribute them to the beneficiaries of the trust as stipulated in the Will over the next 10 years. Then after 10 years, Carl will distribute the shop lot’s ownership to the beneficiaries and thus, end his duties as the trustee.
Alternatively, Mike could appoint a trust company to be his trustee. In this case, the trust company shall carry out the duties (as stated above) for annual fees. It ranges between 0.5%-1.0% per annum of the value of the property. So if Mike’s shop lot is valued at RM 2 million, the annual fee ranges RM 10,000-RM 20,000. The annual fee will be higher if the property appreciates in value over time.
So, if Mike wishes to save on annual fees, he can appoint an individual person as his trustee. However if Mike has more faith in a trust company and prefers to relieve all his children from the responsibilities of managing this property, then, Mike should be appointing a trust company to be his trustee.
Question 1:
Can the trustee sell off the shop lot and pocket the proceeds quietly?
Be it an individual person or a trust company, the answer is no. Why? First, if he passes on, Mike’s shop lot will be transferred to his trustee. The transaction will be recorded in the land office. So, if the trustee decides to sell the property and quietly pocket the proceeds, the trust’s beneficiaries could sue the trustee for a breach of duty. All proof of transactions relating to the property could be easily retrieved as there are proper documentations in the land office.
Question 2:
Can the trustee choose not to transfer the property’s ownership after 10 years?
Once again, the answer is nope. If the trustee does so, all rental income derived after the 10-year period should first be distributed to the trust’s beneficiaries. If the trust’s beneficiaries found evidence that the trustee chooses not to transfer the property ownership to them, they can choose to sue the trustee.
How Much to Write a Testamentary Trust structure in the Will?
Basically, the writing fees for a Testamentary Trust embedded in the Will would be over RM 1,000 as compared to basic Will is only RM 450.
An estate planner is one who walks hand-in-hand with you to craft out a simple and cost-efficient, but yet highly customized solution to address most, if not all, of your concerns and needs when it comes to estate planning matters.
Announcement:
Presently, we have a promotion, where the fees to write or update a will and its lifetime custody worth RM 1,550, would be waived in full upon successful setup of a living trust with WG Legacy.
This promotion would end by 31 August 2022 and you may subscribe to this by first booking yourself a 30-minute consultation session below:
