The following are common questions that I received on estate planning:
1. I am servicing a few life insurance policies. Do I need to write a will?
2. I have already written a will. Do I need to set up a trust?
3. If I set up a trust, does it mean that I do not need to write a will?
Here is a misconception.
It is to believe that one can offer true financial peace to his loved ones with one single product, be it a life insurance policy, a will document or a trust.
In reality, it takes a combination of life insurance policies, will, and trust to offer a more comprehensive financial safety net to your loved ones, for each of them has their unique attributes and would fulfill certain functions towards achieving your intended objectives.
To illustrate, let’s use a case study below:
Meet Nelson
Nelson is a 40-year old Sales Manager based in Penang. He is married to Pay Lin and together, they are blessed with two daughters aged 2 and 5 respectively. As of now, they reside in a terrace house which Nelson bought six years ago. Apart from his property, Nelson has about RM 100,000 in his bank accounts. Upon his passing, Nelson intends to:
a. Contribute RM 4,000 a month to Pay Lin for household expenses.
b. Bequeath his terrace house to Pay Lin.
c. Contribute RM 1,000 a month to Nelson’s mother for her retirement.
d. Offer RM 100,000 in tertiary education fees each for his two daughters.
Tool #1: Life Insurance
A life insurance policy is a source of funds.
It replaces Nelson as the financial contributor to his loved ones, if he passes on. This explains why life insurance is used as an income replacement tool for it can take the place of a breadwinner upon the passing of its life insured. As such, for Nelson, if he wants to contribute to his wife and mother over the next 10 years, subsequent to his passing, and provide tertiary education fees for his daughters in the future, the amount of sum assured he should obtain would be:
But, there are limitations for Nelson to use life insurance as the only tool for his purpose of offering financial stability to his family members. This is because:
a. There is no control on how Pay Lin should use the money after collecting it.
b. It is likely that Nelson’s mother will not inherit her sum in full.
Why?
This is because of the inherent limitations of insurance nomination in Malaysia.
We will touch on how we can solve the above issues. But first, let’s move onto:
Tool #2: Will Document
A will is a legal document to administer all estates (except life insurance policies and EPF) under your name upon your passing.
They include immovable assets such as real estate and movable assets like bank balances, stocks, unit trust funds, and so on and so forth.
Take Nelson as an example.
It will be a grave mistake for Nelson to assume that Pay Lin shall indisputably be inheriting his terrace house automatically, upon his passing without a valid will. According to the Distribution Act 1958, if Nelson passed on intestate, the house ownership shall be distributed:
There are many issues that could potentially arise from the above.
First, this property could not be transacted if Nelson’s daughters are still minors as they do not have the capacity to make buy or sell decisions on the property.
Second, what if Nelson’s mother passes on after inheriting 1/4 of the property?
Also, what if Nelson’s mother passes on without writing a will?
How will her share in the property be distributed?
As you can see, things could get so much more complicated.
So, to avoid such complications, it is best for Nelson to write a will to specify his beneficiaries to all of his estates, upon consultation of an estate planner.
#3: Trust
And finally, we have trust.
A trust is helpful if one wishes to offer delayed gifts to his beneficiaries.
In Nelson’s case, his delayed gifts shall include his contribution of:
a. RM 4,000 a month to Pay Lin.
b. RM 1,000 a month to his mother.
c. RM 100,000 in tertiary education fees to Daughter 1.
d. RM 100,000 in tertiary education fees to Daughter 2.
Let’s say, Nelson intends to fulfill all his objectives with a RM 800,000 insurance policy. So, here is what Nelson could do.
He could set up a trust and assign his RM 800,000 policy to his trust. In his trust deed, he could state his instructions on how the sum assured is to be managed, administered, and distributed if he passes on prematurely in the future.
As such, if Nelson passes on, the trustee shall collect RM 800,000 from Nelson’s life insurer. Then, the trustee shall follow the instructions given in his trust deed and distribute the insurance proceeds accordingly. This would prevent:
a. Financial losses arising from mismanagement of funds by beneficiaries.
b. Disputes and conflicts over the distribution and management of funds.
Hence, Nelson could be assured that the RM 800,000 shall be used efficiently in accordance with his intentions.
Conclusion:
In short, it takes a combination of the three estate planning tools above to offer a more comprehensive financial safety net to your loved ones.
The above offers a brief discussion as to their unique attributes. In practise, the tools to be employed will have to be tailor-made in accordance to the wishes of each individual for each differs in his circumstances. So, if you are Nelson today, you can begin by filling up the form below to book yourself a 30-minute session with a professional estate planner where you can brainstorm for ideas, insights, and strategies to offer an ironclad financial security to your loved ones today:
