Estate Planning Issues, Process, Personalities and Instruments · 12-2 Malaysian Financial Planning Council (MFPC) RFP Programme - Module 1 Chapter 12: Estate Planning Issues, Process,

Malaysian Financial Planning Council (MFPC) 12-1

RFP Programme - Module 1 Chapter 12: Estate Planning Issues, Process, Personalities and Instruments

Chapter 12

Estate Planning Issues, Process, Personalities and Instruments

Chapter Objectives

Students must be able to:

Understand the Estate Planning Phases.

DefinewhatisanEstate.

Describe the Different Types of Property in an Estate .

DefineswhatisEstatePlanning.

Understand the Estate Planning Process.

Describe the Types of Estate Planning Instruments

– Wills

– Trusts

– Powerofattorney

– Business buy-sell agreements

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12-2 Malaysian Financial Planning Council (MFPC)


Chapter 12

Estate Planning Issues, Process, Personalities and Instruments

Introduction

Weareinaworldwheredeathandtaxesisacertainty.Theneedforestateplanningispreciselybecauseoftheproblemscreatedbydeathandtoalesserextent–taxes.

An individual generally moves through life in phases. The moment he starts to earning an income, hehastheopportunitytokeepsomeofhisearningsandcommencetheaccumulationofwealthinthe form of savings and/or asset building. This phase may generally be termed the accumulation phaseofaperson’slife.Becauseoftheexistenceofcompetinginterests,thisisaverychallengingphase indeed,where the individualhas todecidewhere toplacehispriority–more for today’sspendingandimmediatesatisfaction,ortoaccumulatefortomorrow’ssecurityforthefamilyandself. At this phase, the role of estate planning is to set up the mechanism that encourages the attainment of the later.

Assuming,thatindividualhasgonethroughthefirstphasesuccessfully,newproblemswillemergeastheindividualmovesintothesecondphaseofhislife.Henowhastoconsiderhowtopreservehiswealthwhileheisgrowingitfurther.Standinginhiswayisahostofobstaclesthatthreatentodiminishhiswealth.Whilehelives,hehastoconsidertheerodingeffectofinflationandtaxes;andwhenhedies,hehastoconsiderissueslikeestatedutiesandfinalexpenses.Thewealthhastobeconservedandprotectedfromtheseperilsofliving.Hence,wemaytermthisphasegenerallyasthe conservation phase.Estateplanningplaystheroleherebysettingupfinancialarrangementsandlegalstructurestoensurethatthevalueoftheestatewillbepreserved,orevenenhanced.

Andfinally,whentheindividualhassettleddownwithsomewealthholdings,hewillhavetoconsiderhowhiswealthistobedistributedwhenhedies,towhom,andinwhatproportionandmanners.Andhewillhavetodecideandimplementtheplanbeforehedies.Thislastphaseisgenerallyknownasthe distribution phase.Estateplanninghelpstoputinplacethefinancialandlegalinstrumentstoensurethattheestateowner’swishesarehonouredinthemosteffectiveandefficientmanner.

It should be noted that estate planning considers the problems manifested in the three phases in a holisticmanner.Inthisway,theclientwillgethisproblemsolvedinanintegratedandnotapiecemeal fashion.

Malaysian Financial Planning Council (MFPC) 12-�


Definition of Estate

Intoday’scontext,themeaningofestateencompassesallthepropertyandpropertyrightsthatanindividualowns,netofhisdebts.

Itcoversthefollowing:

− Real(e.g.landandbuilding),personal(jewellery,etc.),

− Tangible (car, etc.), and

− Intangible assets (copyrights, life insurance, etc.).

− Theestatealsoincludesrights,whichthedecedentheldatthetimeofhisdeath.Thismayincludedebtsowedtohim,royalties,rightstodamagesclaimedinactionswhichsurvivedforthebenefitoftheestate,evenwheretheserightsandchose in action is not held by the decedent at the date of his demise.

Inshort,everythingthatadeceasedpersonleavesbehindthat isbeneficiallyhisbelongstohisestate.Inlaw,anestateiscreatedwhenthepersondiesandbecomesadistinctandseparatelegalentity that replaces the deceased.

Types of Property Ownership

Beforeanestateplancanbedeveloped,thefinancialpractitionermustbefamiliarwiththevarioustypesofpropertyownershipandthemannerpropertycanbetransferred.

Propertyownershipcanbegenerallyclassifiedonthefollowingbasis:

The owner’s rights exercised over the property, andThe duration of the owner’s interests.

Both can be in the form of individual or joint ownership:

“Individualownership”mayincludethefollowing:

a. FeeSimpleoroutrightOwnership

b. Life Interest

c. Term Interest

d. Future Interest

“Jointownership”mayincludethefollowing:

a. Tenancy in Common

b. Joint Tenancy

12-� Malaysian Financial Planning Council (MFPC)


Individual Ownership Property

− Fee Simple or Outright Ownership

This represents thebroadestownershipofapropertyby the individual.Heholdsunlimitedinterest in thepropertyandhenceall the rightsassociatedwith theproperty.This includespresent proprietary rights and the right-of-transfer to anyone at any time the property’s title –whilealiveoratdeath.

− Life Interest or Estate

Thisreferstoownershipofpropertywherethe individual’sright topossess,useandderiveincome from the property is absolute but limited to the mortality of the life tenant. When the life tenantdies,theownershiprightsend.

− Term Interest

Thistypeofpropertyownershipreferstoapropertywheretheprevailingtenanthastherightto possess, use and derive income form the property during a designated term. When the pre-scribed term ends, the rights of the tenant also end.

− Future Interest

This is a vested or contingent current right of the individual to the future right to enjoy a property. Iftherightiscontingent,itwillbecomevestedonthehappeningofacertainevent.

Joint Ownership Property

Morethanonepersonmayholdtherightstoaproperty,andthisisknownasjointownership.ThefollowingaretwotypesofjointownershipofpropertyfoundinMalaysia.

− Tenancy in Common

Tenancyincommoniswherepropertyareownedbymorethanoneindividuallackingsurvivorshipright,i.e.thesurvivorwillnotautomaticallybetransferredtheportionofthedeceasedownerinterest in thepropertywhen thedeathoccurs.Theownersofsuchpropertyareknownastenantincommon.Eachownerhastherighttotransferhisinterestinthepropertytoothersatdeathoratanyothertime.Theinterestsoftheestateownerinthepropertyareconsideredprobate assets.

− Joint Tenancy (with right of survivorship)

Wherepropertyisownedjointlybyoneormoreindividualswithrightofsurvivorship,itisknownas a joint tenancyandtheownersarecalledjointtenants.Therearenorestrictionstotherelationshipbetweentheowners.Becausethedeathofajointownerautomaticallytransfers



hisinterestinthepropertytothesurvivingjointtenants,suchpropertyareclassifiedasnon-probateassets.Ajointtenantmaytransferhisinterestinthepropertywithouttheconsentoftheotherjointtenantsandsuchact,iftaken,willeffectivelyobliteratethesurvivorshiprightstherein.

Estate Planning

Definition

From the introduction of this session, we have learned that an individual goes through threephasesoflifewhereestateplanningisapplicable.Wemaythusdefinetheterm‘estateplanning’asfollows:

“The process of managing and administrating the assets of an individual through the accumulation, conservation and distribution phase of his life in the most effective and efficient manner feasible.”

Byeffective,wemeanthedegreethewishesoftheestateownerareattainedthroughtheprocessof estate planning.And by efficient, itmeans thosewishes can be attained at the lowest costfeasible.

Purpose

Thepurposeofestateplanningistoensurethatwhenapersonfinallydies,

a. Assetsaresufficienttomeetobjectives,

b. Beneficiariesreceivesassetsintheproportionandmannerdesired,

c. Assetsdepletingexpensesliketaxesareminimised,and

d. Theestateissufficientlyliquidtopaycostoftransfer.

The Six-Step Estate Planning Process

1. Thefirststepistoestablishwhattheclientreallywantsforhisestate.Theobjectivesoftheclientsshouldbesetsothattheestateplanningprocessisalwaysdoneinviewofthedesiredoutcomes of the client.

2. Thesecondstepwouldbetogatherrelevantinformationontheclientinanorganisedmanner.Adetailedfact-findingsheetisusuallyusedandthisprocessisoftencitedasthefact-findingprocess.Theinformationgatheredincludeshardandsoftfactsontheclientsandwouldprovidethebasisforplanningoftheestate.Ifthereareanyexistingplans,theyshouldbeexaminedtodeterminewhetherthecontentsarestillcurrentinrespectoftheclient’spresentsituation.



3. The third step involves the analysis of the entire facts of the client’s situation. Estate planning hasnumerous toolsat itsdisposal.Decisionsas towhether toemploy testamentary trustsor living trusts andwhether to usewills or trusts have to be decided. The costs attachedtothedifferent instrumentsaresignificant. Inbusinesssuccessionplanningtherearemanyexploratoryissues.Whatwouldsuittheclientmustbeanalyzed.

4. The fourth step is the preparation and presentation of the plan. Once the relevant issues and dataareexamined,aplanisdesignedandpresentedtotheclientforhisinitialapproval.Aftertheclient’sreview,afinaldraftismadeaftermakingthenecessaryadjustmentsbasedonthefeedback.

5. Thefifthstepistheimplementationstage.Itisherethatallthelegaldocumentsandtransfersofpropertyareexecuted.Willsandtrustsinstrumentsareoftenusedtomeettheobjectivesset.

6. Thefinalsixthstepislettingtheclientknowthataperiodicreviewisneededtokeeptheestateplancurrent.Often,thelifeofclientchangesovertimeandnewobjectivesmustbeestablishedinviewofthis.Furthermore,taxlawsandnewregulationsmaybeintroducedbyparliamentthat may affect the viability of the estate plan.

Workings of the Six-Step Estate Planning Process

Understandingtheworkingsofthesixbroadstepsintheestateplanningprocessiscrucialtothesuccess of creating the estate plan. Each of these steps is discussed in detail here.

Step 1 – Establishing Objectives

The goals of the individual must be established and prioritised. The estate plan is likened to a road mapwhichisusedtoguidetheprospecttoacertaindestination.Thedestinationistheoverallgoalcomprising several objectives of varying priority.

Keyobjectiveswillcirculatearound thedesiresof theestateownerwith regard toproviding forlovedonesandotherheirs;theliquidationorpreservationofbusinessinterests,andthemakingofcharitablebequests.

Step 2 – Information Gathering

The foundation of a good estate plan must be based on correct and complete information on the clientorasnearaspossible.Thelivingconcernoftheestateowneraside,theordinateconsid-erations of estate planning involve the passing of property to the heirs.

Hence,theplanningwouldrevolvearoundthesefourkeyquestionsof:



a. What kindofpropertydoestheestateownerhave?Thishelpstoidentifytheestateowner’swealthholdingsandasset-mixed.

b. Whoshouldreceivetheassets?Thisdealswith identifyingthebeneficiaries that theestateownerwishestohavehisestatepass-onto.

c. Howshouldthetransferbedone?Thisdeterminesthemethodsandinstrumentstobeusedinthe process of planning for the estate.

d. Whenshouldthetransferbedone?Thisistosetatriggeringeventthatwillactivatethetransferor to set the timing for the transfer to take place.

Toeffectivelydealwiththesefourquestions,itiscrucialtohavealltherelevantfacts.Hence,itislogicalfortheplannertoperformathoroughfact-findinginterviewwiththeclientsupportedwithagoodfact-findersheetandasetofincisivequestions.Acompletelistingoftheclient’sassetsshouldbeoneofthethingsidentifiedinthefact-findingstep.

Itmustbenotedherethatthefact-findinginterviewdoesnotonlyconcernwithgettinghardfactsontheestateowner,butalsoinvolvesgetting“soft”factsinsubjectiveareaslikehisattitudeandfeelingstowardshisheirs,businessandhisotherassets–whicharerevealedbyaskingspecificquestions.Agoodfact-findinginterviewshouldcomprisethefollowingissues:

Hard facts on the client, such as personal particulars, property, business, etc.

Feelings and attitudes

His business goals and objectives in relation to family’s goals and objectives

Problems and obstacles that can prevent the achievement of these goals

Causes and sources of these problems and obstacles and steps he has taken to resolve them.

In summation, this second step involves assembling a complete list of all assets possessed by the estateowner;compilingadetailedrecordofhispersonalfamilydatasuchasage,relationship,healthconditions,etc.;hisdesiresandtheobstaclesinhisway,andthenatureoftheseobstacles.

Step 3 – Analysing the Data

Thedatagatheredalongwiththeestablishedobjectivesmustbeanalyzed.Aswasmentionedinthefactfindingsessioneachareaofconcernneedsanalysis.Thecostsofemployingthedifferentinstruments must also be taken into consideration. There are several alternatives to be considered. Theclientsprioritymustbeaccommodatedalongwiththeanalysisoflikelihoodofmeetingthesaidobjectives.Thisstepintertwineswiththeearlierstepsandthefourthstep.



Step 4 – Preparation and presentation of the plan.

Thenextstepiswhereanoverallplanisselectedbasedonanalysisanddraftedforpresentationto theestate owner for his approval.This stagenormally involvesa lot of groundwork and re-preparationonthepartoftheplannerashegetsreadythefinalplanforreviewandfine-tuningwiththeestateowner.

Themainthingatthislevelistocomeoutwithaplanthatwillmeetalltheobjectivesoftheestateowner.Theplanshouldbetestedviaaprocessofsimulatingtheprocedureofadministrationsothat any defects in the plan can be detected before it is implemented.

Strategicquestionsstructuredtocoverallbasesarerigorouslyaskedtotesttheplan.Theestateowner’sspecificneedsintheareaofestateaccumulation,conservationanddistributionidentifiedin the earlier steps are the guideposts in the testing process.

Oncetheestateownerissatisfiedwiththesimulatedoutcomeoftheplan,andtheplannerfeelshe has selected all the component methods of transfer and disposition, the plan is ready for implementation.

Step 5 – Plan Implementing

Thisisacrucialstepwheretheplanismeticulouslyexecuted.Thiswill involvetheexecutionofthenecessarylegaldocumentsandmakingarrangementsforanycurrenttransferofownershipaswellascateringforliquidityexigencies.Achecklistmaybenecessarytoensurethatalltheplannedactionsarecarriedout.Again,theobjectivesoftheestateownermustalwaysbeintheforefrontofthe planner as he puts the plan into action – selecting only those mechanisms that are congruent withtheaimsestablished.

Step 6 – Periodic Plan Review

Oncetheestateplanisfullyimplemented,theestateownershouldbemadeawarethataperiodicreviewisrequiredtokeeptheplancurrentinviewofchangingcircumstancesandlaws.

Areviewprocedureshouldbeadopted.Afterwhich,theestateownershouldbemadeawarethathehastakenanactivepartinmakingtheplan–andshouldhavenowgreaterpeaceofmindintheknowledgethathehasprovidedforthefinancialsecurityforhimselfandhislovedones.

Estate Personalities: Beneficiaries & Fiduciaries

Beneficiariesandpersonalrepresentativesarecentralfigurestotheestateplan.Theformerbeingtheobjectoftheplanwhilethelateristheofficialrepresentativesoftheestateownerwhosejobistoexecuteandimplementtheplanforthebenefitofthebeneficiaries.

Thepersonalrepresentativemayormaynotbeabeneficiaryoftheestateheorsheadministers.Inpractice,itiscommontofindthewifeorhusbandactingasthepersonalrepresentativeandalsoasabeneficiary.Frequently,thepersonalrepresentativealsoactsastrusteeifappointedinthewill.



Inthischapter,wewilldescribethevariousfacetsofthesepersonalities–therolestheyplayandtheir responsibilities.

Beneficiaries

Once a person dies, his estate goes through a legal process of administration or probate before it ispassedontotheheirs.Theheirstotheestateareknownasthedistributeesorbeneficiariesofthe deceased’s property.

Thefollowingfactmustalwaysbeborneinmindofthepractitionerwhenheplansanestate.Thebeneficiariesarethekeyobjectsoftheestateplan,meaning,theultimatepurposeofhavingtheplan is to facilitate transfer of property of the deceased in the best possible manner to them.

Thepeculiarmake-upofthevariousbeneficiariesintermsoftheircharacter,age,job,hobbiesandcircumstancesmustbetakenintoconsiderationandexaminedtoseeiftheplanwillbecompatible.Forinstance,itisoflittlepointforacoffeeshopbusinesstobepassedontoasonwhoisahighlysuccessful doctor. A better alternative may be to pre-arrange for a sale on the death of the estate owner.

Fiduciaries

This isapositionof trust.Afiduciary isaperson,personsor institutionappointedbytheestateownertoholdormanagespropertyforthebenefitofthebeneficiaries.Hecouldbeanexecutororatrusteeappointedbytheestateownerorthecourt.

Therelationshipbetweentheappointeeandthebeneficiariesisknownasafiduciaryrelationship.Becausethesearepositionsoftrust,thelawimposesstrictfiduciaryprinciplesandstandardsonallfiduciaries.

The types of fiduciaries discussed in this chapter are the trustees, guardians and personalrepresentatives(executorsandadministrators).

The Responsibilities of a Fiduciary

Themostbasicdutyofafiduciaryistoactinthebestinterestofthebeneficiariesoftheestate.Inexercisinghisduty,afiduciaryisexpectedtoexhibittotaldevotiontotheestateinrespectofthescopeofworktobedone.Ifhebreachesthisduty,hecanbeheldliablebythebeneficiariesforlosses incurred due to the breach.

Herearesomeofthegeneralprinciplesconcerningtheconductofafiduciary:

1. Heisnottodelegatehisdutyinareasthataretobeperformedbyhimasafiduciary.Thisisespeciallysoinmatterswhereheischosenbecauseheisthebestpersontodothejoblegallyand properly.



2. Heistoactimpartiallywiththebeneficiariesconcerningtheirinterestsintheestateinareaswhere there isaconflictof interest.For instance, inselectingan investment, the trustee isunderanobligationtoholdabalancebetweentheinterestsofthebeneficiaries.Hemustnotinordinately favour the tenant for life as against the remainder men or vice versa.

3. Heshouldnotdealwithmattersinthecourseofhisdutytoprofithimselfattheexpenseofthebeneficiaries.Forinstance,heshouldavoidconflict-of-interestsituations,wherehemayacttothedisadvantageofthebeneficiary.Wherethereisapossibleconflictofinterest,heshoulddeclarealltheimportantfactstoallthebeneficiariesandgettheirapproval(providedtheyarelegallycompetent) toconduct thebusiness.Otherwise, thepermissionof thecourtmaybeneededbeforethepersonactingasafiduciarycanactandstaywithintheboundaryofhislegalduties.

4. He should act to preserve the estate property under his charge, such as to get them properly insured.

5. Heshouldkeeppropertyinproductivestatessothatthebeneficiarymaygainfromtheincomeproducedbyinvestingtheproperty.Forinstance,asumofmoneymaybeinvestedinafixed-deposit account in a bank to earn interests.

Theothermorespecificdutiesofthevariousfiduciariesarediscussedbelow.

- Trustees

ThelegislationgoverningthepowersofthetrusteesarefoundintheTrusteeAct.Thejobofthetrusteeissimilartothepersonalrepresentative,whosometimesalsoactsasatrustee.Moreontheroleofthepersonalrepresentativeactingasatrusteewillbediscussedlater.

Dependingonthesizeandnatureofpropertyintheestate,theresponsibilitiesofthetrusteescanbe a heavy one. If the trustee(s) fails to perform his duty, as a last resort, the court may step in and decidehowthepropertyshallbedistributed,andthedesiresofthesettlorassetoutinthetrustdeedwillbeborneinmind.

Itmustbeappreciatedthatthepowersofappointmentexistwithintrustsanditmaybethatthetrustee(s)whois/aregiventheabilitytodecideonthedestinationofthepropertystatedinthedeed.Justbecauseapersonisatrusteedoesnotmeanthathisdutieswithregardtoaproperty isatrustandnotapower.Becauseofitsimportancetofinancialplanning,adetaileddiscussionontheconcept of a trustee is in order.

Appointment of Trustees

Anyindividualwhohasthecapacitytoholdpropertycanbeappointedastrustee.Inpractice,wecangenerallyassumethatthecreatorofthetrustappointsthefirsttrusteeortrusteestothetrust.



Forsettlementsanddispositionsontrustproperty,whethermovableorimmovable,theTrusteeActofMalaysialimitsthenumberoftrusteestobeappointedatmaximumfour.Thisrestrictionis removed in the case of property vested in the trustees for charitable, religious and public purposes.

Thefollowingaresomeoftheinstanceswheretheremaybeaneedfortheappointmentoftrustees:

a. Wherelandisvestedintrustsforcharitableorpublicpurposesorwherethenetproceedsofthesaleofsuchlandareheldforthosepurposes;

b. In caseswhereany trusts for saleandsettlementsof landare vested to the trusteesinvolving a term of years that is limited by settlements or trusts for raising money.

c. Statutory trusts for life insurance created by naming the spouse and/or children as provided for under Sec 166 life policy.

d. Non-statutorylifeinsurancetrustswherethefundsaremanagedtoproduceincome.

e. Forcaseswherethebeneficiaryofatestateorintestateestateisaminororsufferingfromdisability.

Implications of Various Appointments

Theselectionandfinallyappointmentoftrusteesarenoeasydecisionsforthegrantor.Asageneralrule,themannerofappointingtrusteesmustfittheobjectiveofthetrustsocreated.Thequestionof,“What is the purpose of the trust?”mustbeansweredandusedasaguide.

Forlargefundsintheestatewherespecialfundsmanagementskillsareneeded,theappointmentof corporate trustee takes precedence over individual trustees.

Responsibilities of Trustees

When a trustee is appointed to a trust fund, he assumes full responsibility for the property that isplacedunderhiscare.Wheretherearemorethanonetrustee,atrusteewillbeheldjointlyliableifhenegligentlyleftthemanagementofthetrustinthehandsofhisco-trustees,whichresulted in a loss to the trust.

It is also the responsibility of the trustee to ensure that there is proper recording of the asset inventoryofthetrust.Incaseswherethesurvivingspouseisbequeathedwiththerighttostayonthetrustproperty,whichholdassetsthatformpartofthetrust,itisthedutyofthetrusteetomakesurethat thebeneficialoccupantacknowledgesthoseassetsontheproperty.Thisistosafeguardtheassetsofthetrusts,whichmaybepassedontootherbeneficiariesinthefuture.



Scope of Powers of Trustees

While the statutory powers of a trustee are granted under theTrusteeAct, hemay obtainadditionalpowersfromthetrustdeedorthewillappointinghim.Forinstance,thegrantororthewill-makermayempowerthetrusteetocarryonhisbusinesswhenhediesortovarythedistribution period.

General Liabilities of Trustees

Sincebeneficiaries toa trust fundhavecertainenforceable rights, the trusteeappointed tomanagethetrustpropertymustexercisecare inhandlingthoseproperty.For instance, it isimperativethatthetrusteecarriesouthisdutiesinaccordancewiththeprovisionsstatedinthewillortrustinstrument.

Anyneglecttocarryouthisdutiesornotactinginaccordancewiththeprovisionsofthetrustinstrumentwouldconstituteabreachoftrust–whichislegallyactionablebythebeneficiaries.It should also be noted that the liability is for actual loss of each transaction and may not be compensatedbyprofitsinanother.

Legal Provisions affecting Trustees

Whereawillappointsatrustee,whocouldalsobetheexecutor,hisrolebeginsassoonasall administration formalities have been completed. In the case of intestacies, the personal representative, in the position of an administrator, automatically assumes the role of a trustee on his appointment by the court.

Legally,theprocessofadministrationisconsideredcompletewhenthepersonalrepresentativehascompiledtheestateandpaidormadeprovisionforthepaymentoftheexpenses,debts,liabilitiesofthedeceasedestateownerincludingwhateverinheritancetaxesistobepaid.

Personal Liabilities of Trustees in Contract

Once an individual has taken on the role of a trustee, it is one of his jobs to ensure that contractslegallyenteredintobythedeceasedestateownerishonouredbytheestate.Theexceptionwouldbethecontractsofapersonalnatureenteredintobythedeceased,whicharebroughttoanendonhisdeath.Ifthetrusteeisrequiredtoadvancemoneystotheestatefromhis personal funds to settle contractual damages or compensation, he is entitled to receive a refund.

Power to Request Discharge form DutiesOnce a trustee has completed his trusteeship in dealingwith thetrustpropertyhandledbyhim,hecanhavehisaccountsexamined,settledandbegivenaformaldischarge.Otherwise,ifexpresslyprovidedforinthewill,atrusteemayvoluntarily retire from the trust if he chooses to do so.

Withsomeexceptions,atrusteegenerallyhasnorighttodemandareleaseunderseal.Tofreehimselffromfurtherobligations,atrusteemustobtainaproperdischargefromthebeneficiariesand the creditors of the estate. He can get this done by getting the form of properly signed

Malaysian Financial Planning Council (MFPC) 12-1�


receiptsoracknowledgementsfromboththebeneficiariesandthecreditorsoftheestate.Thedocumentmuststatethatthebeneficiariesand/orcreditorshavefullyobtainedtheirdueshareordebtandthattheyhavenofurtherclaimswhatsoever,againsttheestate.

In the case, King v. Mullins, itwasheldthatareleasebydeedmaybedemandedifthereisnowritingtoshowthefollowing:

⇒ Whatthetrustfundswere,or

⇒ The actual amount of the trust fund, and

⇒ “Wherethetrusteehasbeenaskedtodothatwhichisnotinaccordancewiththetenorofthetrust.”

A trusteemustadministerseparateanddistinct trust funds independentofeachotherwithregard to thebeneficiaries.Hemaynotmix the twoand refuse topayoverone funduntilquestionsrelatingtotheotherhavebeensettled.

Where the trust funds have been resettled, the trustees of the original settlement are entitled toreleaseundersealfromthebeneficiaries.

The trustees have a right to a receipt for any funds paid over.

– Guardians

Aguardianissimplysomeoneappointedbythecourttotakecareofsomeonewhoiseitheraminoror incapable of looking after oneself.

Thedurationofguardianshipwillonly last for theperiodofminorityor incompetency.Once theperson under the care of the guardian reached 21 or had recovered from his or her incapability, the guardianship ends.

Inthecaseofcaringforindividualswhoareincompetentduetosomeformofdisability,thetermofguardianship could last a lifetime.

– Legal Personal Representatives

While the due process is in progress, the legal title of the estate is in the hands of the personal representatives or trustees of the deceased individual. These are the legal guardians of the estate ofthedeceasedestateowner.

Thewordpersonalrepresentativeisagenerictermthatcoverstheexecutororadministratorofanestate.Heistherightfullegalrepresentativeoftheestatewithcertainpowersconferredbylaworthelegaldocumentssuchasawilloratrustdeed.

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Persons applying to be legal representatives of the estate are usually close relatives and commonly, thepersonisthespouseofthedeceased.Whenthepersonalrepresentativeisnamedinthewill,heisknownasanexecutor,orexecutrix,ifsheisafemale.Otherwise,inthecaseofintestacyorwheretheexecutorisnotnamedinthewill,theappointeeofthecourtisknownasanadministrator.

Boththeexecutorandtheadministratorhavesimilarresponsibilitieswhenadministeringtheestate.Theirgeneraldutieswouldbetoidentifyandgatheralltheassets,tosettlealldebtsandfinancialobligations,andfinally,todistributetheresidualestatetothebeneficiaries.

Powers of Personal Representatives

Itispossiblethatanappointeeofawillorthecourtisbothatrusteeandapersonalrepresentative.Insuchcases,thequestionmayariseastowhenoneroleendsandtheotheremerges.Accordingto legal principles established in various court cases, the role of the personal representative ends whenhehascompletedadministration,settledalltheestate’sliabilitiesandascertainedtheresidueestate for distribution. Thereafter, the trustee role begins.

Inbothcases,whethertestacyorintestacy–beforetheestateisfullyadministered–thepersonalrepresentative holds the estate vested in him for the purpose of carrying out the functions and dutiesasanadministrator.Inotherwords,heholdsthelegaltitletotheproperty.Duringthisperiodofadministration,theestatebeneficiariesandcreditorsmayexertonthepersonalrepresentative’sfunction and responsibility on their rights.

Thisputsthepersonalrepresentativeinafiduciarypositionconcerningassetsplacedinhishandsduring thisperiod. Insomerespects,where thecasedemands, thecourtmay functionally treatthepersonalrepresentativeasatrusteeinsteadofanexecutororanadministratorintheordinarysense.

Hence,inadditiontothepowersconferredbyawill,apersonalrepresentativemayderivepowersfrom the Malaysian Trustee Act. The trustee’s responsibility is to organise the assets, convert them intocashanddistributethemtothebeneficiaries.Ifthetrusteecarriesonthebusinessleftbythedeceasedestateowner,hedoesitathisownrisk–evenwhenthereareinstructionsallowinghimto do so.

Therankingofpaymentsasprovidedbythelawconcerninganinsolventandsolventestateshouldbenoted.The rules imposeapersonal accountability on the trusteewhodisburses theassetsrecklessly.Forinstance,wherehepaidthebeneficiariesaheadoftheestatecreditors,hemaybeheldpersonallyliablefortheamountinquestion.

Asaguardagainstpersonalliability,apersonalrepresentativewhoactsasatrusteemustmanagetheaffairsoftheestatebytakingprecautionsasanordinaryprudentmanofbusinesswouldhavetakeninmanaginghisownaffairs.Ifhehasdonesoaccordinglytosatisfythisruleintheeyesofthelaw,hewouldhavebeenconsideredhavingdischargedhisdutysufficiently.

Inthecaseofahiredtrusteewhereremunerationismetedouttohimtoadministertheestate,ahigherlevelofdiligenceandknowledgeisimposedonsuchatrusteeascomparedtosomeone



actingtherolewhoisnotpaid.AgoodexampleiswhereaprivateTrustCorporationisappointedto administer an estate.

Estate Planning Instruments

Wills

Basicallyawill isawritten instrumentbywhichan individualsignifieshiswishesas to thedistributionofhisestateafterhisdemise.Sinceittakeseffectonlyafterdeath,awill,byitsverynature,isrevocableandcanbemodifiedatanytimebeforethewill-makerdies.

TheMalaysianWillsAct,1959definesa“will”asa“declarationintendedtohavelegaleffectoftheintentionsofatestatorwithrespecttothepropertyorothermatterswhichhedesirestobe carried into effect after his death and includes a testament, a codicil and an appointment by willorbywritinginthenatureofawillinexerciseofapowerandalsoadispositionbywillortestamentoftheguardianship,custodyandtuitionofanychild.”

So,fromtheabovedefinition,awillisinessence:

a. awrittendeclarationofthewill-maker’sintentiononthedispositionofhispropertyoranymattersthatbecomeslegallyeffectiveafterhisdeath;

b. adocumentorsetofdocumentsthatincludesanyofhiswrittentestaments,codicilsandappointmentoranywritinginthenatureofawillinexerciseofapower;and

c. adocumentthateffectadispositionbywillortestamentoftheguardianship,custodyandtuition of any child

Trust Essentially,atrustisalegalarrangementorrelationshipwherebyanindividualtransfersassetstoathirdpartycalledatrusteewhoareboundtofollowasetofdirectives,rulesandregulationsforthebenefitofothersknownasthebeneficiaryordistributee.

In estate planning, the trust instrument is a very important and useful instrument. The trustee may be an individual, a professional advisor or a corporation.

A trust creates an equitable obligation, either expressly undertaken or strictly imposed bythecourtoflaw.Thetrusteeisdutyboundtohandlethetrustpropertyforthebenefitofthebeneficiaries.

Trust Property

Trust properties are those properties that have been transferred to the trustee to be held for the benefitofotherpersons.Aslongasthetrustpersists,thetrusteesarelookeduponasasingleand



continuing body that administers the trust. As for the trust property, the trustee holds the legal title, whichallowshimtomanagethepropertyofthesettlor,whilethedistributeeholdsthebeneficialinteresttotheproperty,whichentitlesthemtoreceivebenefitsfromthetrusts.

Theword trustwould have conveyed implicitly that the trustee is a persononwhom faith andconfidencehavebeenplaced, and that he has to act out his duties for the sole benefit of thebeneficiary.Legally,theappointedtrusteehasafiduciaryobligationtoactinconformitywiththelawandtheprovisionsassetoutinthetrustdeed.Intheabsenceofatrustdeedorwherethedutiesarenotdefinedinthedeed,thepowersanddutiesofthetrusteesshallbeinaccordancetotheTrusteeAc.Thebeneficiariesofatrustsholdtherighttoenforcethatthetrusteesperformtheirdutyinaccordancewithwhatissetoutinthetrustdeed.

Components of Trusts

Theremaybemanytypesoftrust,butallofthemsharesomecommoncomponents.Thefollowingarefivecomponentsthatarecommontoalltrusts;

1. The Grantor or Settlor

2. The Property or Trust Corpus

3. The Trustee

4. TheBeneficiary

5. The Trust Deed

The Grantor or Settlor

Thegrantororsettlorisbasicallythecreatorofthetrustproperty.Thetrustiscreatedwhenthegrantortransfersthetitleofhispersonalpropertytothetrust.Afterwhichheappointsthetrustee(s) tohandle thepropertyandname thebeneficiaryorbeneficiarieswhowillbenefitfrom the trust.

The Property or Trust Corpus

Thisisanythingofvaluethatcanbeownedandthetitletransferredtoatrust.Itmaybeanyreal or personal property, or rights.An example of trust property is a life insurance policyassignedtoatrusteeforthebenefitofaclassofperson.

The Trustee

The character of a trustee has already been thoroughly discussed in an earlier chapter.

Torecap,atrusteeiseitherapersonoratrustcorporationwhoactsinafiduciarycapacitytolookafterthetrustpropertyforthebenefitofthebeneficiary.Itshouldbenotedthatthefiduciary



relationshipexistsbetweenthetrusteeandthebeneficiaryandnotbetweenthegrantorandthetrustee–eventhoughitisthegrantorwhocreatesthetrust.

The Trustees Act governs the appointment, roles and responsibilities of trustees. In Malaysia, it is the Trustees Act that governs the activities of trustees.

The Beneficiary

Astheword“beneficiary”wouldhavesuggestedtheseindividualsownthebeneficialinterestof the property and are the object of the trust. They have legally enforceable rights that enable them to defend and protect their interest in the trust.

The Trust Deed

Thisisthedocumentthatsetsoutthetermsofthetrustthatthetrusteesmustfollowincarryingout their duties. For life insurance created through statutory or non-statutory means, the trust deed can provide instructions to the trustees to manage and distribute the property in accordancewiththewishesofthegrantor.

Power of Attorney

Awillonlytakeseffect,afterthedeathofthewill-makerandwhenithasbeensuccessfullyprobatedinthecourtoflaws.Hence,forinstance,whereillnessoraccidentincapacitatesaperson,thewillisofnousewhilehestill liveson.Under thesecircumstances, the “durable”power of attorney whichauthorisesatrustedpersontohandlethefinancialaffairsofapersonisausefultoolthatcanbeinvokedtomeettheneed.Itisasimpleandinexpensivewaytoarrangeforsomeonetomakefinancialdecisionsforanindividualshouldthepersonbecomeunabletodosohimself.

Thepersonappointed in thepowerofattorney iscalledanattorney-in-fact,who isbasicallyanagentofthedonorofthepower.Theappointeeorattorney-in-fact neednotbealawyerorbelegallytrained.Theword“attorney”heremeansanyoneauthorisedtoactonanother’sbehalf.Toauthen-ticatethedocument,itmustbearthewords“truecopy”markedbytherelevantauthority.

Generally, a simplepowerofattorneycanberevokedunderthefollowingcircumstancesasprovidedin the Act:

i. Writtenrevocationbythedonorofthepower;

ii. Renunciationbythedonee(attorney-in-fact);

iii. Deathorlegalincapacity(e.g.ofunsoundmind)ofthedonor;or

iv. Death or legal incapacity (e.g. of unsound mind and bankruptcy) of the donee.

Foritems(i)and(ii),therelevantdocumentsmustbelodgedwitheveryofficeinwhichanofficeortrue copy has been previously deposited.



Therearetwowaysinwhichapowerofattorneycanbemadeirrevocableordurable:

i. Wherethereisvaluableconsiderationgivenandisexpressedtobeirrevocable;and

ii. Wherethepowerofattorneyisexpressedtobeirrevocableforafixedtime.

Theattorney-in-factmaybeconferredsomeorallofthefollowingduties:

− Applyassetstopaytheeverydayexpensesofthedonorandhisfamily;

− Buy,sell,maintain,settletaxesonandmortgagerealestateandotherproperty;

− Makeinvestmentdecisionsonshares,bonds,commoditiesandmutualfunds;

− Handleallthedonor’sinsuranceneedsandclaims;

− Filetaxreturnsandmakepayments;

− Managethebusiness;

− Representthedonorincourtortomakearrangementswithathirdpartytoperformtherole;and

− Handle the retirement accounts.

Forestateplanningpurposes,thedurablepowerofattorneyshouldbedraftedtoterminateatthedonor’sdeath.Ifthedonorwishespersontocarryondealingwithhisdutiesconferredbythepowerofattorneyoriginally,heshouldnamethatpersoninthewillasanexecutorortrusteeorboth.

Business Buy-Sell Contracts

Estateownerswithbusinessset-upsmayrequireadditionalplanningandtheinclusionofinstrumentslike contractual buy-sell agreements. The basic purposes of these contracts are to ensure that the heirscansellthebusinesstoareadybuyer(s)ataprefixedprice.

Theagreementisusuallybetweentheestateownerandhisbusinesspartnersorfellowshareholders,but for the sole proprietorship, a third party such as an employee may be the other contracting party.

Selecting the right funding mechanism is also important. The absence of effective funding arrangementsoftenforcesthebuyerintofinancialdisarrayatthetimeoffulfillingthecontractualobligationtobuy.Thesellertoomaybeforcedintoadifficultpositionasthebuyerisinnofinancialposition to take up the offer as promised.

There are various funding mechanisms, but the most effective one preferred by the majority of the planning professionals is life insurance. The reason is mainly it cheapness and speed in creating therequiredfundstosupportthepurchaseasrequiredinthebuy-sellcontract.



Self-Assessment

1. Estate Planning is the process of

a. makingproperinvestmentsinrealestateswithplanningtomaximisereturnofcapital

b. makingproperpreservationofallestateslikelytobeliquidatedbycreditors

c. making proper arrangements for the protection, preservation and provision of a person’s totalassetsforthebenefitofhis/herfamilyandlovedones

d. draftingafull-proofwillwhichminimisesthedissatisfactionoffamilymembersatthepointof receiving the assets

2. WhichoneofthefollowingisNOTabasicstepintheestateplanningprocess?

a. Establish the client’s objectives/goals

b. Analyseandevaluatetheclient’scurrentfinancialsituationandreality

c. Formulate practical strategies by selecting proper estate planning tools

d. Source out best investment advisers

3. Choosethebestanswerforcommonestateplanningobjectives:

i. Provideadequateincometodependantstomaintaintheirstandardofliving

ii. Preserve sentimental assets for future generations

iii. Makeprovisionforadequateretirementfunds

iv. Make special provision for less fortunate heirs

a. i and ii only

b. iii only

c. i, ii and iii only

d. i, ii and iv only



4. The main advantage in holding properties in trust is to

a. avoidallformsoftax

b. keeptheminsecret,nottobeknownbythegovernment

c. avoid long delays in settlement, legal hassles or creditors’ claims

d. prevent untrusteed parties to lay claims on the properties

5. Whenimmovableassetsaregiventoabeneficiaryforabsoluterightstopossess,toenjoyandtoreceivethecurrentincomefromthepropertyuntilthedemiseofthebeneficiary,thisformofownershiprightistermedas

a. Outrightownership

b. Lifeinterestownership

c. Terminterestownership

d. Futureinterestownership

6. Twoormore individualsmayholdanundividedordividedshare in theproperty.Upon thedemiseofanyoneindividual,his/hersharewillbetransferredaccordingtohis/herwill.Thisformofownershiprightistermedas

a. Joint Tenancy

b. Tenancy in Common

c. TermInterestOwnership

d. OutrightOwnership

7. Thefollowingaresomestatementsaboutwills:

i. Thetestatormustsignthewillattheendofthedocumentii. Thetestatorneednotsignthewillifthereareatleasttwowitnessesattestingtohis/her

williii. Thewitnessestothewillmustnotbebeneficiariesofthewilliv. The testator can be a minor

a. i and ii only

b. i and iii only

c. ii and iv only

d. i only



8. Therearemanyadvantagesincreatingalivingtrust.WhichoneofthefollowingisNOTanadvantage?

a. There are no legal hassles or long delays in settlement

b. Beneficiariesmustbeactiveinthesettlementoftheestates

c. Itisoneofthebestwaysofprotectingminors’interests.

d. It can be used to preserve special family property for future generations.

9. A competent financial planner must be conversant with the tax regimes pertaining to thevariousestateplanningtools.Ofthefollowing,whichoneisNOlongerconsideredimportantinMalaysia?

a. ServiceTax

b. IncomeTax

c. RealPropertyGainsTax

d. Stamp Duty

e. Estate Duty

10. Thefollowingarefactorsaffectingthechoiceofdifferentestateplanningtools:

i. Cost of setting up

ii. Cost of transferring the assets

iii. Yearly administration charges

iv. Taximplications

v. Ease of management

a. iv is the most important

b. v is the least important

c. All are important

d. None is important

Answers:1-C,2-D,3-D,4-C,5-B,6-B,7-B,8-B,9-C,10-C.

Documents

Estate Planning Issues, Process, Personalities and Instruments · 12-2 Malaysian Financial Planning Council (MFPC) RFP Programme - Module 1 Chapter 12: Estate Planning Issues, Process,