Estate Planning PDF

ESTATE PLANNING  Estate Planning Learning Objective  Overview of Estate Planning  Define Estate and Estate Planning  Elaborate the 6 stages of Estate Planning  Illustrate Estate Planning via a Will  Illustrate Estate Planning via a Trust  Power of Attorney  Glimpse of Islamic Est...

ESTATE PLANNING  Estate Planning Learning Objective  Overview of Estate Planning  Define Estate and Estate Planning  Elaborate the 6 stages of Estate Planning  Illustrate Estate Planning via a Will  Illustrate Estate Planning via a Trust  Power of Attorney  Glimpse of Islamic Estate Planning  Business succession planning  What is Estate? Real Property (Immovable) Personal Property ESTATE Tangible Personal Property (collectibles) Intangible Personal Property (cash, shares, bonds, intellectual rights)  When there is NO WILL Distribution Act 1958 (amended 1997) Issues Spouse Parents  Estate duty ONE-time payment at death for the transfer of assets from the deceased to the beneficiaries Estate duty = inheritance tax - In Malaysia - The Finance Act 1992 - has abolished the estate duty liability of all persons dying on or after 1 November 1991. Previously below RM 2mil is 0% … above RM4mil is 10% being the highest  Japan 55%, UK & US 40% (amongst the highest in the world)  What is Estate Planning? ESTATE PLANNING A PROCESS of having a structured arrangement for protection, preservation and efficient transfer of one’s wealth to the desired & RIGHTFUL parties.  Importance of Estate Planning Determine current ownership of assets Establish family dynamics Preservation and distribution of assets (both current and future) Transfer of wealth or legacy to the rightful parties Appointment of suitable guardian for minors Minimize estate duties, taxes and other relevant costs  6 Steps for Estate Planning Step 1: Step 2: Established Objectives Data Collection Step 6 : Step 3: Monitor & Review Data Analysis & Evaluation Step 5: Step 4 : Implement Plan Develop Strategies  Tools of estate planning Trust Life insurance / takaful Wills / Wasiat Private Investment Corporations Hibah for Muslims Harta Sepencarian  Stage 1: Establishing Objectives Who will be the intended recipients ? WHO ? Family members, friends, charitable organizations, etc HOW ? How do you want to distribute the estate? WHEN ? When do you want to distribute the estate ?  While alive VS upon death  Upon occurrence of certain events  Stage 1 : Establishing Objectives CONSIDERATIONS 1. Cost 2. Speed of distribution of estate 3. Liquidity at death to meet expenses 4. Providing liquidity at Death 5. Providing for dependents /children  Stage 1 : Establishing Objectives CONSIDERATIONS 1. Cost Minimum costs Maximize exemptions Residential property as inheritance EPF Irrevocable trusts  Stage 1 : Establishing Objectives CONSIDERATIONS 2. Speed of Distribution of Estate Facilitate speedy distribution of estate through valid WILL  Avoid time loss & legal challenges  Appointment of choice Executor  Provide liquidity to pay estate taxes  Stage 1 : Establishing Objectives CONSIDERATIONS 3. Liquidity at Death to Meet Expenses Medical bills Outstanding debts including income tax Funeral expenses To settle estate duties, if any Living expenses for survivors  Stage 1 : Establishing Objectives CONSIDERATIONS 4. Providing Liquidity at Death  Bank accounts  Term policy on the life of the deceased with assignment to the beneficiary  Stage 1 : Establishing Objectives CONSIDERATIONS 5. Providing for Dependents / Children Appointment of guardians  Appointment of trustee to manage inheritance  Stage 2 : Data Collection  Residency or Tax Status  Assets and Liabilities  Location of Assets (Local or overseas)  Ownership Arrangement (Joint ownership vs. Sole Proprietor; joint tenancy vs. tenancy–in– common)  Dependents:-  Age? Where?  Stage 3: Data Analysis & Situation Evaluation  Types of ownership will have implications on costs, duties, taxes  2 types of ownership:-  Trust properties -  Pass directly to beneficiaries  Protection from creditors, bankruptcy  Non trust properties –  Needs letter of probate or administration Stage 4 : Develop Strategies  Who to provide for?  How much? When?  Factors to consider :  Set up costs  Cost of transfer – stamp duties, capital gains  Annual administration cost charged by trustees  Taxation implications – corporate tax must be settled before distribution of the estate to beneficiaries  Ease of management  Stage 5 : Implement Strategies Estate planning tools:-  Wills  Wills writing services by Rockwills / Integrated WS / HSBC Trustee / CIMB Trustee / OSK / lawyers, etc  Trusts  Outright transfer of ownership  Stage 6: Monitor and Review  Watch out for changes  In life circumstances  In net worth  In relationship with beneficiaries  In regulatory environment  In tax  In estate duties  Review and revise as and when necessary  ESTATE PLANNING WITH WILL  Ownership rights Outright ownership – own all rights Life interest ownership – rights cease upon the death of a beneficiary Term Interest ownership – a defined & limited period only Future Interest ownership – no immediate rights but with a predetermined effective date  Co - Ownership 3 types : Tenancy in Common Joint Tenancy Tenancy by the Entirety  Co -Ownership 1.Tenancy in common:- Joint ownership without rights of survivorship Each person owns a specified percentage. Upon the death of an owner, his owned percentage is transferred to the estate Distribution is as per the manner listed in the WILL or by the Distribution Act 1958 Commonly ownership in immovable assets  Co-Ownership 2. Joint tenancy:-  Ownership of the deceased will be immediately transferred to surviving owners.  Away from probate  Might be used in bank and investment account  Trust asset account – permit survivor of joint account to inherit any credit or debit balance in the account.  Co-Ownership 3. Tenancy by Entirety:- Joint ownership with rights of survivorship between a husband and a wife Upon the death of an owner, the remaining joint owner becomes the SOLE owner Away from probate Offers creditor proof in countries where it is recognized VALID WILLS  WILLS Wills Act 1959 (revised 1988) –  It is a declaration of intention of the person making it of the matters which he wishes to take effect on or after his death, until which time it is revocable  May contain non-financial related matters  Becomes a legal document only upon death  Disadvantage: must go through the probate process for the distribution to be affected  WILLS Advantages!  Estate of the Testator to be distributed according to his choice  Avoids imposition of Surety  Allows the choice of personal representatives to execute the will (min 1; max 4 executors; > age 21)  Reduces the likelihood of a prolonged estate settlement process  Assets will be distributed by the executor upon obtaining a Grant of Probate from the Courts  WILLS Main parties in a Valid WILL:  Testator and testatrix (if female)  Witness  Executor/s: executrix (if female)  Beneficiary (ies)  WILLS A Valid WILL shall : 1. be in writing 2. The testator must sign at the end of the document and at the foot of every page 3. The Testator must be of sound mind & NOT a minor  21 years old)  Witness & spouse lose all rights to become beneficiaries  WILLS (cont.) A Valid WILL shall: 5. Shall have 1 - 4 executors 6. Testator to keep the executor informed of where the WILL is kept 7. CODICIL is a simple amendment to the existing WILL 8. Codicil must be written in the same language, prepared, executed and signed in the same manner as the original sections of the WILL (though the witness may not be the same)  Role of Executor Act in the best interest of the beneficiaries Keep the beneficiaries informed throughout the estate administration process May face legal action as he owes a fiduciary duty to the beneficiaries. Section 43 of the Probate and Administration Act 1959 states that: The court allows the executors or administrators a commission not exceeding 5% on the value of the assets they collected.  Duties of Executors  Locate the WILL  Call in the Assets  Pay the Debts  Manage the testamentary trust  Distribute the Assets according to the WILL  Prepare a Statement of Account  Role of Witnesses  Must be present to witness the signature of the testator  Must sign the will immediately after that  May have to attend COURT during the probate process to ensure that the will is valid  Beneficiary Who is not eligible to be a beneficiary? Witness Witness’s spouse Testator’s killer  Revocation of a Will Will is Revoked by: A subsequent Will Marriage or remarriage Destruction to revoke Writing declaring the intention to revoke Conversion to Islam faith Divorce or separation will NOT revoke a will Amendment to the will is not Revocation What cannot be willed away Proceeds in insurance policies Funds with EPF Certain movables hold under joint ownership especially those with auto survivorship Foreign assets Movable = Law of testator’s domicile applies Immovable = Law of the country where the property is situated applies  Types of Estate Testate Intestate Partial Intestate  Importance of Having a WILL  Opportunity to create a testamentary Trust  Avoids family dispute over rights of ownership to the estate  Allows for the appointment of chosen guardians  Able to meet any special needs of non-members of the family  Legal cost of Probate is cheaper than LA  There is a shorter time frame to obtain GP than LA  No surety required  Choice of Guardian(s)  Guardian(s) must be > 21 years old  Duties of a guardian (until children turn 21 years old) Custody, Support / Education, Health  Who can be a Guardian (Section 5-8 Guardianship of Infants Act 1961)? Surviving Parent (father/mother) Testamentary guardian Guardian appointed by Court  Probate  It is a legal process authorizing the executor to administer the testator’s estate. The executor goes to Court to:-  Prove that the WILL is valid  Identify the listed property,  Agree on asset valuations,  Settle govt taxes, creditors’ claims and LASTLY to effect distribution  No confidentiality – the WILL becomes a public doc.  Probate Unfavourable  Asset is frozen during the process  WILL can be contested  Complex matter if assets are located in different countries  Expenses & legal costs  Taxation implication  Intestacy  “Intestate” – a person dies without a WILL  Process is termed “intestate succession”  Beneficiaries & portions are as per the Law of Intestacy – Distribution Act 1958 (amended 1997)  Distribution may not be by the dead person’s wish  Assets to be distributed only upon the issue of a Letter of Administration by the courts  DISTRIBUTION ACT 1958 (as amended by the Distribution (Amendment) Act 1997) This Act only applies to West Malaysia & Sarawak Intestate Succession Ordinance 1968 applicable to Sabah. Muslims to distribute the estate by the Syariah principles i.e. Faraid  DISTRIBUTION ACT 1958 (amended by the Distribution (Amendment) Act 1997) ENTITLEMENT Spouse only ( no parent(s)/issue ) Spouse - whole estate- Spouse and Parent(s) only (no issue) Spouse - ½; parents - ½ Issue only ( no Spouse/Parent(s) ) Issue – the whole estate Parent(s) only ( no Spouse/issue ) Parent(s) - whole estate- Spouse - 1/3; Issue - 2/3- Spouse and issue ( no Parent(s)) Issue - 2/3; Parent(s) 1/3 Issue and Parent(s) ( no Spouse ) Spouse - ¼, Issue - ½. Spouse & Issue & Parent(s) Parent(s) - ¼  DISTRIBUTION ACT 1958 (amended by the Distribution (Amendment) Act 1997) SITUATIONS ENTITLEMENT Spouse only (no parent(s)/issue) Spouse – the whole estate Spouse and Parent(s) only (no Spouse - ½; parents - ½ issue) Issue only (no Spouse/Parent(s)) Issue – the whole estate Parent(s) only (no Spouse/issue) Parent(s) - whole estate- Spouse and issue (no Parent(s)) Spouse - 1/3; Issue - 2/3- Issue and Parent(s) (no Spouse) Issue - 2/3; Parent(s) 1/3 Spouse & Issue & Parent(s) Spouse - ¼, Issue - ½. Parent(s) - ¼  DISTRIBUTION ACT 1958 (as amended by the Distribution (Amendment) Act 1997) If dies without leaving a spouse, child, or parent, the following person(s) are entitled to the estate by priority and equal share:- 1. Brothers & sisters 2. Grandparents 3. Uncles & aunts 4. Great grandparents 5. Great grand uncles & aunts 6. Government (whole estate) Note : (brothers and sisters will receive in equal shares; only when siblings are no longer around, then only grandparents will receive and so on )  Disadvantages of Intestacy Dying without a Will! 1. Distribution by Intestate Succession Ordinance 1968 for Sabah and Distribution Act 1958 for West Malaysia & Sarawak 2. Application for LA is required 3. Appointment of Administrator – need consensus from all beneficiaries 4. Need 2 sureties with the amount equivalent to the gross value of the estate (debts are NOT to be deducted in ascertaining the value of the estate)  Disadvantages of Intestacy Dying without a Will! 5. Appointment of guardian for minors at the Judge’s discretion (Judge’s decision can be challenged) 6. Process is LONGER  Small Estate Definition Property of a deceased with a total gross value of ≤RM 2 million Criteria of Small estate: must include LANDED property or Immovable property; If the estate has only liquid assets without land, it is NOT a small estate. Debts are not to be deducted in ascertaining the value of the estate Trust properties are excluded  Small Estate Distribute through: For movable assets (testate or intestate) – by Amanah Rakyat Bhd who can administer without surety For wholly or partly immovable assets (intestate only) – by District Land Administrator. A Distribution Order will be issued and NO sureties are needed.  Inheritance (Family Provision) Act 1971 “eligible person*” can apply to the Court for their right (to a share or an increase in his share of the estate) to adequate provision if dissatisfied with the allocation:-  *Spouse (wife or husband)  A daughter who has not been married or is of mental or physical disability incapable of maintaining herself  A son who is of mental or physical disability incapable of maintaining himself To avoid delay, set up a Trust  What is Trust? TRUST  A trust comes into effect when a person (the Settlor/grantor/trustor) transfers the legal title of his asset to the Trustee with written instructions (the Trust Deed) as to how the Asset (the Trust Property) is to be used for the benefit of the named persons (the Beneficiaries.)  The trustees will hold, manage & distribute the assets for the interest of the beneficiaries.  Settlor can be the trustee and also beneficiary  Max. Trustee: 4  Benefits of a Trust Avoidance of probate’s delay and expenses Taxation - inheritance tax issues Liquidity for young beneficiaries Confidentiality - privacy of ownership and privacy of distribution plan Wealth management during old age and incapacity Administrative convenience - ensure continuity of management Legacy planning Charitable intentions  Type of Trust TRUST 1. Fixed Trust 2. Discretionary Trust 3. Statutory Trust 4. Living Trust: Recovable & irrevocable Trust 5. Testamentary Trust 6. Off-Shore Trust  Type of Trust TRUST 1. Fixed Trust  For named beneficiaries in defined shares 2. Discretionary Trust  The trustee is empowered to allocate (within defined limits) the shares to beneficiaries  Type of Trust TRUST 3. Statutory Trust Created by operation of law automatically  The insurance policy owner nominates spouse, children or parents (if not married at the inception of the insurance policy) as a nominee. They are the beneficiaries. It is a Trust Policy and creditor-proof  EPF – the nominee is a beneficiary for non- Muslims. For Muslims – the nominee will act as executor and the distribution of the estate is as  Type of Trust TRUST 4. Living Trust (inter vivos)  Created during the lifetime of the settlor. It can be amended and revocable OR irrevocable trust (cant amend or revoke once created) 5. Testamentary Trust  Created under a WILL and is revocable until the death of the testator.  Type of Trust TRUST 6. Off-Shore Trust  Created outside the jurisdiction of the country one domicile in a tax-free Financial Centre such as Bahamas, Labuan, Cayman Islands, etc  Off Shore Trust Advantages  PRIVACY – Assets held in trust name  FINANCIAL SECURITY – The trustee continues to manage the Assets and provide payment to meet the settlor’s disability if needed  TAX MINIMIZATION - To shelter unnecessary tax payments until the beneficiary is in a position to receive the distribution  DISTRIBUTION AND SUCCESSION PLANNING - enables the settlor to determine who and when to distribute the assets  CONTINUITY – The trustee continues to manage till the beneficiary is of age to receive the distribution  AVOID PROBATE  Private Investment Company Clients avail the services of a private investment company (PIC) to hold the assets and investments Benefits of holding assets through a PIC :  Financial privacy  Limited liability – separate legal entity provides protection from any legal claims on the beneficial owners  Professional Management  Tax consideration – enjoy favourable tax consideration as PICs are incorporated under tax-friendly jurisdictions. POWER OF ATTORNEY  Power of Attorney A legal document that one party (donor) gives another party (donee or attorney) the power to act on one’s behalf Valid only during the lifetime of the donor Consent of donee is required if it is expressed as irrevocable  Power of Attorney A valid POA:- Donor & donee are of sound mind and above age 18 years old Donee is not an undischarged bankrupt POA executed & deposited in the High Court of Malaysia or any of its branches Joint attorneys/donees is possible: either one to act or both signatures required  Power of Attorney 3 principal types :  General PA  Enduring PA  Enduring (medical treatment)  Power of Attorney General PA – validity ceases when the donor is again fully able to manage their own affairs Empower donee to act for short period of time eg donor wishes to travel for a period becomes void when the donor becomes mental incapacity Limited PA – general PA for a specific function for a limited period only  Power of Attorney Enduring PA – valid when the donor becomes mental incapacity. Normally a precautionary measure for unforeseen development. Approaching old age, fears the onset of illness may cause incapacity  Power of Attorney Enduring PA (Medical treatment) -  allows the donor to appoint someone to make medical decisions including medication, surgery, and other medical procedures  endures (valid) so long as the donor is unable to make decisions himself  ESTATE PLANNING FOR MUSLIM MUSLIM WILL - WASIAT  WILLS Act 1949 is not applicable  Islamic laws permit :  Giving away one-third of the Estate only to those non faraid recipients including non Muslim  Consent from Faraid recipients to be obtained if more than 1/3 is to be willed away  2/3 to be distributed by Faraid  Muslims Estate Planning Estate under Islamic Law All the assets and liabilities of a deceased person :  Immovable and movable property  Investment  Money owed to a deceased person  Mortgaged property  Property that has been purchased but not yet taken delivery  Clear all Debts Duties discharged by heirs under FARAID in the following order :- 1. To discharge his obligations relating to Zakat, various kaffarah or penalties for oath 2. To pay for funeral expenses 3. To settle all his debts including the performance of Haj and payment of Mas Kahwin if payment has not been made 4. To execute Wasiat 5. To distribute the remaining estate among his heirs  Faraid Beneficiaries are persons who have the right to inherit the estate of a deceased person based on their relationship (blood-related) Male inherits double of female’s share because male deemed to support the family financially. In Islam a woman has NO financial obligation  Baitulmal It is a BODY / Institution that functions as a TRUSTEE of the Muslims The Estate of the deceased person will go to Baitulmal when:-  There is no rightful beneficiary  All beneficiaries have received their share, yet there is still a portion remained  No claimant to the estate  Deceased person leaves no heir  Hibah Assets transferred to the donee during the lifetime of the donor Gift asset is away from estate thus Faraid does not apply Allows donor to Gift to beneficiaries and or donee in the proportions determined by the donor with minimum hassle  Harta Pencarian Declaration for distribution on jointly acquired properties during the subsistence of marriage of legally married spouses, the Islamic way. The portion entitled is stated in the Declaration and becomes effective upon Divorce or death Declaration to be signed by spouses Amendment if there is has to be agreed by both parties. Away from Faraid Summary  SUMMARY  Plan early  Do not procrastinate to write WILL  Tax avoidance  Plan for liquidity at an interval of time  Consider all scenario  THANK YOU THIS PRESENTATION IS COPYRIGHT PROTECTED. ALL RIGHTS RESERVED. REPRODUCTION AND DISTRIBUTION WITHOUT WRITTEN PERMISSION OF THE CREATOR IS PROHIBITED