What came as a surprise was the speed that the estate administration process kicked into motion. Here is the brief timeline: MJ passed away on 25 June and the first series of court hearings began four days later. On 1 July, MJ’s Will dated 7 July 2002 was filed with Los Angeles County Superior Court, which became a public document and almost instantly became of public interest. All these took place even before the memorial arrangements were finalized.

In summary, MJ, in his five-paged Will appointed three of his close aides to be his executors; his mother to be the first named guardian and failing which his close friend, singer Diana Ross, would be the substitute guardian. The Will also make mention of a living trust which he created prior to the Will which is known as Michael Jackson Family Trust (“MJFT”) whereby his mother, children and certain charities are the named beneficiaries. Pursuant to the Will, the executors will ultimately “shepherd” all the assets in the estate into. The MJFT, which details are of course, key private and confidential inheritance taxes are still in many countries and this often is the paramount reason why people consider creating trust(s) in addition to a Will.

For MJ’s case, his estate would be looking at Federal Inheritance Tax that could possibly be as high as 45% in addition to the probate fees (to be based on the gross value of the estate) which is value of the estate) which is also applicable in the state of California. Fortunately, neither of such taxes is applicable in Malaysia.

It seems that MJ was well advised in terms of his estate affairs. However many are skeptical of his actual net worth bearing in mind he has been entangled with numerous lawsuits in the past which was later settled out of court with massive sums being paid out as settlement. At the time of his death, it was reported that he has an existing USD300 million loan with Barclays Bank. No doubt, many observers belief that he may be heavily in debt but he certainly is not broke. It is estimated that his interests in Sony / ATV alone is worth approximately USD 1 billion on top of royalties which will be channeled into his estate or trust (which is yet to be determined) is also extremely significant.

The executors would now have to determine what are the assets belonging to the estate. There could be a possibility that the aforementioned valuable assets might have been settled into or assigned to the MJFT which means that there is a possibility that the estate’s assets are significantly less as compared to the existing debts in such circumstance. If the estate has insufficient assets to settle all the debts, the estate would be technically insolvent. In all likelihood when this happens, the creditors would embark on a hunting spree to claw back as many assets as possible. This would possibly include tracing the assets that was previously settled or assigned into the MJFT and if this materializes, the assets held by the MJFT may be vulnerable.

Translating the above into Malaysian context, the fundamental principles of estate planning are very much similar. Generally, a Will is where a testator bequeaths his/her assets to the selected beneficiaries, appoints guardian(s) for his/her minor children and appoints person(s) whom he/she trusts to be the executor(s) of the estate. The testator may also make provisions for testamentary trust(s) if certain assets are to be held on trust for a period of time, in accordance to the testator’s instructions. However, one need to be mindful that all debts and liabilities would have to be settled by the estate before any bequeaths can be fulfilled. In addition, a Will also becomes a public document the moment it is filed in the court for the application of probate. Therefore, if there are certain assets, which are to, given to selected individuals who details are to remain private, living trusts would be the available option to establish such arrangements.

Notwithstanding his modest means, Gwen is a compulsive shopper and spendthrift. Alex has many times tried to advise his daughter-in-law to curb her spending habits but it only ended up in arguments between them. Many times she has told him to mind his own business. This went on until the relationship between them deteriorated so much that both avoided each other in the house.

Alex had savings of his own and he is the sole owner of the house he stayed in and as such, he did not need any monthly allowance from Donvin. As time passed, Alex’s health deteriorated and he began to think of how to pass his assets to Donvin. He wanted a hassle-free transfer of the house to Donvin. He figured that although his relationship with Gwen was not good, she would still take care of him out of her duty as a daughter-in-law and Donvin would be around to ensure that. After considering for some time, Alex decided to transfer the house to Donvin’s name believing that he would be taken care of. He also wanted to take advantage of the 50% reduction of the stamp duty to transfer the property to Donvin.

Unfortunately for him, shortly after the transfer, Donvin passed away in an accident. Though Donvin did not have much, he wrote a Will anyway to give away his assets. In his Will, he gave all his assets to his wife, Gwen. Alex’s name was not mentioned in his Will since the son had felt that he could take care of his father and that he had his savings. The first thing, Gwen did when she obtained the Grant of Probate was to chase Alex out of the house. Since Alex was no longer the owner of the house, he had no choice but to leave. Luckily for Alex, he still had his own savings. He managed to check into a nursing home. Though he had a place to stay in, he was filled with regret over what had occurred.

The above scenario highlights the common mistakes many make by assuming that the older always dies before the younger and transferring of assets is the only way to solve their inheritance problems. What has been described here is similar to many cases previously reported in the papers.

Had he been properly advised, Alex could have written a Will or set up a Declaration of Trust.

For Alex to get his Will done, all he needs to think about is:

A)    Who will he appoint to be his executor to carry out his instructions stated in his Will? He can appoint an individual or a trust company as his executor. Since Donvin would probably be his sole beneficiary, he can appoint him to the executor, failing which a trust company to be the substitute executor. It is important to have a substitute executor in the event Donvin cannot act for whatsoever reason.

B)    What assets will be inherited by Donvin and whether Alex would like to impose any conditions before Donvin inherits?

C)    Who will the beneficiary in the event Donvin predeceases Alex and whether any conditions to be imposed before the substitute beneficiary inherits?

Alternatively, if Alex would like certain assets (not his whole estate) to be received by Alex without having to wait for Probate, a Declaration of Trust can be created. This is where he declares himself as the main trustee of the assets and a trustee company. In this arrangement, he would have control and enjoyment of the assets during his lifetime and upon his demise, the trustee company would then step in and the trust assets to his son Donvin or any other beneficiaries as directed by Alex. The documents needed for setting up a declaration of trust are a trust agreement and an irrevocable power of attorney between him and the trustee company.

The inclusion of a power of attorney would allow the substitute trustee to take over the role as trustee form Alex, without having to wait for Probate.

Alex is able to enjoy the trust assets as he will the substantial beneficiaries and Donvin would be a minority beneficiary. Only upon Alex’s death, would Donvin be the absolute beneficiary. At the same time, as the ownership and control of the trust assets still belongs to Alex, no assets are being transferred away from Alex.

For total peace of mind and ensuring the instructions of the declaration of trust are carried out, rather than relying on an individual to be the substitute trustee, it is better to appoint a trustee company for the simple reason that an individual will die, fall ill or meet with an accident and be incapacitated or become bankrupt. When the individual substitute trustee passes away, his assets including the assets he holds on trust will be frozen until the necessary estate administration processes are completed. There will be a long delay before the trust is able to continue to benefit Donvin and this defeats the purpose of creating the declaration of trust.

What would be the difference if Alex writes a Will and declaration of trust? The Will is subject to Probate and payment of debts and liabilities. There are also hosts of procedures that a prudent executor would need to go through before distribution to Donvin. Donvin would have to wait until the all procedures are completed and this would typically take between 12 months to 18 months.

However, with the declaration of trust, the assets are part of the trust which effectively would mean that these assets no longer form part of the estate of Alex. As a result, Alex’s Will will exclude these assets and the distribution to Donovan need- to go through the complicated and long procedures when one applies for Probate.

I would recommend that if Alex feels he would like certain assets to be received by Donvin without having to go through Probate, then he should create a declaration of trust. The assets he should include as part of the declaration of trust should be moneys in his bank accounts, unit trust and mutual fund investments, shares of listed companies, whereas properties should be handled by his Will. By leaving the properties in his estate to be handled by his Will, the stamp duty involved for the transmission of the properties to Donovan. If these properties are included in the declaration o trust, the stamp duty that Donovan would have to pay will be very high based on the market value of the property i.e. for the first USD100,000, 1% shall be payable; for the next USD 100,000, 2% shall be payable and if it is above USD500,000, 3% shall be payable.

Therefore, if Cheong has a property valued today at USD500,000, the stamp duty payable would be USD9,000 (as USD1,000 is payable for the first USD 100,000 and USD4,000 is payable for the next USD 100,000 to USD500,000).

In addition, with a declaration of trust, Alex will be protected in the event he suffers from a serious illness or disability where he can no longer be mobile, the substitute trustee can use the assets in the trust for his maintenance and to pay for his medical expenses.

Both Will and declaration of trust would give Alex the flexibility to amend the terms during his lifetime and this will accommodate changing circumstances within the family unit.

Estate Planning will bring you super rich and famous!!!

Well I hope you don’t get the impression that only the super rich can use such instruments like Will and Trust in their estate planning.

The concept of trust may be new to many people in Asian but the Trustee Act had been in place since 1949!

Don’t Just Give the Fruit, Teach Them To Plant

In your estate plan, you should set up a private trust that you can place your assets in the trust and entrusts the appointed trustee to manage and invest your assets, either movable or even immovable and distribute the interest, dividend or even net rental income to your intended beneficiaries in the form of periodical streams of income.

Remember: Your Beneficiaries CANNOT Simply Sell Your Assets

Since the assets are in the name of the appointed trustee, the beneficiaries cannot simply sell your assets! As you instruct the trustee to pay regular income to them; they will be able to enjoy the fruits of the investments without being able to liquidate the assets.

Properties wrapped in Private Limited

I observe many people like to park their properties such as shop houses and lands in private limited companies. As a company is meant for business purpose, it is not suitable for estate planning purpose.

Though you can pass on the properties to your beneficiaries by bequeathing the shares of the company to them, the drawback is that there is nothing to stop them from selling the company or strip off the properties parked in the company when the time comes!

This is because your beneficiaries will the shareholders of the property- holding company and as long as they agree among themselves, they can do whatever they want!

Reason for Setting up a Private Trust:

A)    You run a thriving business but want to ensure that at least a part of your wealth you have built up is preserved for your loved ones. After the world economic crisis, you have learnt that huge and unexpected risks can hit your business.

B)    You want to ensure that should you die prematurely, your children / next generation are taken care of. You can put assets into a trust with specific instructions on how you want to provide for your children.

C)    You are unsure if your beneficiaries are able to manage their inheritance prudently.

D)    You have a successful career and your wife is a homemaker with no income of her own. You want to ensure that after you die, she will have income to reply on in case your children do not look after her well into her old age.

E)     You have a child who may be disabled or unlikely to be able to earn a decent living.

Moreover, you can set up a trust in support of your favorite religious or charity organizations. You can specify how much to give each year and for what purpose, it was for education for the poor students, disaster relief or supplies for the old folk’s home.

What Is The Advantages Of Setting Up Private Trust

The benefits are many. Some of the most important benefits of setting up Trust are as follows:

A)    Assets held on trust are not subject to probate or Letter of Administration and therefore not frozen upon demise. Your assets like your cash or your properties will not be frozen when you set up an inter vivo trust, unlike all your other assets in your Will.

B)    You can specify your own beneficiaries

You will have full discretion in deciding who you want to include as your beneficiaries who will benefit from your Trust. They can even be an organization, for e.g. an orphanage.

C) You can include your own specific instructions

You can “ time release ” your streams of income to your children over a period of time if you are worried that they may not be able to hold on to their inheritance.

Or providing maintenance and education expenses to minor children in the event of common disaster.

D) Protection of your assets from the reach of creditors

You can protect and preserve your hard earned assets from creditors provided it is not meant to deliberately defraud your creditors. However, it is subject to bankruptcy laws in Malaysia.

Conclusion

While you are busy accumulating your assets, do take time off to plan how you are going to preserve and perpetuate your estate.

Wealth accumulation is rarely an end in itself. Plan your wealth prudently so that your beneficiaries can truly cherish the wisdom of your estate plan.