Finance Planning For Your Old Man

Alex Pinol aged 68 is a widower with a son Donvin aged 30, and married with Gwen. Alex’s relationship with his daughter-in-law has not been a happy one. Both Donvin and Gwen are staying in Alex’s house since Donvin’s income is not enough to purchase a house of their own and Donvin is the sole breadwinner.

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.

Finance Planning For Your Old Man
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