Don't disinherit your parents in your financial plan!

Since the beginning of 2007, I was privileged to work with a few young couples in planning their finances. Below are some interesting similarity in their situations:

1. These young couples are new parents.

2. These young couples plan for their finances.

3. These young couples do not have a will.

4. These young couples also love their respective parents and provide for them.

5. These young couples also DISINHERIT THEIR PARENTS from their financial plan !

Sounds funny and illogical ? Let me explain the facts:

Lets assume Peter marries Mary, and Mary gives birth to Peter Junior. Peter has an elderly parents.

The moment Peter and Mary sign the marriage certificate, their previous wills (if any) and CPF nominations are revoked. This means that if Peter dies, his assets (or estate) will be distributed according to the Intestate Succession Act, which means 50% of the estate will go to Mary (being his spouse), and the other 50% will go to Peter Junior(being his son), leaving Peter's parents nothing!

In an un-planned situation, a married couple with children and write no wills will automatically disinherit their respective parents from their estates.

One cannot assume that our parents will die before us. Anything can happen in life. Therefore it is necessary to plan. Below are some suggestions:

1. Write a will to include your parents as beneficiaries to your estate. (Similarily, update your CPF nomination)

2. Provide sufficient capital in your estate to make sure the allocation stated in your will is meaningful. Use a life insurance policy to create the capital if it is insufficient. For a small fraction of premium,you could create a sizeable estate immediately.

3. If it is not convenient to name your parents in the will (in reality, some spouses cannot get along with their in-laws), do an assignment of life insurance policy to your parents. An assignment of life insurance policy means you transfer the legal ownership of the policy to your parent(s), say your mother. When you die, the insurance proceed is an asset belong to your mother.

4. Last but not least, communicate to your parents ! If you assign a life policy to your parents, let them have the policy document. If you have a will, use your judgement to let them know the necessary (similarily if you have updated your CPF nomination). If you have a trusted financial planner, let him (or her) knows your intention.

Yes, we can enjoy our family, but lets not disinherit our papa and mama in our financial plan.

IRAS response on assignment of mortgage life policy to bank

Recently, there were some lively debates on the press regarding estate duty and mortgage life insurance. Below is an email reply by IRAS to me on the estate duty treatment when one assigns a mortgage life policy to bank.

"If the policy is assigned to a bank and the proceeds are used to redeem the outstanding loan due by the deceased, there is no estate duty payable on the proceeds because there is no beneficial interest accruing or arising on the deceased's death to the bank.

However, if the proceeds exceed the outstanding loan as at the date of death, the excess is subject to estate duty.

The assignment is not subject to the 5 years rule. The bank need not pay the premium for such assignment of policy in order for the proceeds of the policy to be excluded from estate duty assessment."

Source: An email reply to me by IRAS, Ruling & Estate Duty Branch, on 13 Mar 2007.

Life can be beautiful

Me and my wife had a most wonderful evening with an elderly lady(age 74 plus, a widow living alone). This is what we did:

We had a hearty dinner meal at the famous hawker centre beside Bedok bus interchange;

Back to her 3 room HDB flat, we listened with joy when the elderly lady described to us the life she had when she was young;

We were delighted when she showed us the numerous photos she had, the photos were memories for her;

We listened to "Smoke gets to your eyes" by Platters, and she sang along;

She taught us how to dance tenderly;

Before we go, me and my wife gave her a big hug.

This is life at its best... simple, beautiful and memorable.

(*while hugging her, i noticed my neck and shoulder were slightly wet. I shortly realised it was the tears from her eyes. No words can express the feeling then. Go hug your love ones now.)

Financial Planning for Children

At the beginning of 2007, a few of my clients are blessed with babies, who added much joy into their life. As usual, my role was to assist these proud parents to work out a financial plan for their children. I would like to share the processes i used.

There are basically 3 areas of financial concern when planning for children:

Concern number 1: Risk Management

How financially prepared are you if your child has critical illness? Nobody likes to experience this situation, but in reality, some of us will face it. No parents will dispute the time spent with one's child during critical time is important, but one needs sufficient financial strength to do this. (For example, taking no pay leave for 3 years etc)

A good solution to deal with this concern is a portfolio of critical illness and medical insurance on the child while he/she is healthy.

Concern number 2: Education Funding

Planning for university funding cannot depend on luck, parents need to take control. It is probably the one and only substantial saving parents do for someone else.

Since most parents will be the owner and payor for such plans, one has to consider whether the saving effort would be disrupted by the parent(s) death, disability, critical illness or financial stress.

If the parent(s) is a business owner, is the university funding plan shielded away from the business owner's business liabilities?

A good solution is a portfolio of trust- owned endowment policy, trust-owned investment-linked fund with yearly top-ups, and deferred annuities.

If the grandparents have existing whole life insurance policies which have outlived their objective, it might be good to assign these policies to the parents for the benefit of the grandchildren.

Concern number 3: Will and Trust Planning

Most financial plans are seriously compromised if a common disaster falls onto (both) the parents. It is not uncommon to see the saving plans intended for the children being diluted by the estate settlement process.

A wise solution is to revise the parents' wills to include a guardian to look after the children's welfare in case of common disaster on the parents, and effect a trust-owned life policy which specifies the children as the beneficiaries.

In going through the thought process of risk management, education funding, and will & trust planning, the parents can then deploy their financial resources effectively to address above concerns.

How to make your mortgage insurance not estate taxable

I refer to the letters by Ms. Maria Loh Mun Foong, "Exempt up to full value of main residence"(ST, March 3), and Ms. Fang Mei Ling, "Estate-duty laws unfair to the middle income"(ST, March 1).

The issue is that the mortgage insurance proceeds are listed as "other assets" in the estate duty computation, and hence it unfortunately bring up the estate duty payable for the widow. One simple way to get around this problem is to have the wife "owns and applies" the policy on the life of the husband. The wife will therefore be the owner of the policy on the life of the husband. This is allowed under section 57(1) of the Insurance Act (Cap. 142) on "Insurable interest required for life insurances".

In this way, the mortgage policy become an asset of the wife instead of the husband. When the husband dies, the insurance proceed will not be aggregated with the husband's estate and be taxable. The other advantage of this arrangement is that the insurance proceed will not be subjected to probate and therefore the widow can get the proceed very fast.