Karen Tang, CFP®: Certified Financial Planner in Singapore

The Importance of Estate Planning: 5 Consequences You Cannot Ignore

Estate planning may sound like a big, complicated word. But in reality, planning your asset distribution need not be a daunting task. When you work with an experienced financial advisor and estate planner, you can be assured that all your priorities and key concerns will be addressed.

As with many cultures, Singaporeans don’t like to think about death. As a result, many people are unprepared for what happens to their assets, liabilities and financial arrangements for their loved ones when they pass on.

Hence, it is important to have things set in place while you are still in control of your finances and have a lucid mind. Contrary to popular belief, estate planning is for everyone, not just for the rich and famous or those who are nearing retirement.

After establishing your wealth distribution plan, you will have the assurance that you have done what you can to ensure your loved ones will be well cared for. Secondly, it will be easier to review and make changes along the way.

First thing first, what is an estate?

Everything of monetary value that the deceased leaves behind makes up his or her estate. In other words, an estate is the economic valuation of all the investments, assets, and interests of an individual. The estate includes a person’s belongings, physical and intangible assets, land and real estate, investments, savings, collectibles, and furnishings.

A person’s estate includes:

  • Everything owned in his or her sole name
  • The deceased person’s share of assets owned jointly with others
  • Gifts made within five years before his or her date of death
  • Gifts made anytime from which he or she retains some benefits (e.g. collecting the monthly rental income from a house even though the house was given to someone else 10 years ago)
  • Assets held in trust from which he or she receives some personal benefit (e.g. bank accounts held in trust for children who are still minors).

What is Estate Planning?

Estate planning ensures that your wealth is seamlessly passed on to the people you love according to your wishes, and not let the law decide for you. 

By doing so, you are being responsible for making your intentions crystal clear to your beneficiaries so as to avoid potential arguments and fights between family members and tedious, costly legal procedures. With careful planning, you can enhance your wealth and create an immediate estate that can last generations.

(Note: In Singapore, estate duties or Inheritance tax has been abolished for deaths on and after 15 Feb 2008.)

What happens when you pass away

Before any distribution to beneficiaries can happen, the assets of the deceased have to first be used to settle any debts the deceased was liable for. This may mean a reduction in the eventual size of the bequest left behind for loved ones.

The exception to this are your CPF monies and assets held in trust, both of which come under separate legal status and does not form part of one’s estate. As a result, these cannot be touched by creditors.

a) With a will
The person who has been appointed in the deceased’s will to handle the estate is known as the executor. An executor is usually a trusted family member, friend, or lawyer. 

Once a person passes away, all of his or her assets will be frozen. The executor will then apply for a grant of probate, which is a court order that empowers the executor to settle liabilities of the deceased and distribute any assets that are remaining.

Funeral costs usually have to be taken care of first. Following that, the executor will use the estate, often by liquidating investments first, to pay off any outstanding debts. These include debts owed to the government (unpaid taxes), financial institutions (loans, mortgages, credit card bills), medical institutions (hospital bills) and companies (e.g. telephone, utility bills).

Only after the court is satisfied all debts have been paid can the remaining assets be distributed to the beneficiaries, in accordance to the will.

If the estate is found to be insolvent, where the debts of the deceased exceed their assets, then the order of debt repayment will follow the Bankruptcy Act, after funeral costs are paid for.

b) Without a will 

If someone dies without making a will i.e. intestate, the Intestate Succession Act (ISA) will kick in. It will dictate who manages the estate, who gets the assets, and in what percentage. If you are a Muslim, the ISA does not apply to you as there is a separate law for distribution.

When a person dies without a will, the assets of the deceased are frozen. To unfreeze the assets, the next-of-kin will need to apply for a Grant of Letters of Administration. It is a legal document which makes your next-of-kin the administrator of your estate. He or she is tasked with collecting all the assets, paying off debts, and distributing the rest of the estate assets to the lawful beneficiaries.

The court can appoint up to 4 administrators but they must act together to distribute the assets. If the estate does not exceed $50,000, the surviving family members may apply to the Public Trustee to have the assets administered according to the Intestate Succession Act.

Will your family members be liable for your debt?

In Singapore, surviving family members are generally not legally responsible for the debts left behind by the deceased. That being said, outstanding credit card and medical bills will have to be paid off.

However, there is an exception – when the deceased has a joint loan account with a surviving family member, the latter will have to take on the deceased’s debt responsibility. This is applicable for joint personal loans and mortgages.

Do note that a joint homeowner or someone inheriting a property with a mortgage on it will have to be responsible for that outstanding liability. They can’t ‘run away’ from this – hence, they would need to either pay off the mortgage to retain control of the property, or get a new home loan. If there is no joint owner, the executor will have no choice but to sell off the property to pay off the mortgage. 

And this is where mortgage insurance will be extremely useful to help in settling the outstanding mortgage and allowing the beneficiaries to keep the property. Force selling of any property rarely secures the seller the best price. 

For HDB homeowners using CPF to service your mortgage, you already have a mandatory mortgage-reducing insurance, known as the Home Protection Scheme (HPS). It protects families from losing their HDB flat in the event of death, terminal illness or total permanent disability. HPS insures members up to age 65 or until the housing loans are paid up, whichever is sooner.​

5 consequences of not doing Estate Planning

Your beneficiaries can lose the value of their inheritance and thus, receive less.

#1 Forced liquidation of assets

Assets like properties have to be sold before proceeds can be split. They could be sold at unfavourable prices due to bad market timing or an urgent time line.

#2 Heirs can’t manage your portfolio

Without specific instructions or a plan, your heir(s) may not know what to do with your portfolio or how to manage a sophisticated investment portfolio.

#3 Family not knowing about your assets

If you do not draw up a list of all your assets (including personal IOUs from friends), your family members will face difficulties in locating all of them.  

#4 Overspending on your funeral

Without specific instructions from you, your family may feel obliged to send you off on a grand scale.

#5 Family has to pay your debts

If family members are co-signers on your credit cards and loans, they will be liable for the debts you leave behind. 

How to kick start your Estate Planning?

Your first step: List down all your assets and liabilities

To get started, make a list of all your assets, both local and overseas, and their respective current market values. Be sure to update this list regularly. This includes your: 

  1. Properties
  2. Bank accounts
  3. Central Provident Fund (CPF) savings
  4. Investments
  5. Insurance policies and retirement plans
  6. Artwork
  7. Jewellery
  8. Antiques, and
  9. Anything of monetary value. 

Following this, you should also consider your liabilities. This includes everything that you owe:

  1. Mortgage loans
  2. Car loans
  3. Personal loans
  4. Business loans
  5. Credit card debts
  6. Medical bills
  7. Outstanding taxes
  8. Being a guarantor or co-signer i.e. the amount you are liable for

The net value of your estate takes into account your assets, liabilities, fees and expenses, and the nature of ownership (for owned property).

What’s next?

Work with a Certified Financial Planner to bring you through the Estate Planning process. There is no one-size-fits-all estate plan as every person’s intentions and circumstance are unique. 

Generally, having a will provides far more benefits than not having one. In death, the only wish you have is for your family to live comfortably with whatever you have provided.

Making a will is affordable and costs only a few hundreds (for a basic one). Depending on your needs and concerns, a more complex will may need to be drawn up and proper estate planning done utilising appropriate instruments.

For a start, these basics can be done under the guidance of a financial advisor:

  1. CPF nominations
  2. Insurance nominations (Revocable, Irrevocable)
  3. Lasting Power of Attorney (LPA)

Wealth distribution is as important as protecting and growing your wealth. Life is unpredictable. Take that first step today!

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