In simple terms, estate planning is more than drawing up your will. It is a process for making proper arrangements for the protection, preservation and provision of a person’s total assets for the benefit of his family and loved ones.
Estate planning can protect one’s estate from being claimed by creditors or even wasteful and irresponsible beneficiaries. It can also help preserve the estate from shrinkage in value due to long settlement and provide a fail-safe money management programme (in which immediate and future financial needs are met) for beneficiaries lacking in financial acumen.
One of the basic goals of estate planning is making sure your assets are transferred to your loved ones, according to your wishes after death. Without proper estate planning, the people whom you most want to benefit could be left out in the cold – even if you’ve made your wishes clear during your lifetime. In estate planning, there are several ways that your assets can be transferred and the transfers can be done at death or even during your lifetime.
Transfer by statutory law
The transfer is created by the operation of law. One common example is your life insurance policy nominations, which can be made revocable or non-revocable, depending on the beneficiaries you name in your life insurance policies. (Do refer to your insurance planner for more details on this. Ask about the impact of Section 166 for non-Muslims and Section 163 for Muslims under the Insurance Act). This mode of transfer can be both creditor and non-creditor proof.
EPF nominations are also considered transfer by statutory law. All EPF nominations are creditor-proof.
However, for Muslims, do note that the names nominated are not your beneficiaries; they are only your nominees whose duty is to distribute your EPF funds according to the Al-Faraid Distribution laws.
The most commonly-talked about example of transfer by operation of law is when two people share ownership of a bank or unit trust account. When one of them dies, ownership rights may or may not be passed on to the survivor(s).
Do check the institution where your accounts are maintained on their position on “survivorship clause” as not every institution in Malaysia practises this clause.
It is therefore important to make sure you resolve any ownership issues during your lifetime because jointly-owned accounts can be passed on to the survivors, under operation of law.
Transfer by contract
You can make a contract or agreement during your lifetime to ensure that your assets are transferred to someone else at the time of your death. The most common example of operation of contract is an absolute assignment of your life insurance policies.
The term “absolute assignment” means an irrevocable transfer (giving) of all rights of ownership of a life insurance policy or annuity contract to another individual or entity. For example, a policy owner can freely assign a policy to another or an institution for the purpose of designating them to receive funds at the time of one’s death.
For example, some of us are familiar with this when our bank, which is offering us a loan, requests for insurance policies to be assigned to them, so that if the insured dies before the full repayment of the loan, the bank would receive a portion of the death benefit that equals the outstanding loan and the remainder of the death benefit would be payable to the insured’s beneficiary.
Other than absolute assignment, you can also make a contract or agreement during your lifetime to ensure that your assets are transferred to someone else at the time of your death. The most common is Inter Vivos or Living Trusts. A living trust is created where the owner passes legal title of trust property to a trustee to hold on trust for the beneficiary in accordance to the terms set out in the trust.
A trust is applicable to both Muslims and non-Muslims, and this is an efficient tool, which can be used for creditor protection. If the asset is transferred to the trust during the owner’s lifetime, the trust agreement can specify who will receive the asset at death.
If the transfer of your assets is done through an irrevocable trust, the original owner of the trust no longer owns the assets as they have been transferred to the independent trustee who has a fiduciary duty to manage the assets for the benefit of all beneficiaries. Thus, no creditors can claim your assets anymore, once it has been irrevocably transferred.
Transfer by administration or probate
When someone dies and his/her property is not transferred under the operation of law or operation of contract, it must be transferred to those entitled to it under the terms of a will (testate, or if there is no will, intestate), under the Distribution Act 1997 for non-Muslims or the Al-Faraid (Islamic Distribution laws) for Muslims.
It is always advisable to write a will, no matter how little you think your assets are worth. There are many plus points for having a will. However, we ought to know some setbacks of having a will, as discussed below:
Advantages of probate administration
Disadvantages of probate administration
Each of the above methods of transferring property at death has its advantages and disadvantages. But remember, the various methods may not be mutually exclusive.
If your estate is transferred under one method, then the other methods cannot be used to distribute your estate.
For example, the designated non-Muslim beneficiary of your EPF and life insurance policies (as long as they are considered trust policies under Section 166 of the Insurance Act), will receive your EPF funds and insurance coverage payout when one dies, regardless of one’s written wishes in his/her will to bequeath his/her EPF funds and insurance proceeds to someone else.
Do consider the following when choosing your estate planning tools:
My advice is that you speak to your estate planner on the best tool that is suited to your needs, family and financial situation.
- Source from The Star, 4 February 2008 by Joyce Chuah.
