FUNDAMENTAL OF ESTATE PLANNING By Associate Professor Dr. GholamReza Zandi

INTRODUCTION Estate Planning is an important part of financial planning as it completes the process of financial planning to distribute the wealth of the client to his chosen beneficiaries. In Malaysia, though the Capital Markets and Services Act 2007 does not regulate the practice of will writing and trusts but the estate planning advice and plan writing forming part of a financial plan is a regulated activity under the Capital Markets and Services Act A well-designed estate plan can help clients to manage their wealth protection, preservation and distribution effectively to the intended beneficiaries to be used for its intended purposes. 13-2

Definition It's the process of planning for efficient handling of assets to protect, preserve and distribute a person's assets to his beneficiaries during the lifetime of the owner and/or upon his death that fulfils the objectives of the person. Different clients have different needs and objectives that they would like to be fulfilled. No one client is the same as the other. As such every estate plan is to be customized to meet the objectives of the client as well as provide protection, preservation and distribution of the client's assets to his intended beneficiaries. 13-3

Purpose and Objective To determine which heir to be entitled to receive the assets as beneficiaries for a Muslim or non-Muslim estate. For Muslims, various estate planning tools for Muslims can be used to fulfil the wishes of the client. Provide an efficient manner to distribute assets to intended beneficiaries so as to prevent unnecessary delay. Ensure a cost effective method to pass assets to intended beneficiaries during your client's lifetime and/or upon his death. Protect the assets in the estate from your creditors in the event of bankruptcy and/or to prevent the occurrence of an insolvent estate as well as protection of the estate against creditors of the beneficiaries. 13-4

Purpose and Objective Prevent spendthrift beneficiaries from wasting the income they receive from you with instruction for a structured and/or periodical distribution upon fulfilment of conditions precedent. Provide adequate income to the beneficiaries for their maintenance, education and medical expenses during their dependent years. Preserve family owned assets to be enjoyed and used by family members only. Making special provisions for disabled and/or less fortunate beneficiaries/dependents. Making special provisions for various charitable objectives such as financial assistance/ donations to the poor and scholarship/study loan for the needy. 13-5

Purpose and Objective Where possible, to minimize transaction costs including costs of transfer such as stamp duty and taxes for the execution of an estate plan, such as transfer of assets to a trust. Provide liquidity for the purposes of administration of the estate and trust by the executor and trustee. For the continuation of your business by your beneficiaries or family members and to prevent sale of the business to outsiders. In such cases, it is also important to include a succession plan for an heir or a hired professional(s) to manage the business to benefit the family members. 13-6

Purpose and Objective Making plans for the sale of your shareholding/interests in a business to co- owners with the appropriate terms and funding. To minimize/eliminate the possibility of claims by creditors of the company when you are one of the company's guarantor. To create a suitable business start-up fund for your beneficiaries. Set forth the kind of funeral arrangements you would like, and how related expenses are to be paid. 13-7

What is Estate? The term "estate" consists of all the assets a person owns or controls, whether in his sole name, held in a partnership, in a joint ownership arrangement, or through a trust, and all other monies that would be generated on the person's death, such as through life insurance and Employees' Provident Fund. Upon the death of a person, his estate represents him as the legal entity. An estate consists of the following asset classes: Personal property Real property Intellectual property 13-8

THE PLAYERS IN ESTATE PLANNING 13-9

THE PROCESS INVOLVED IN ESTATE PLANNING 13-10

Establishing and Defining The Relationship With The Client Who would the client intend to benefit? This would depend on who are his dependents and the possibility of charitable gifts to the needy. For minor beneficiaries, what are the client's concern and who will care for them? In the event a guardian is appointed for the minor children or a caretaker is appointed for aged old or disabled dependents, it should include the possibility of making monthly allowance to the caregiver or guardian concerned. What are the current assets and investments of the client? Is there any estate duty/inheritance tax for assets in Malaysia and overseas? Would it be possible to avoid such taxes and how to provide funding for such taxes? What would be the immediate needs of the family members? What are the liquidity needs of the beneficiaries, including spouse, child and parents, based on the family circumstances? The possibility of making charitable gifts to the needy? 13-11

Gathering Client's Relevant Data What is the total gross value of all the assets of the client and of each separate asset? Where are the assets located, including those overseas? What are the current debts and liabilities of the client? Whether there exists any insurance plan to cancel or reduce the liability? 13-12

The Client's Financial Status TRUST ASSETS - where the client has either a Legal Ownership as Trustee or a Beneficial Ownership as a Beneficiary. Where a person has only Legal Ownership but no Beneficial Ownership, he is then a trustee and cannot create an estate plan for these assets he is holding as trustee. This is because the assets do not belong to him personally. NON-TRUST ASSETS - where the client owns the assets absolutely (i.e. having both Legal Ownership and Beneficial Ownership) but subjected to the ownership rights below

Types Of Ownership Rights 1- Joint ownership: Tenancy-in-common Joint tenancy Tenancy by the entirety 2- Beneficial ownership 3- Individual ownership: Outright ownership Life interests Future interests 13-14

Joint ownership 13-15

Beneficial Ownership & Legal Ownership The beneficial owner of an asset is the person for whose benefit it is being held. Beneficial ownership arises when an asset is owned by one person. The "legal owner" who has a duty to use it on behalf of another; one person holds assets as trustee for another. Beneficial ownership will have a legal right to enforce his beneficial ownership against the trustee or the legal owner. Beneficial ownership allows the person to enjoy the use of the assets or to benefit from the assets

Individual Ownership 13-17

Financial Planner Recommendations Before formulating the practical strategies, it is important to consider the objectives of the client for wealth accumulation, protection, preservation and distribution of the assets are met using the various estate planning tools. Before formulating the estate plan for the client, the financial planner shall be in consultation with the members of the Estate Planning Team to obtain information regarding the suitability of the various instruments to be used for the particular client

Estate Planning Instruments (Non-Muslims) 13-19

Estate Planning Instruments (Muslims) 13-20

Factors to Choose The Estate Planning Instruments The objectives of the client The effectiveness of the instrument to meet the objectives of the client Set-up costs Transfer costs involved Assets to form part of the estate planning instrument and the role of life insurance Annual trustee fees, if any Tax implications including stamp duty, service tax and income tax Practicality and ease of management 13-21

Implementing the Plan & Monitoring Implementing The Planning Recommendations Monitor the Plan As the client's needs and goals are ever changing, it is important that the financial planner periodically review and re-examine the strategy and make the necessary adjustments to the estate plan. The birth or death of a family member as beneficiary; Separation or divorce of the client or a family member; Change in financial status of the client and that of the family members as well; Change in the financial status and trustworthiness of the executor and trustee; Changes in the law especially regarding taxes, administration of an estate and trust, insurance policies, nomination, will and trust; Acquisition of new assets

STRATEGIES OF PROTECTION, PRESERVATION AND DISTRIBUTION OF WEALTH a) A statutory trust is created by nominating spouse, children or parent (if there is no spouse and children at the date of nomination) b) Generally, the proceeds are protected from claims by creditors of the estate but in the event of bankruptcy the cash value and the sum assured may not be protected. c) Conserve and preserve the assets by using life insurance to pay off the debts of the estate. In turn the assets can be easily inherited or given by the beneficiaries. d) A trust can be created to ensure that the proceeds of life insurance will be used purposefully (rather than being spent by the beneficiaries) to fulfill the objectives of the client. This is an effective way to preserve the insurance proceeds. Making adequate provisions in the will for dependents which is stated under the Inheritance (Family Provisions) Act 1971 where the spouse, minor son and unmarried daughters are to be provided for. Creating a trust (whether by testamentary trust or inter vivos trust) to preserve the matrimonial home by creating a life interests for the spouse to be able to live there and thereafter to transfer it to the children. The possibility of using lifetime transfers/gifts to the dependents to prevent the probate process. Assets in such transfers no longer form part of the estate. Protecting assets from any possibility of financial mismanagement and claims by creditors especially in bankruptcy by using an irrevocable trust and/or lifetime transfers Using trust to preserve the family's legacy for future generations for a) Heirs who lack financial intelligence b) Heirs who are disabled, mentally and physically 13-23

Will or Wasiat (Muslim) It is a legal instrument where the deceased states his wishes to distribute his assets to his named beneficiaries in the manner that he specifies. The will also allow the deceased to name the executor as the person to carry out his instructions. Other matters that can be dealt with by the will: Appointing guardian for minor children; Naming his beneficiaries and when they are to receive their inheritance/gift; Funeral instructions; Donation of organs; Creation of a testamentary trust to provide long term benefit to be enjoyed by the beneficiaries; Listing the assets that he owns. However, for Muslims, he can only give away 1/3 of his assets to non-Faraid heirs and the remaining 2/3 will be distributed according to Faraid. Even though there is a limitation on the usage of a wasiat, it is important for Muslims to write a wasiat to easily obtain Probate than without a wasiat where a Letters of Administration is required to distribute the assets

Power of Attorney (POA) POA is a legal document authorizing a person to act on behalf of the client. There are various types of POA. The POA is only to be used when necessary as it can lead to assets being absconded as certain types of POA cannot be revoked, unless with the consent of the recipient (donee). The usage of POA in Malaysia for estate planning purposes is not uncommon but the financial planner is to advise the client on the implication of executing a POA.

Trust It is where the client appoints a trustee to hold assets for the enjoyment of the beneficiaries. The client will be the settlor and the trustee can be an individual or trust company. Trusts are created for certain purposes, which the will or any other estate planning tool may not be able to fulfil, such as: Protecting assets from creditors in the event if bankruptcy or from the creditors of the estate; Providing continuous income for a minor with instructions to the trustee to manage the funds; Preventing spendthrift beneficiaries from wasting the trust asset; Providing for special needs beneficiaries; Providing income to the settlor during his old age

Life insurance plays an important role to provide essential funding to many estate planning situations so as to ensure that the estate plan is functional and well funded. It provides liquidity upon death or disability of the client. It is also a good funding source for trust to provide immediate funds to beneficiaries where the process for distribution of assets upon the client's death can take many months or sometimes years to complete. Basic functions of life insurance: to protect and create wealth for the beneficiaries in the event of death of the client, who will be life assured; to cover illness and disability of the client and that of the beneficiaries; to cancel or reduce debts and taxes of the client; provide adequate provisions for costs of administration of an estate and trust. Life Insurance- Function 14-27

Income for dependents (including aged parents) who are disabled or require financial assistance; Young married couple with minor children to ensure available funds for the financial well-being of the minor children; Client himself in the event of disability and serious illness; Smaller estates that lack liquidity to create wealth and also to pay for the costs of transferring assets in the estate administration process; Client's and/or spouse's retirement needs; Funding buy-sell agreements; Additional cash flow to the client's business. Life Insurance- Benefits 14-28

Hibah It is a gift of love by the donor to the donee without any consideration being provided by the donee. However, such a gift is only complete when the offer made by the donor is accepted by the donee and upon taking delivery of the transferred property. The hibah must be created during the lifetime of the donor. When a hibah is created, the asset under hibah no longer forms part of the estate of the donor. As a result the hibah asset is not subjected to Faraid. For a hibah to be created, the following must be fulfilled: Donor - he must be at least the age of 18 years old, be of sound mind and has full ownership of the assets to be given away. If the asset is encumbered by a loan, then that assets cannot be part of a hibah. The donor when creating the hibah must be in good health. A hibah that is made upon death or due to an illness that causes death will be subject to the 1/3 rule. Donee - he can be a minor or not and need not be of sound mind. In the event the donee has no sound mind then the guardian or trustee for the donee may accept on the donee's behalf of the gift. Assets - The asset placed under hibah must be halal, have economic value and must be given in total, not partially. If the donor owns an undivided share in a property, hibah can be done on the donor's entire undivided share in the property but not, for example, 1/4 of the donor's undivided share. However, it is not recommended that the donor create a hibah based on his undivided share in a property because it will give rise to complications where the joint owner of the property may not consent to it. Siahah - this is where the donor communicates clearly to the donee that the donor is giving the asset under a hibah and the donee must accept the hibah

Harta Sepencarian It is defined as the earnings, or the property acquired, as a result of joint labour of two spouses that includes the income derived from capital (which is itself the result of joint labour). In order words, it applies to assets that were acquired by: Husband and wife; and During the subsistence of the marriage; and Both parties contributed directly or indirectly towards the acquisition of the asset. Harta Sepencarian often occurs in divorce cases to allow the divorced spouse a share in the assets jointly acquired during their marriage. Harta Sepencarian can be also created by way of a Declaration of Harta Sepencarian signed by the husband and wife, where the husband agrees to give up to 50% of the jointly acquired assets to the wife in the event of death or divorce. As it is a contract, any amendments, additions and revocation can only be done with the agreement of both husband and wife. When a Declaration of Harta Sepencarian is executed, the assets stated in the contract will not form part of the estate of the spouse giving the assets to the other spouse, thus the assets will not be subjected to Faraid

Problems without Harta Sepencarian Lengthy legal process for spouse to claim Harta Sepencarian; Difficult to prove contribution towards the acquisition of the asset; It is subject to Syariah Court ruling, which may not be in favour of the spouse claiming Harta Sepencarian; It could lead to dissatisfaction and conflict between spouse and the Faraid heirs; In order to claim Harta Sepencarian, an action in Syariah Court is required to be filed, which can be costly

Advantages of Harta Sepencarian Husband and wife can amicably agree on the distribution; As it is a contract stating the rights of the spouse to claim Harta Sepencarian, it will protect the interest of the spouse; In the absence of any dispute, there would not be any need to make an application to Syariah Court to approve the Declaration of Harta Sepencarian. Therefore, it prevents delay in the division of the asset to the spouse; The Declaration of Harta Sepencarian is not subject to the approval of the court

TAX IMPLICATIONS OF ESTATE PLANNING Individual (deceased) - all sources of income forming during the client's lifetime are taxed based on his personal tax rate taking into account the personal relief and rebates. Executor/Administrator - upon his death, the executor will have to obtain tax clearance from the Inland Revenue Board (IRB) whether there are any unpaid taxes during the lifetime of the testator. Once the initial tax clearance have been obtained, any income of the estate is to be filed using Borang TP where only the personal relief of RM8,000 is available. The amount of tax payable shall be based on the tax rate for an individual. Any income received after the client's death is treated as income of the estate. Trustee - income received is assessed on the chargeable income of the trust. The applicable rate is 25% for the Year Assessment The trustee will have to file Borang TA every year for the income earned whether such income are taxable or not. There will not be any personal relief available save for allowable expenses

TAX IMPLICATIONS OF ESTATE PLANNING Stamp duty - this would be applicable for transfer of properties, shares and other assets, and also for the relevant legal documents requiring stamping according to the Stamp Duty Act The current stamp duty rates payable for properties and shares are stated in First Schedule, Stamp Duty Act 1949: Property and shares Item 32: CONVEYANCE, ASSIGNMENT, TRANSFER OR ABSOLUTE BILL OF SALE: On sale of any property [except stock, shares, marketable securities and accounts receivables or book debts of the kind mentioned in paragraph (c)] - For every RM100 or fractional part of RM100 of the amount of the money value of the consideration or the market value of the property, whichever is the greater - RM1.00 on the first RM100,000; RM2.00 on any amount in excess of RM 100,000 but not exceeding RM500,000; RM3.00 on any amount in excess of RM500,000. In short the stamp duty payable for transfer of property is as follows: First RM100,000 and below, the stamp duty payable is at 1%; and For the next RM100,000, the stamp duty payable is at 2%; and For the amount exceeding RM500,000, the stamp duty payable is at 3% On sale of any stock, shares or marketable securities, to be computed on the price or value thereof on the date of transfer, whichever is the greater - For every RM1,000 or fractional part of RM1,000 - RM3.00 In short, the stamp duty payable for transfer of shares is 0.3% of the value of the shares. The basis of calculating the stamp duty is as follows [according to the GUIDELINES ON THE STAMPING OF SHARE TRANSFER INSTRUMENTS FOR SHARES THAT ARE NOT QUOTED ON THE KUALA LUMPUR STOCK EXCHANGE - No. Ruj: LHDN. 01/34/42/ (T)]

Evaluating a Share Net Tangible Asset per share = Shareholders' Funds Issued Share Capital Shareholders' Funds = Total Assets - Total Liabilities 14-35

Evaluating a Share "PER", the minimum "PER" as extracted from the "Guidelines for the new issue of securities and the valuation of public limited companies" issued by The Capital Issues Committee, Ministry of Finance for certain economic sectors may be used as indicated below:- SectorPE Multiple Property 3.5 Services 4.0 Trading 4.0 Transportation 4.0 Contracting and construction4.5 Tourism (including hotels)4.5 Insurance 5.0 Insurance 5.0 Manufacturing 5.0 Agriculture 5.0 Gaming 6.0 Finance companies 6.0 Stock broking companies6.0 Plantations 7.5 Utilities 8.0 Banks

Value Per Share 14-37

Real Property Gains Tax The chargeable gains arising from the disposal of any land situated in Malaysia or any interest, option or other right in or over such land or the disposal of shares in a 'real property company' is subject to Real Property Gains Tax, which is governed by the Real Property Gains Tax Act The latest Real Property Gains Tax (Exemption) (No.2) Order 2009 [PU(A) 486] provides that, any disposal after 5 years of purchase/acquisition is exempt from payment of RPGT. The Order takes effect this year, that is, from 1 January In other words, gains tax at the flat rated of 5% is payable for the first 5 years of purchase, but after 5 years of purchase, no gains tax is payable for any disposal of real property

Inheritance Tax/Estate Duty In Malaysia, the Finance Act 1992 has abolished estate duty liability of all persons dying on 1 November Estate duty is levied on property which passes on death. The material date of valuation of the property is the date of death. The Estate Duty Enactment 1941 and various other Enactments relating to estate duty were repealed with effect from 1 November The Enactments however, remain in operation only for cases where the date of death was before 1 November

The End