10 Tips On How To Leave Money For The Young

Today, we have reached the 200th week of our #SundayTimesRecap learning series. What a milestone to celebrate!

?

When I started this initiative back in 2020 during covid lockdown season, it was because, for the last 20 years before then, I had been reading the Sunday Times Invest section every week, and that was how my knowledge of financial concepts compounded over the years.

?

Therefore, I thought, since I was already reading on my own, why not share what I read every week with you all on this channel so that we can learn together? And that was how the 1st weekly sharing of the #SundayTimesRecap learning series started..

?

So, if you have been reading with me since the start, please do give yourself a pat on your shoulder! Many people say it is difficult to learn about money matters, but you have just proven them wrong – all it takes is a consistent effort, and eventually you will grow your knowledge over time :)

?

For this week’s reading, let us look at this article published in the previous Sunday Times Invest Section, “10 tips for a smooth legacy planning journey” – the information is especially helpful for parents or even angels like you who are thinking about leaving money for the younger generation.

?

In this article, we can learn that Boston Consulting Group’s 2023 Global Wealth Report estimates that personal financial assets in Asia (excluding Japan) will rise by an average of 7.8% annually over the next five years, well above the 5.3% global average. With more wealth on hand, legacy planning becomes more important. Here are 10 things to think about:

1. Do not overlook the impact of the ABSD (additional buyer’s stamp duty) when making a will. Given our current tax regime, with ABSD and seller’s stamp duty (SSD), while you may have good intentions to leave properties to your children, you might burden them with tax issues. These taxes are not payable on death, but they may kick in when the children undertake any property transactions. Beneficiaries who want to sell their stake may incur SSD depending on when the deceased bought the property. If a beneficiary wants to buy an additional property, he or she will have to pay ABSD.

?

2. Don’t forget mortgage insurance. A businessman died, leaving behind several properties including one that had a large outstanding loan. However, his homemaker wife and son who had just started working did not meet the income requirements under the total debt servicing ratio framework. Aneat solution would have been for the businessman to have taken out insurance on the home loan, to ensure that it would be fully paid up should he die prematurely.

?

3. Set up a standby trust for non-working spouses, elderly parents or those with special needs. Even though standby trusts are not widely employed, they may be useful given our ageing population and to cater for children with special needs. Take a couple who want to make provision for their special needs daughter who is likely to outlive them. Assume they take out a loan to buy an investment property. There is a clause in the will for a standby trust that will spring into action once the parents die. The property’s ownership will transfer to the trust. The trustee will handle the rental income and look after the daughter’s affairs. Note that the parents should also take out mortgage insurance to ensure the loan is paid up if they die earlier. The standby trust does not incur costs but, once it kicks in, there will be the usual trustee expenses. Therefore, it is best to engage a professional trustee company for peace of mind.

?

4. Start by defining your legacy; communicate and review regularly. Start planning early on. You will have to ask some tough questions such as, “Is it just financial security for our loved ones or do we also want to make an impact in areas that we’re passionate about?” Whether the children are already financially secure or are young and need financial support are factors that will also determine who the beneficiaries should be, how much should be allocated to each area, and how it should be distributed. There must be sufficient funds to meet your own retirement needs as well as to cater for what you plan to leave for the next generation, whether for family members or a charity. Therefore, it is important to take stock of everything that you own, whether it is insurance policies, bank accounts, investments, property and businesses, as well as your debts. It is also important to communicate the legacy plan to avoid confusion or conflict. Note that legacy plans should be reviewed and updated periodically as life circumstances, family dynamics and assets change. This ensures that the legacy plan reflects your current needs and wishes.

?

5. What about passing a substantial amount of wealth to children early on? There was a scenario where a couple in their 60s gave away a large proportion of their wealth to their three children who were, at that point, in their late 30s and early 40s. In the Asian context, 60-plus is still young, so giving away their wealth while they still have another 20 years of lifespan would be surprising to many. However, the couple felt that they did not want to wait until their 90s, when their children would be in their 60s or even 70s before distributing the wealth. They did not need so much money to live on and felt that the children needed it more than they did as there were grandchildren. The funds could give the adult children the chance to clear any debts they might have and get a head start on financial planning. The couple also felt that the children were sensible and mature enough to handle the funds, and would not splurge it all in one go. On balance, this could be a safe enough decision as the couple kept a primary residence for themselves and had set aside sufficient savings for their daily needs.

?

6. Don’t count your chickens before they are hatched. But do not assume every parent will act the same as the previous scenario. With greater life expectancy, it is possible that your parents may be stretched financially after they retire. Instead of parents who help children financially, there are children who help their parents with CPF top-ups, for example. Note that it is usually the case where adult children often give their parents a monthly allowance and chip in to pay for their health insurance plans.

?

7. Start to invest. Regardless of whether there will be a legacy for you, it is important to invest. For those with free cash, diversify investment portfolios across different asset classes, risk levels, and geographical regions to offset risk. Enhance long-term returns by looking at new investments if there is sufficient investment knowledge. Consider doing an allocation based on your investment goals and time horizon and approach an investment professional if you need more help. Keep yourself updated on financial markets, economic trends and investment opportunities. Continuously educate yourself on personal finance topics, investment strategies and financial planning.

?

8. Rein in expenses. Adopt the usual budgeting rule of thumb of 50:30:20. This means 50% of your income goes to needs, 30% to wants and 20% to savings. Prioritise those liabilities that come with the highest interest rate and focus on paying that down. Avoid rolling over credit card debt as far as possible. With interest rates easily at 26% or more, the outstanding amount quickly rises if you keep rolling over the sum. Younger couples too may have found that their mortgage payments have gone up as interest rates have risen. Although the higher payments may be met from CPF funds, it means there is less money for their retirement. Some of these couples may find themselves quite stretched. They are also at the stage where they are starting a family. If the breadwinner at this point develops a critical illness, the household budget will become quite stretched. Apart from ensuring that there is sufficient critical illness coverage, also aim to reduce discretionary spending and increase the proportion that goes to savings.

?

9. Insurance is increasingly popular as a wealth management tool. Insurance policies are increasingly used as a financial management tool, not only for mitigating risks but also for wealth accumulation and intergenerational wealth transfer. One example is a life insurance plan with a policy term of 300 years. Such a policy has intergenerational wealth transfer in mind and can be useful for those who want to explore very long-term wealth planning for their future generations. This plan not only targets the very wealthy but is also designed to suit mass-affluent clients who plan to provide beyond their children’s generation. Clients need to go beyond accumulating “products” and put in place a comprehensive legacy plan that will be activated when a trigger event occurs, such as incapacity or death. In any case, it is important that putting in place a lasting power of attorney and drawing up a will are important for everyone. These provide a seamless transition of decision-making authority and asset management while protecting the interests of the individual and his family.

?

10. Nominate beneficiaries in your insurance policy. There are several ways for people to pass on their wealth to their children. The approach depends on the size and type of assets, family dynamics and how the person intends their wealth to be used. One example is to nominate children as beneficiaries for their insurance policies that have death benefits. For someone who bought an insurance policy with a $200,000 death benefit and has done the nomination of beneficiary - upon death, the named beneficiaries will get $200,000. Even if the nomination of beneficiary process was not done, insurers may pay up to $150,000 to the proper claimants under the Insurance Act and any remaining amount will be paid to the administrator of the estate or executor upon receipt of letter of administration or probate. It is important to ensure that your premiums are paid on time, so that the plan remains in force and its benefits apply.

?

In summary, legacy planning can be an emotionally fraught journey. Starting early and better planning helps you avoid pitfalls that can cause problems for your loved ones even as they are grieving.

?

When you plan with the end in mind, it is also important you also build up assets that gives you monthly income, so that you not only take care of your old age expenses, but you can also create a legacy for your loved ones even after you have passed on.

?

I invite you to join my next webinar, “The Lifetime Income Streams”, on Tuesday 18th Jun 2024 at 8pm, where my teammates and I will share more knowledge for you to embark on your investing journey. You will feel more confident in managing your money matters as most of our attendees can testify.

?

Register for the zoom link – select “Invited by Victor” - here: https://www.thelifetimeincomestreams.com/tlisvip.

?

To reach me over my personal Telegram chat, click here: t.me/victorfong

?

Subscribe directly to my Telegram Channel for more life and money tips delivered weekly: t.me/victoriousfinance