Step Back - Episode 3 : Step Back with a Case Study

Your estate plan involves giving away your assets to your beneficiaries at a time and in a way that best fulfils your ultimate goals for them, after addressing your concerns.

This Episode 3 is a case study on how your estate plan works.

Here’s a little diddy about Jack and Diane

Excerpts of a song by John Mellencamp called “Jack and Diane”.

Jack and Diane have a solid marriage of 35 years. Both are now in their 60s and have just retired. They are both Singapore citizens.

Having been busy with their jobs and raising their son, Tom (now 30 years old), they have had little time for travel holidays. They start making plans to travel to Africa. They want to explore the continent for a year. They are aware of the dangers, and decide to make their estate plans, just in case.

Tom will not be joining them as he ploughs through the job market seeking his ideal job. He is a university graduate with a degree in Business Administration. Tom lives with Jack and Diane, like many young Singaporeans. Owning your home, especially on a single income, is out of reach. To help Tom save, Jack and Diane often find themselves paying for his upkeep.

Jack and Diane are confident that Tom does not regard himself as being “entitled”. He just needs time to find the right career to inspire him. They recollect times when Tom excelled because he was inspired.

Case Notes

Beneficiary: Solely, Tom, a 30-year old Singapore citizen.

Goals: Jack and Diane want to give Tom just enough to keep him comfortable, but not hungry; driven but not defeated.

Assets:?

a. some cash in a joint bank account with ABC Bank Limited.

b. their home, which is an apartment, at 123 Long-Life Lane, Unit #08-08, Singapore 123456 (“Long-Life property”). It is co-owned by Jack and Diane as joint tenants.

c. A life insurance policy, one on each of their lives, with a payout of SGD 1 million, each.

Liabilities:? An outstanding housing loan to ABC Bank Limited secured by a mortgage over the Long-Life property. Roughly SGD 150,000.00 is outstanding.

Requirements and Concerns (ranked from greatest to least):

1.????? Any plan they put in place must be reversible. The plan must be flexible.

2.????? The Long-Life Property cannot deteriorate, and Tom cannot be left destitute because of a lengthy probate. Even though obtaining probate in Singapore takes about 6 months, their minds are not at ease as the timing is not within their control.

Also, the monthly instalments for the housing loan need to be paid to avoid late interest charges being imposed.

3.????? Immediate funds are necessary. When asked to estimate the amount required for Year 1following their demise, Jack and Diane believe that SGD 200,000 should be alright - SGD 180,000 to comfortably to pay off the outstanding housing loan (principle plus interest) and SGD 20,000 for the Long-Life property – repairs, utilities, property tax, etc- allowing for some left over for Tom’s upkeep.

4.????? Uncertain about who Tom’s life partner may be, or whether he will go into business for himself, the balance amount and the home should be protected from a divorce, creditors, and the like. Asset protection must feature in the plan.

5.????? Confident of the values they have instilled in Tom, Jack and Diane want Tom to have whatever is left over once he is 50 years old.?

[Inheritance tax is not a concern as there is none in Singapore.]

Analysis

• Reversibility being of paramount importance, Jack and Diane must remain the owners of their assets.
• SGD 200,000 must be carved out to tie over Year 1. After a conversation with me, this amount is raised to SGD 230,000 as there are funeral expenses, and perhaps other miscellaneous expenses, to factor in.
• With the need for asset preservation, there must be a protective sheath over the assets. If Tom becomes the legal and beneficial owner of the assets, the protection is lost. A Trust must feature in their plans.
• Jack and Diane, however, are comfortable with the protective cover falling off once Tom reaches an age milestone – 50 years old, they decide.

Solutions

My suggestions are happily accepted by Jack and Diane. They find them easy to understand and implement – and most importantly, they are reversible and flexible.

I propose that

1.????? Jack and Diane make Mirror Wills with a Testamentary Trust built in.

“Mirror Wills” are made by two persons, usually spouses or partners, at the same time (or close enough in time) and the Wills are identical. Either Will (or both) can be revoked or changed freely at any time without the consent or knowledge of the other person.

A “Testamentary Trust” is contained in the Will. Instructions are left in the Will by the Testator (the person whose Will it is) for a named Executor detailing how the assets (identified in the Will as Trust assets) are to be managed by a named Trustee.? The Trust comes into existence only upon the passing of the Testator. Just as a Will can be revoked or changed, so can a Testamentary Trust be deleted or changed. The Testator remains the owner and in full control of the assets until death. Upon the Testator’s passing, the Probate Court verifies that the Will is valid before the Trust can be established. Because probate details of the Trust Assets enter the public domain, privacy is compromised. Once the Trust is established, the Trustee manages the Testator’s Trust Assets on behalf of the beneficiaries according to the Testator’s predetermined terms and conditions. The Testamentary Trust lasts until the terms of the Trust expire and the Trust Assets are distributed to the Beneficiaries.

?2.????? Jack and Diane make Nominations under their respective insurance policy

-????????? Such that the entire payout is to be made to each other (as a 1st level nomination) should either of them survive the trip. I remind Jack and Diane of the chance that one of them may survive the other.

-????????? If the 1st level nominee predeceases the insured, or passes away at the same time, then

A sum of SGD 220,000 is first to be paid out as follows:-

• An amount equivalent to the redemption amount payable to ABC Bank Limited to discharge the mortgage over the Long -Life property;
• With the balance amount to be paid to Tom.

This takes care of the need for immediate liquidity. This payout does not need to go through Probate.

The rest of the insurance payout is payable to the Testamentary Trust created in the Will of the insured.

3.????? Jack and Diane can guide Tom via a Letter written to him as to what he is to do with the initial insurance payout. They like the idea of a personal letter to Tom.

4.????? Jack and Diane can guide the Testamentary Trustees by leaving them a Letter of Wishes. I help them draft this Letter - they set out the parameters for distributions to Tom and conditions. They like the idea that if all goes safely, they can change their Letter of Wishes as they watch Tom’s life unfold.

?A Deeper look at the Mirror Will with a Testamentary Trust.

What may Jack’s Will may look like?

If Diane survives Jack (and returns a widow):

-????????? The Long-Life Property is identified as being held by Jack and Diane as joint tenants, with the right of survivorship.

Under law, property held under a “joint tenancy” goes to the survivor.

Jack reiterates his intention that the property is to go to Diane virtue of the right of survivorship.

-????????? The money in their Joint Bank Account goes to Diane absolutely.

Even though this is a “joint” account, there is no right of survivorship. The account may operate on an “and/or basis” but this does not translate into a joint tenancy.

If Diane should inherit all the amounts that Jack has placed in the account, he should say so in his Will.

-????????? There is no mention of Jack’s insurance payout as Diane, being his sole Nominee, would have obtained the full amount immediately upon Jack’s death.

-????????? And lastly, Diane is appointed as Jack’s sole Executor.

This ties in neatly as Diane is his sole beneficiary as well. No third person need be involved.

If Diane does not survive Jack:

-????????? Jack appoints his nephew, David, to be his Executor. David, a lawyer, is several years older than Tom.

-????????? The money in the Joint Bank Account is now all Jack’s because Diane has predeceased him. Diane’s Mirror Will would have said so.

-????????? Jack creates the Testamentary Trust.

• He names the Trustee, another nephew, Goliath, also several years older than Tom. Goliath is an accountant. He would understand his fiduciary duties in operating the Trust.

The “fiduciary duties” of a Trustee applies to all types of trust, albeit a living trust or a testamentary one. In a later Step Back episode, these terms will be explained in more detail.

• Tom is named as Jack’s sole Beneficiary in the Testamentary Trust.
• The Trust Assets are identified.

1. The Bank Account with ABC Bank Limited, which at this point of time is no longer a joint account.
2. The Long-Life Property - with the right of survivorship, Jack is the sole owner of this.
3. Several Fixed Deposit Accounts with XYZ Bank Limited belonging to Jack. After receiving the payout from Diane’s life insurance policy, Jack placed them in several Fixed Deposit Accounts.

• ?The Testamentary Trust expires on Tom’s 50th birthday. The balance Trust Assets will be distributed to Tom at that time.

?

The Terms of the Testamentary Trust Jack’s Will

The Testamentary Trust can serve as a flexible tool to help guide Tom after Jack and Diane have passed.

-????????? Protection of assets if there is a divorce.

The Trustee cannot sell the Long-Life Property. Tom can live in it rent free. If Tom marries, he can continue to live there with his spouse and children of his lineage, only if Tom and his future spouse enter into a pre-nuptial agreement.

The prenuptial agreement must stipulate that all Trust Assets (which includes the Long-Life Property) will not be a matrimonial asset.

Before letting Tom and his spouse live in the Long-Life Property, the Trustee is to obtain a legal opinion from a lawyer practicing in Singapore on the enforceability of the prenuptial agreement at the Singapore Courts.

If the agreement is not enforceable, then the Long-Life Property is to be rented out, with rentals paid into the Trust.

?

-????????? Jack and Diane’s ultimate Goals

Recollection: “They want to give Tom just enough to keep him comfortable, but not hungry; driven but not defeated.” ?

Prior to Tom attaining the age of 38 years, the Trustee is empowered to apply for the maintenance, education, advancement or benefit of Tom any part of the Trust Assets.

This gives the Trustee leeway to gauge how Tom develops and what he needs to steer his career in the direction he wants. It also ensures that Tom is able to study full-time and continue to have a comfortable life.

Jack then has me draft his Letter of Wishes with him.

Conclusion

Jack and Diane started with a game plan. With my help, they drew up their Concerns, ranking them. Next, we came up with an Assets List. And then, the estate plan was drawn up and the estate planning tools put together and implemented.

With peace of mind, Jack and Diane happily romp around Africa, knowing that they can change their plans upon their return or let it sit for years.

?