“How Much Are You Truly Leaving Behind?”, Published in The Star, On 16 July 2022.
Part and parcel of good and holistic financial plan means accounting for the possibility of your own and your spouse’s demise.
However, most people don’t like talking about this part of their wealth planning. Firstly, it is difficult to predict what may or may not happen in the future, and on top of that the topic isn’t exactly all roses and sunshine.
Hard as it is to sit and contemplate the worst-case scenarios in life, it is a necessary step to take to make sure your family will have accessibility to the cash flow and assets to survive. Many middle-class folks think that their lives are comfortable now, hence their families should have no problem surviving and maintaining the same lifestyle. But what they do not realise is the amount of cash outflow that can be incurred after death. Even the wealthy can end up leaving little to nothing for their families, after deducting these cash outflows.
Take the example of Mr. Tan, a family man with four kids in his mid 40s. Mr. Tan was a highly successful engineer, serving as the director and major shareholder of his own engineering company.
As the engineering company was thriving, Mr. Tan needed more investment as capital to help expand and scale the business. To do this, he and his directors signed personal guarantees for credit facilities, such as loans, and overdrafts.
Initially, the business boomed and flourished. But that did not last. As they struggled to keep up with their loan repayments, an economic crisis hit, further affecting the company’s cash flow. Amid all this stress, Mr. Tan suffered a stroke and passed away, leaving behind a RM 5mil estate for his family – a sum that seems sufficient for the family to go on with their lives for a long while.
But alas, most of his assets went to settle the mounting debts and liabilities. Eventually, his estate got depleted, and his family was left with close to nothing.
Not all stories are as extreme as Mr. Tan’s. This example highlights the importance of reviewing the estate that you leave behind and take mitigating steps to ensure your cash outflows don’t affect the final amount your family receives by much.
In my experience, the following incidentals are the source of some of the biggest cash outflows after a death:
- Final Expenses
Final expenses such as funeral costs are paid out of a person’s estate before any other liabilities, regardless of whether the estate is solvent or insolvent. In Malaysia, final expenses can range from a few thousands to tens of thousands. - Medical Expenses Before Death
With healthcare costs constantly on the rise, medical bills become another big cash outflow possibility. Considering that we are only just beginning to come out of a pandemic, the possibility for covid-19 infection and hospitalization is still high.Even if you are an individual of high net worth, complications to your health and the desire to get the best treatment possible could result in a bill that runs up to the hundreds of thousands or even in the millions. If these cannot be settled by your family’s liquidated assets at the time of your death, it would be payable by the estate you leave behind. - Costs of Estate Administration
Many underestimate the amount of chargeable legal fees and man-hours that is spent in estate administration, especially if you have not documented this information prior to your death. These involve the expenses such as applying for a grand of probate or letter of administration, the expenses of identifying, gathering and protecting the assets, the professional fees of getting legal, financial, and tax advice, the allowable commissions to personal representatives for duties performed, the cost of investigating the claims of the estate and/ or against the estate and the expenses of transferring the gift to the beneficiaries.Generally, the larger your estate, the more time and money it costs to put everything together. - Debts & Liabilities
After your death, any creditors will require that all outstanding loans and debts be settled up. Banks will want the outstanding amount owed through your housing loans, car loans or personal loans. Credit card companies may require that all outstanding bills be settled. Any outstanding income taxes owed to the government will need to be settled in full. Basically, anything that is under your name and has not been paid in full will need settling. These are your personal debts of which will be settled through your estate. - Contingent Liabilities
If you are a business owner, the personal guarantees that you signed on behalf of your company with the company’s banks, suppliers and other creditors are contingent liabilities to your estate. These liabilities come into effect only when the first debtor – which is the business concern – defaults on payment of these loans and debts. In circumstances whereby the business loses its credit standing with creditors upon the death of a key business owner, personal guarantees signed may become actual claims on the deceased’s estate. It is easy to see the impact of personal guarantees upon the following illustrative balance sheets:
- Unsettled Income Taxes
Currently, there is no estate duty in Malaysia. However, tax liabilities are still a major concern because the Income Tax Act’s Section 74(5) requires the will executor to first ensure that there is no outstanding taxes before distributing the assets left behind by the deceased. Under the same law’s Section 106, the Inland Revenue Board has the right to sue the will executor to collect the taxes owed, if the latter fails to clear off the outstanding tax when the deceased has left behind assets. - Losses due to Force Sale of Assets
In a situation where your liabilities can only be settled by liquidating your assets, the forced sale of these assets could deplete your estate significantly. You will not be able to pick and choose the right timing and optimal pricing to sell your assets. On top of that, if there is an economic downturn when this happens, fire sales of any property can diminish its value easily by 30 to 50% due to the lack of ready buyers and the withdrawal of financing from banks. - Losses due to business interest
Similarly, if you own a business and the business interest has to be liquidated to settle outstanding liabilities, more often than not the liquidation value of your business will be much less than current market value. The forced sales of land, building, inventory, machinery, equipment and other assets within a short period will most definitely result in losses, and the impact is worsened when the economy is bad.Make no mistake. Death does not offer a free pass.While living, you may be financially able to handle your creditors and outstanding loans, but in the event of death, all those would be accounted for with your assets and estate. Therefore if you wish to leave your family well taken care of, perhaps it would be best to relook at your estate.In the past, estate planning was taken more seriously when there was a hefty estate duty imposed. While the duty has been abolished, this does not mean that your estate is impervious to any other financial forces or leakages.So, where does all this talk about death leave us? Well, it is never too late to start reviewing and planning your estate while you are well and living. After all, if you’ve spent your entire living building and accumulating your wealth for your family’s financial freedom, why not have the peace of mind to know that it can continue after you are gone?
Yap Ming Hui is a licensed financial planner. The views expressed here are the author’s. Any reliance you place on the information shared is therefore strictly at your own risk.
The article is featured in The Star Online, at the following link:How much are you truly leaving behind? | The Star