A 20 mins presentation on “What parents must do to safeguard their children from unforeseen circumstances?
Parents of young children are often overwhelmed by the burden to take care of their children when they are young. However, it is always the concern of all parents on what will happen if either or both parents pass away (say through a common accident). In addition to existing assets, the prudent approach is to purchase life insurance so that monies from life insurance proceeds can be used for their children’s cost of living and education. The usage of life insurance is technically called estate creation and this is normally achieved through term insurance offering high coverage at rock bottom prices.
The problem is that such life insurance proceeds cannot be given to minors because they are not allowed to own assets. Moreover, they may be still immature to manage money.
These life insurance proceeds and as well as all other wealth owned by parents will be held by a trustee who are usually a family member. If there was no Will, the Administrator will hold the monies in trust. If there was a Will, normally the Executor will hold in trust on behalf of the children. The common issues are
- Which family member can be trusted and will not embezzle these monies? Using a simple calculation of providing for $2000 per month for two children over 20 years, the lump sum amount is 2000x12x20 = $480,000 assuming inflation and investment returns the same. You can see the temptation which the family member is subjected to.
- If such a trusted person can be identified, is such a person financially savvy so as not to get cheated by financial salespersons, scams and ponzi schemes?
- Will this family member have the time to maintain proper records so as to ensure that the monies are not accidentally mixed with his own estate resulting in his own creditors making a claim on such monies? Do not forget that the monies will be held in trust possibility for more than one decade depending on the children’s age.
To address the above three problems, we offer a service called Wills & Trusts Planning for Parents with Young Children. Under this service, the estate planning practitioner will be able to arrange for such monies to be placed in a testamentary trust. A testamentary trust is a trust setup only after a person dies. Arrangement can be made to have the trust setup automatically if both parents pass away. After deducting for all debts, all movable assets such as life insurance proceeds, bank saving accounts, fixed deposits, unit trusts, shares and ETFs are shifted to the testamentary trust. Immovable assets such as properties can also be shifted to the testamentary trust. The following are some characteristics of the trust:
- The trustee can be given powers to invest the assets, sell the assets and/or rent properties to generate income and capital gains. Such powers and asset allocation can be pre-specified from the onset.
- Parents are also able to specify exactly which investment adviser the trustee should consult. The trustee has the fiduciary duty to ensure the assets are managed to the benefit of the beneficiaries. In this case, it will be the children.
- The trust can provide maintenance, education and medical expenses to the children on a discretionary basis. A certain regular amount of money can also be specified to provide for the children guardian’s personal allowance.
- As the trustee holds huge powers, it only makes sense that a corporate trust company be allowed to be the trustee. In Singapore, corporate trust company must be licensed by Monetary Authority of Singapore. Also, anyone offering trust services within Singapore can only recommend MAS licensed trust companies.
What is the difference between drafting your own will or getting the cheapest wills from a lawyer as compared to using the ‘Wills & Trusts Planning for Parents with Young Children’ service?
- We will do a thorough fact find and check through all your assets and potential conflicts.
- We will advice you whether your existing assets are sufficient for your children in the first place because we are authorized to advice on protection planning. Your lawyer and yourself are not competent in protection planning. Your lawyers are not permitted by law to advice on protection planning unless they are financial advisers themselves.
- The setting up of such a testamentary trust requires careful planning such as the duration of the trust and the contingency event on what happens if one of the beneficiaries dies. When the duration of the trust ends, how the proceeds are to be distributed is also needed to be plan for. We will help you to plan.
- We will use a MAS licensed trust company as trustee of your children’s assets.
Source: http://www.ifa.sg/wills-trusts-planning-parents-young-children/