Let’s take Linnet as an example.
Linnet is single and she is 58 years old. She is an ex financial controller working for a manufacturing company in Shah Alam. Presently, Linnet resides in a nice landed property with Linda, her sister. Linda, a widow has a 20-year old son who is now studying in Melbourne, Australia. His tuition fees are currently sponsored by Linnet.
In addition to her property, Linnet has accumulated some financial assets from many years of working. They include savings, investment accounts, EPF monies,
and a couple of life insurance policies.
She has no other immediate family members. Hence, the question is, ‘Is having a will and life insurance policies enough to provide a solid financial safety net for herself, Linda and her nephew if she loses the ability to manage her financial affairs today?
To answer this, we first have to look at:
Situations that May Cause Linnet to Lose Her Ability to Manage Her Financial Affairs
To name a few, they include:
b. Total Permanent Disability (TPD)
c. Critical Illness
e. Mental Incapacitated.
In this article, we shall be assessing the effectiveness of a will and life insurance policies in offering financial support to Linnet, her sister, and her nephew, if any of the five above occurs to Linnet.
As such, let’s take a look at:
#1: Linnet’s Will Document
A Will is a legal document that states the distribution wishes to his or her intended beneficiaries.
This document will come into effect only after Linnet’s death. Hence, it will not be useful if she is TPD, comatosed, mentally incapacitated or critically ill. This is because Linnet is still alive. Therefore, we would now look at:
#2: Linnet’s Life Insurance Policies
Here are three possible scenarios:
Linnet could nominate and assign her life insurance policies to Linda. If Linnet is to pass on in the future, Linda could freely use these sum assured.
2. Critically Ill But Remains Mentally Sound
In this case, Linnet could fund her hospital bills and living expenses if Linnet has a medical card and life insurance policies that have critical illness coverages. So, the question is on the amount of medical and illness coverage she possesses.
3. TPD, Comatosed, and Mentally Incapacitated
Will Linnet be compensated by her life insurers?
The answer is yes. Her life insurer may issue a cheque or place the sum assured into Linnet’s bank account. As a result, Linnet will have a lot more money inside her bank account.
Next question, ‘Who can have access to the money apart from Linnet herself?’
Do Linda and her nephew have:
a. Linnet’s username and password to her bank accounts?
b. the authority to issue cheques on behalf of Linnet?
c. Linnet’s pin number to her debit or credit card?
If the answers are nope, Linnet’s money (cash and life insurance proceeds) shall be as good as frozen in her bank accounts. Linnet can have RM 1 million in cash and RM 2 million in EPF and they are of no help to anyone if Linnet cannot have access to them.
Linnet will be a burden to Linda as she will depend on Linda to take care of her.
It can be problematic if Linda does not have the financial means to do so.
Overcoming Deficiencies Above with a Living Trust
Before I go on, let me reiterate that a living trust is not better than writing a will and having life insurance policies. This is because a living trust is intended to be a much needed ‘team member’ that solidifies your estate plan.
A living trust is able to address the shortcomings addressed above if Linnet only has a written will and some life insurance policies. But, before we look into how it could do so, let me explain how a living trust is set up.
It starts with Linnet having a box. She places her assets and a ‘card’ into her box where the card is an instruction guide on how her assets will be distributed and managed, if she passes on or becomes TPD, critically ill, mentally incapacitated, or comatosed at a future date. Then, she gives her box to her Trustee. Thus,
The box – living trust
The card – is the trust deed
So, what if Linnet passes on?
In this case, her Trustee shall distribute her assets (typically cash) to Linnet’s nominated beneficiaries (Linda and / or her nephew) as instructed in her ‘card’. Her beneficiaries will receive the money within 7 days after her passing.
What if Linnet is TPD, Comatosed, and Mentally Incapacitated?
First, Linnet could name Linda, her sister to be her caretaker in her ‘card’.
Hence, her Trustee could then distribute her assets to Linda, allowing her to use them to take care of Linnet and as well as both her son and herself if Linnet wishes to prepare her living trust in such a manner. Likewise, the assets (usually cash) shall be distributed to Linda within 7 days from any of the events above.
But, What if Linnet remains Healthy and Alive?
First, Linnet has agreed to allocate a sum of cash into her trust account which is managed by the Trustee.
Typically, the placement is for a period of 3 years and this is renewable upon its expiry, for as long as Linnet wishes her best friend to manage her ‘box’.
During this period, Linnet could earn at least 5% in interest a year for cash placed in her ‘box’.
Conclusion: Why Set Up a Living Trust?
This is despite Linnet already having a will and some life insurance policies.
The answers are simple.
a. Linnet’s beneficiaries can receive her assets (cash) in 7 days, which is fast.
b. Linnet can benefit from her living trust as she has appointed Linda, her sister to be her caretaker if she is TPD, comatosed, and mentally incapacitated.
c. Linnet can earn at least 5% in interest a year if she remains healthy and alive.
So, should you set up a living trust?
Well, the best is to find out if this is suitable for you through having coffee with a professional estate planner who specialises in trust related services. You may start by filling up the details below to book a 30-minute consultation session so that you can brainstorm ideas on if this is for you and how you could set yours up: