TODAY, it is a sad day for Leng Chai. He got divorced from his wife, Maggie. They had a roller coaster marriage.
During happier times, they became parents to twin girls. The court granted Maggie custody of the twins. Leng Chai spent so much time to build a successful business that he neglected Maggie and the girls in the process.
Leng Chai and Maggie attempted several times to reconcile but each time, their relationship became more strained.
As Maggie has been out of work for some time to care for the twins, Leng Chai is worried about the financial wellbeing of the girls (now three years of age) in case he dies before they grow up.
Though Maggie knows that Leng Chai loves the girls, she is also worried that he may not keep his promise, like so many of the promises he made when they were trying to save their marriage.
Maggie is also worried that he may remarry and neglect the twins especially when he has children with his new wife.
Leng Chai, in turn, is worried that Maggie may remarry and neglect the girls to focus on her new family. The least he can do is provide for them financially.
An easy way to resolve both Leng Chai and Maggie’s concerns is for Leng Chai to setup a trust for the girls. This agreement to setup a trust could be incorporated as part of their divorce settlement.
The trust would need to be one that cannot be revoked by Leng Chai. If Leng Chai is allowed to revoke the trust, Maggie would be concerned because there is no certainty that Leng Chai will not terminate the trust arrangement in the future or amend it to benefit his new family.
Leng Chai should approach a licensed trust company that is able to address his and Maggie’s concerns for a customised trust solution to be prepared, rather than using a boilerplate trust template.
Having a trust company to act as the trustee ensures continuity of the trusteeship and accountability to the twins.
As the purpose of the trust is to provide financial security to the girls, it is important to ensure that the assets placed into the trust provide sufficient funds for them even when Leng Chai is no longer around.
Since Leng Chai intends to purchase a RM2 million life insurance policy, he can transfer it to the trustee together with the unit trust investments he owns that has a market value of RM1 million. With RM3 million in the trust, the twins would have financial security to pay for their daily expenses, education, and medical needs in the future.
During Leng Chai’s lifetime, there should not be any distribution to the girls, but any dividends are reinvested by the trustee to increase the available amount for them in the future.
Leng Chai can continue to provide financially for the girls before his death or disability.
Having a trust company to act as the trustee ensures continuity of the trusteeship and accountability to the twins.
When death or disability occurs to Leng Chai or when certain conditions stated in the trust are met, it would trigger the trustee to begin disbursing the funds for the girls’ maintenance, education, and medical needs through their guardian before they are 18 years old.
Leng Chai may want to indicate his investment preferences or give power to the protector to make such a decision. It would make sense for Leng Chai to appoint Maggie to act as the protector when he is no longer around.
As the protector, Maggie would be the watchdog for the girls and liaise with the trustee on the needs of the girls from time to time.
The trustee may also refer to the protector for an opinion before exercising its discretionary powers with a view of fulfilling the objectives of the trust and to benefit the twins.
This trust arrangement for the twins should end when Leng Chai is no longer around and the girls reaching the age of 25 years. When they are 25, the remaining funds are to be given to them as a legacy from Leng Chai.
At the same time, Leng Chai should have a will written where part of the instructions may give other assets to the twins when they reach a certain age.
However, if he remarries, he will need to prepare a new will as that marriage will revoke an earlier will.
Maggie in her will may use her savings and assets to include a testamentary trust for the girls, should she pass on before they are 25 years old. With a testamentary trust, Maggie will leave clear instructions on how her assets should be used for the twins. This is similar to Leng Chai’s trust for the girls.
There are a few differences between Maggie’s testamentary trust and Leng Chai’s trust.
For Maggie’s testamentary trust to take effect, it is dependent on Maggie’s passing before her will is probated and all her debts and taxes fully settled before the testamentary trust begins. It would be different for Leng Chai’s trust where it is not in his will but in a deed which begins during his lifetime.
Leng Chai would have to retitle the unit trust investments and insurance policy into the name of the trustee.
By doing so, the trust will not be subjected to probate and debts, resulting in the trustee being able to use the assets for the girls immediately when Leng Chai is disabled or dies or even when he is having financial difficulty.
This will address their concerns and both will have their wishes come true.
This column is produced by Rockwills Trustee Bhd. Please email your questions related to estate planning to Rckwills’ training and business development assistant general manager Sam Chan (samchan@ rockwills.com).