How Much To Leaves Behind?

PLANNING so much ahead of time can get quite arduous. After all, it's difficult enough to predict the next few months.  But it's important that we know whether or not we are leaving enough for our family, when we depart.

As such this requires a great deal of foresight, a dash of pessimism (we must always think what is the worst case scenario and try to mitigate that) and adequate planning.  Otherwise, things can turn awry.  Read a real life example below.

Wong was a major shareholder and director of an engineering company.  He was in his mid-40s, married with four children.  Over the years, he had managed to accumulate a few million-ringgit worth of assets.

As his business grew, his company required more working capital to finance the expansion.  Together with his fellow directors, he had signed personal guarantees for several credit facilities like overdraft, loans and so forth.

Initially, the company had to charge some properties and fixed deposits as collateral on I -to- I basis.  But given the company's good servicing track record, it was granted more credit facilities with no extra requirement on collateral to the extent that the credit was almost eight times the collateral.  With the bank's support, the business grew and flourished.  But it was not meant to last.

The economic crunch came and with that, the business buckled. Repayments on borrowings turned choppy and the company's cash-flow position worsened. And alas, Wong passed away, leaving behind a gross estate worth RM5 million to his family.

His contingent liabilities of personal guarantees came back to haunt his family.  Eventually, his estate became insolvent and his family was left with nothing.

Naturally, not all businesses will go down the same way. But this case brings to mind the importance of taking into consideration essential factors such as liabilities and contingent liabilities when planning ahead as they can significantly reduce the size of our estate.

If your estate is worth accumulating in your lifetime, then it is definitely worth the effort to preserve it. most people don't do anything wrong.  They don't do anything and that's where they go wrong.

There are a few cash outflow factors that can determine how much we leave behind for our family.

 Final expenses

Final expenses are paid out of a person's estate before any other liabilities regardless of whether the estate is insolvent or not.  In Malaysia, final expenses can range from a few thousands to tens of thousands.

 Medical expenses before death

According to General Hospital statistics, out of 100 people who pass away in hospital, 17.1 percent suffer from heart disease, 9.2 per cent suffer from stroke and 9.1 per cent suffer from cancer before they pass away. Medical expenses for treatment are not getting any cheaper.  For high net worth individuals who can afford it they may have spent hundreds of thousand, even million for their medical treatment.  If these expenses are not settled, it would be payable  by the estate.

 Cost  of estate administration

Costs of estate administration involve the expenses of applying  for the grant of probate or letter of administration, the expenses of  identifying, gathering and protecting the assets, the professional fees of getting legal, financial and tax advices, the allowable commissions to personal representative 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, a huge estate administration is more complicated and more time consuming, thus incurring higher estate administration costs.

Debts and liabilities

After a person's death, the bank will want the money owed on the houses.  Finance company will want the money owed on the cars.  Credit card companies will want payment on the outstanding balance.  The electric, water supply and telephone companies will send out their monthly statements as usual.  These are your personal debts and it will be passed on to the estate.

 Contingent liabilities

If you are a business owner, the personal guarantees that you signed to its banks; suppliers and other creditors are contingent liabilities to the estate.  These liabilities do not affect you directly but are liable only upon the default of the first debtor, which is the business concern.

In a circumstance whereby the business loses its credit standing to creditors due to the death of key business owner, personal guarantees signed may become actual claims to the estate.

 Unsettled incomes taxes

Effective November 1, 1991, estate duty has been abolished.  However, tax liabilities are still a concern to consider because the estate is liable for income tax.  According to income Tax Act 1967 (Act 33) Section 64 the income up to the date of death and income during estate administration are still taxable.

 Losses due to forced sale of assets

Your assets are doomed to suffer great losses in value if they need to be liquidated to settle outstanding liabilities.  In a downturn, the forced sales of any property may easily bring about value loss of 30 and 50 per cent due to the lack of buyers and financing from banks. So, it is always wiser to plan ahead in order to prevent unnecessary loss from forced selling of assets.

Lost due to liquidation of business interest

If the business interest has to be liquidated to settle outstanding liabilities, the liquidation value is often much lower than current market value.  The forced sales of land, building, inventory, machinery and equipment and others within a short period would result in a loss, more so when the economy is bad.

A lot of people are only concerned about liabilities and cost aspect of estate planning when there is heavy estate duty imposed on the deceased's estate.

In the absence of estate duty, people seem to take other aspects of cost and liabilities in estate planning very lightly.

 From TheSTAR BizWeek dated Saturday 22 November 2003

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