What Happens to Assets of Incapacitated Person? (Part II)

What Happens to Assets of Incapacitated Person? (Part II)

 

Last month we discussed on the topic of incapacitated property owner and the legal difficulties surrounding the issue. This month, we will look into what the property owners and family members can do prior to and after the unfortunate event of incapacitation.

To recap, incapacitated person generally means person who has undergone unfortunate event that either caused them to lose sanity of mind, or physical impairment that ultimately resulted in limitations to make their own decision.

Normally, the assets will be maintained just as it were prior to the occurrence of the incapacitation. Our family member cannot simply think that they have inherited the rights or duty to help us to make conscious decision for us on how to manage our assets when one became incapacitated. Having said that, you cannot sign on behalf of your spouse who was incapacitated even though you have a medical officer certified on the condition. I have helped a client completed a permanent disability life insurance claim before, in doing that, we had to get the thumbprint of the incapacitated person in place of signature, the spouse could not help to sign on behalf despite the obvious close relationship.

Do the Right Thing Right
It is obvious and simple, but yet many people has failed to do this right, the first thing everyone who still healthy now can do is to do planning for insurance, especially have adequate coverage for critical illness and medical coverage. Looking at this topic that we are discussing now, hope that people will also aware that the total permanent disability coverage do carry certain significance as normally the TPD coverage is linked with death coverage, and most people have a blind spot thinking that because “I do not have family, I am alone, therefore I do not need to have life insurance coverage”.

You may not have to worry about leaving behind a chunk of money to your family should you pass away, but what happen when the dread event is only TPD, or critical illness? Since you have no family member to care, it also means you are likely to have no one to rely on during this rainy day. Hence it is only wise for us to have some funds prepared to carry us through financially through this sort of events, and insurance is the best tool to use for such planning.

Know Your Objective
Do not use insurance product with aim for investment, but merely for protection. Having done this right and properly, dependents and family will be better off while they are already emotionally drained and tasked with dealings of such misfortunate events, at least the financial burden side is not as heavy. Another advantage is that claimed proceed from life insurance is creditor proof.

Declaration of Trust
Secondly, when one is healthy, one should set up a declaration of trust. It means setting up of a trust when one is healthy, and become the trustee for the trust while appointing a trust company to be backup trustee when triggered event happen.

This trust is unique in the sense that prior to the triggered event, all the wealth and assets do not have to be transferred into the trust first, it allows the settlor (trust settler) to still retain control on how to manage the assets and wealth; when the triggered event (death, mental incapacity, TPD, critical illness), the backup (or substitute) trustee will step in and becomes the trustee and distribute the assets inside the trust according to the trust deed outlined by the settlor before the occurrence of the triggered event, ie. Distributing assets to named beneficiaries etc.

Now, what kind of assets can we use in a declaration of trust? Can we put into the trust assets that are still under encumbrance? The answer is yes, so, assets from real estate, money in bank account, shares, unit trust funds, etc can all be part of a declaration of trust. An alternative to a declaration of trust is living trust. A living trust can provide the benefits outlined earlier, but the settlor will have to transfer the asset into the trust at the point of time where the trust was being set up, which means losing out on the control of the assets. Therefore, a declaration of trust will be more suitable for this kind of planning.

What is a Durable Power of Attorney?
If you have a brain disease that gets worse over time (such as Parkinson’s disease or Alzheimer’s disease), you may wish to create and sign the DPOA (Durable Power of Attorney) papers early in the illness.Once you have signed a living will and DPOA, keep them in a safe place. Do not put them in a safe deposit box because others may not have access to them when the documents are needed. It is a good idea to discuss your wishes with your friends, family members, and your healthcare provider.

Give these people copies of your living will or DPOA-HC (Durable Power of Attorney for HealthCare). Then they will have easy access to the documents if they are needed.

I have written my Will, what else?
Many people will have a misconception that when it comes to estate planning, it means writing a will. Actually, writing a will is only a small part of estate planning, albeit it is a very important and critical part. But for a comprehensive estate plan to work, it may involve use of trust, sometimes, testamentary trust (setting up only after death), or living trust, or it may involve the use of power of attorney; of course, what solutions or how the estate plan design should be, it all boils down to the situation of the client and what are the intention of the clients is.

What can We Claim from SOCSO and EPF?
In addition, i can share more on what people can commonly look at here, under Employees Social Security Act 1969, when a member becomes invalidated, he or she can get payment of benefits introduced under Invalidity Pension Scheme provided their income does not exceed RM3,000 and are below 55 years old. One thing worth to pointed out here, it will be The Medical Board but not the Social Security Appellate Board who will determine the invalidity of employee.

Furthermore, an employee also entitled to get disablement benefits, which divided between permanent or temporary disabled. Also, invalidity means a serious disease or disablement of a permanent nature that is either incurable or not likely to be cured, as a result of which an employee is unable to earn at least 1/3 of what a normally able person could earn, and it also covers heart attack, kidney failure, cancer, mental illness, chronic asthma and other similar conditions are chronic ailments or diseases that could be considered for invalidity.

On another note, if conditions are fulfilled, one can also seek to claim incapacitation withdrawal from your KWSP account and in addition to that, you will receive an incapacitation benefit amounting to one-off payment of RM 5,000.

However, the conditions are not as lenient as one would expect it to be however, the applicant must be younger than 55 year old when KWSP receive the application, and must not be working, have savings in KWSP account, ability to provide evidence of medical record by Doctor, and also have to attend interview session prior to knowing if the application will be approved.

Regarding cases and numbers related to mental incapacitation are on the rise one part is that we are culturally lacking the awareness of consulting with psychologist or psychiatrist, be open to communicate on our personal stress and pressure with loved one, their supports could mean a world when we are facing mental stress, do not let it develop into serious issue.

Think Twice Before Being Adventurous
On physical impairment and critical illness, stay healthy and live a balanced lifestyle, sometimes it means think twice before we decided to do something that is exciting such as participating in extreme sports, or ensure we have done proper planning to deal with the consequences.

Who can i rely on for a comprehensive estate plan?
At VKA Wealth Planners, we will conduct our first line defense by conducting a comprehensive Financial Plan for our client. By doing such processes, we are able to identify areas of financial concerns and find ways to address them before it happens. It will limit or even address most of the financial concerns we talk about earlier.

As financial planners we always advocate preparation before such major disability occurs. Different scenarios have to be discussed to simulate possible financial stress to the family and assets. With a proper financial plan in place, client will be much prepared to face situations like these because the finances are not tied up but more money can be released to the family members to carry on their daily living.

The above was an interview on the topic in Property Insights Malaysia and published on March 2015 issue as a follow up story to the Feb 2015 issue (Click here to read it)

What Happen to Assets of Incapacitated Person? by Kevin Neoh What Happen to Assets of Incapacitated Person? by Kevin Neoh

What Happen to Assets of Incapacitated Person? (Part I)

What Happen to Assets of Incapacitated Person? (Part I)

Generally, according to act such as Income Tax Act, “incapacitated person” means a minor or a person adjudged under any law to be in a state of unsoundness of mind, whereas for some circumstances, we may use incapacitated to refer to “persons with disabilities” include those who have long term physical, mental, intellectual or sensory impairments which in interaction with various barriers may hinder their full and effective participation in society.

However, in any given instances, incapacitated person generally means person who has undergone unfortunate event that either caused them to lose sanity of mind, or physical impairment that ultimately resulted activity limitations.

Normally, the assets will be maintained just as it were prior to the occurrence of the incapacitation. Our family member cannot simply think that they have inherited the rights or duty to help us to make conscious decision for us on how to manage our assets when one became incapacitated. Having said that, you cannot sign on behalf of your spouse who was incapacitated even though you have a medical officer certified on the condition. I have helped a client completed a permanent disability life insurance claim before, in doing that, we had to get the thumbprint of the incapacitated person in place of signature, the spouse could not help to sign on behalf despite the obvious close relationship.

All movable and immovable assets shall remain in the ownership of the incapacitated, thus rendering them in passive state. Any stock investment will be riding the volatility and next of kin can only watch in pain as the family wealth shrink in a falling market.

Many people have not thought about this consequences but it will be hugely impactful and could be worse than the event of death because at least we could distribute the assets to the beneficiaries in that case.

Power Of Attorney (POA)
Power of Attorney (POA) is a legal document where the principal appoint an agent to act on the principal behalf to deal with certain things and scope that will be outlined in the document. Related to healthcare and incapacitation, a special type of power of attorney that is used frequently is the “durable” power of attorney. A durable power of attorney (DPOA) differs from a traditional power of attorney in that it continues the agency relationship beyond the incapacity of the principal. Most often, durable powers of attorney are created to deal with decisions involving either property management or health care. One can use durable power of attorney to appoint a family member or friend to make medical decisions if one cannot make them for him. Of course, you must be legally competent at the time you sign a DPOA for it to be legal.

If the incapacitation is on physical impairment or disability then you will pretty much still have a say on how to handle your stuffs, but if it is related to mental incapacitation, then of course the patient will not be able to make informed and sound decision as he or she is of unsound mind. Interestingly, even if the incapacitated person who are of unsound mind had the awareness and wrote a will in that condition, the will would not stand and assets are going to be ‘frozen’ as well since no one could do anything to those assets.

The assets will still be at its status quo, as of prior to the unfortunate event. Next of kin also cannot do anything to ‘represent’ the patient to do any decision on how to manage the asset, unless there was a power of attorney signed prior to this.

A will is a legal document. For it to be valid, some conditions must be fulfilled. For instance, there must be two witness (who are not the beneficiaries of the will), and more importantly, the person who write the will (Testator) must be in sound mind. A person can be conscious, have awareness, but he may not be having a sound mind and be able to make independent decision and thought process, if such is the situation, the will will not be valid if it is challenged because the Will is resulted from someone who is not able to think independently and logically.

What’s In My Mortgage Agreement?
Obviously,  liabilities of the incapacitated person will continue to be liable against his wealth and capacity. Generally, in our mortgage agreement there is a clause stating “any legal limitation, incapacity or the borrower or the power of any attorney, partner, agent, or other person purporting to act on behalf of the borrower or irregularity in such borrowing or the incurring of such liabilities shall not affect the borrower’s liabilities under this agreement”. So, someone has to come out to help on the repayment, or that most conveniently and wiser way is that there will be insurance proceed that is planned for the purpose of debt cancellation, if the incapacitation has its root in being permanently disabled or due to critical illnesses such as cancer.

If the properties are still under encumbrance, such as mortgaged to a bank, then the bank may execute its rights and execute its power of attorney to foretell the property and recover the bank’s stake in it, should the repayment ceases.

If the property is not mortgaged to bank, then it means the part-owner will have to be stuck to the property for good until the other part-owner who is incapacitated regain the capacity or pass away (and that shareholding will be inherited by the beneficiary, who may cause some challenges to the part-owner, such as objecting to sale of the property, or insisting to have the right to reside in that property since they hold equitable share of the said property).

If the property is shared, and mortgaged to bank, then the part-owner will have to make sure the repayment will continue to be made or the property will be repossessed or simply, be force-sell, if the proceed from foreclosure exceed the total debt, the balance will have to be divided and share among the part-owner and the other owner who is now incapacitated. Therefore, it is imperative that we have a properly planned debt cancellation program such as MRTA or MLTA in place.

Cases and numbers related to mental incapacitation are on the rise one part is that we are culturally lacking the awareness of consulting with psychologist or psychiatrist, be open to communicate on our personal stress and pressure with loved one, their supports could mean a world when we are facing mental stress, do not let it develop into serious issue.

The obvious one, consult medical advisor, and the not so obvious but equally important one, consult a legal advisor as well as financial planner, both will be able to help you to deal with different aspect of the problems.

Under financial planning practices, we will conduct our first line defense by conducting a comprehensive Financial Plan for our client. By doing such processes, we are able to identify areas of financial concerns and find ways to address them before it happens. It will limit or even address most of the financial concerns we talk about earlier.

Read more next month to understand what property owner and their family member can do to prepare themselves before to or after the onset of such unfortunate event. (Click here for the follow up story)

The above was an interview on the topic in Property Insights Malaysia and published on Feb 2015 issue.

What Happen to Assets of Incapacitated Person? by Kevin Neoh What Happen to Assets of Incapacitated Person? by Kevin Neoh What Happen to Assets of Incapacitated Person? by Kevin Neoh

Tips for responsible financial management

Tips for responsible financial management

rainydayfund

It is always ideal and essential that before you move on with any of your investment plan and bid ambitious money-making idea, try make sure that you have had your back covered.

Do not regard this as an unwelcome distractions or delay to your planning, in fact, this should be dealt with as the first step to any other dreams that followed.

Despite the well accepted fact that everybody’s circumstances are uniquely different from one another, but in general, each of us should do the following:

  • Establish an emergency fund
  • Ensure sufficient insurance coverage is in place for your dependents in the event of death or at the onset of critical illness.
  • Ensure you and your partner have wills on how your estate should be distributed in event of death.


Emergency Fund

Set aside or follow a disciplined effort to built up an emergency fund that is sufficient to cover at least 6 months of your income, so that you will not feel nervous or helpless during sickness, retrenchment, or when looking out for new job after resigning. This emergency fund should be kept in deposit or money market account which will give ease of liquidity when it is needed. With an adequate emergency fund backing up, things could not go too wrong as you have buffer to support you through the rough tide.


Insurance Coverage
Just sit down and imagine that you have stop breathing yesterday. How much is needed to settle your debt today, eg. mortgage, credit card, PTPTN, Hire-Purchase, etc. How will your dependent continue to survive without much challenge and hurdle financially especially if you are the breadwinner in the family or the person who bring home a big portion of the household income is you? If you were to become ill long term, how much of your current income or savings can continue to support you and family, for how long? Just ensure that, if at all possible, you will have at least this amount of life insurance coverage in place. Also, ensure that you have a basic medical insurance in place, so that your emergency fund and hard-earned savings will not be wiped out overnight by hefty hospital bill.

You may seek the help of licensed financial advisor to have a personalized insurance solution for you, as they will be able to integrate plans from different companies to cater to your unique need.


Will
s

A will is a legal document which sets out who is to benefit from your property and possessions (your estate) after your death. There are a number of ways of making a will but, to be on the safe side, it is advised that you ask a licensed financial advisor on how your wills should be drafted in order to cater to your unique situation and wishes.

It is important to have a Will in place as if you were to die ‘intestate’ (ie without having made a will), there is a danger that your assets
will not end up in the hands of those that you would have wished to have them, not to mention that it will take relatively longer time for the court to issue clearance order.

Depending on your circumstances, you may wish to include guardianship arrangements in your will so that, in the event that your children are left parentless, there will be someone to take care of them: you obviously need to get the agreement of the people you intend to name as guardian(s) beforehand.


This may conflict with your priority of achieving your goals but, by building up this financial cushion (and maintaining it), you will protect yourself in the event of things going wrong and in a better position to work out alternatives, and you will be able to focus on the next step with peace of mind.

How knowing his financial report card gets him moving.

A prospective client once approached me to ask me how can he determine if he is doing good or bad managing his own finance.

My first question was if he has a plan of what he is doing now, for chances are, if he were to answered “no” for this, then he may need to know more than how he is doing, he need to know his financial health.

To get into knowing that, i helped him to determine his net worth.

Your Net Worth is your total financial worth – measured in MYR and is a good indicator to measure  your financial health. Net worth can be +ve, or -ve. Surely, +ve results is what everyone desire to have.

Generally, net worth is what i actually own. Hence the formula is as simple as:

Net Worth = Asset – Liabilities (DEBT)

Your asset is what you own, while liability is what you owe.

To determine his net worth, three steps are taken:

1. Sum up your asset value:
Generally we have three classes of assets:

    • Cash  & Cash Equivalent- Money in savings account, current accounts, money market etc.
    • Investment Asset- Money in stock market, mutual funds, property, alternative investment etc.
    • Personal-Use Asset- Your properties such as jewellery, car, residential home, furnitures etc.

We will add up the current market value of all your assets (determining this takes experience and skill).

2. Sum up your liability value:
Generally we can classified liability into:

    • Short-term liability- debt such as credit-card debt, overdraft loan etc.
    • Long-term liability- debt such as mortgage, PTPTN, hire-purchase etc.

3. Subtract your total liabilities from your total assets.

He sort of got a shocked when he saw the net worth in the -ve territory. He had some wealth in stock market, unit trust, property, which lead to him thinking that he should have his head well above the water-line.

But then i pointed out that as he accumulated his wealth via the investment vehicles, he also accumulate credit card debts, and he put in minimum equity (down-payment) for his car and mortgage, hence resulting more on the debt level. As a result, the liability outweigh the asset, hence the negative net worth.

I also pointed out that to solve the root problem, we should take a look at his cashflow, ie. how he manage his income against expenses, as it is possible that the credit card debt was a result of uncontrolled, indiscipline way of spending.

Hence, we move forward to establish his cashflow statement, run through it, and helped him to create additional positive cashflow and make adjustment on his balance sheet.

After working with him for the past year, he is now well on track, and his net worth is seeing increase, albeit gradually.

This illustrate the importance of knowing your own net worth. It’s a good benchmark for gauging whether or not your assets are increasing over time, and hence, if you are making progress financially.

My game plan for rising prices: Budgeting and Self-Control

My game plan for rising prices: Budgeting and Self-Control

Budgeting

Year 2014 started with a grim note, overshadowed by the expected (it’s happening) rising prices in goods and services we need on daily basis.

It all started even way before the budget for 2014 was announced, when the price for RON 95 was lifted upward by RM 0.20 in September, followed closely by RM 0.15 on RON 97 just two days later. Just when people were coping with that, the subsidy for white sugar was then abolished and at the same time we were given the definite confirmation of when the GST would start. As if these are not shocking enough, another punch was then thrown our way when the electricity tariff was subsequently increased by 15% (peninsular Malaysia) and 17% (Sabah and Brunei),  when LRT and Monorail also joined the party to increase the charges, it seemed that the floodgate was set opened and more were on the way. We were not so wrong, then, toll fares was rumoured to be under revision, and DBKL also decided they want to share the spotlight, hence the much debated rise in assessment tax were also announced.

One wave after another, it is therefore inevitable that we will be slapped with a bigger bill for everything ranging from food, accommodations, clothings, transportation, personal care, entertainment, even funeral expenses would also go up, all of these, lined up waiting for us stepping into 2014. What a gracious year.

Now, as we dine at the restaurant next door where we normally enjoy our food at, it is no surprise that the size has shrunk, while the price has revved up. What was once affordable at RM 5.00 have now become RM 5.50 to RM 6.00; It did not stop here, of course, and the children who are innocent were not spared from this too. When parents sent their kids to school now, the basic fee have increased, and the money needed for the young children to have their meal during recess have also seen it’s own rise, complemented by bus fares, stationaries etc. The only constant here is that the amount of earning we get from our employment somehow managed to stay the same.

So, do we need to manage our income with more prudence now so that we could minimize the damage of this inflation?

My thought on this. Usually more money do not necessary solve the problems at hand. But more discipline and more planning on the money we have in hand can help to get things in order.

We were all raised with this mindset:
Savings = Income – Expenses, ie. save what is left.

What we should instilled into our mindset is this:
Expenses = Income – Savings, iespend only what is left.

When we save what is left, and when inflation is dancing and cost of living is rising, we are very likely ending up having lesser to save because the ‘expenses’ column is going up.

On the contrary, when we spend only what is left, we will have a fixed pool of funds for paying the expenses. Hence, when prices rise, we need to make adjustment with our pool of fund to ensure we can at least maintain the same lifestyle. If it is insufficient, then we will have to find way to increase another factor in the equation, ie. Income. Get more income, apply the same principle on this extra income, ie. Income – Savings = Expenses. Add this expenses to the balance of fund we have.

If we cannot get this right from the start, we will find that the journey to financial freedom is extremely challenging. So, get it right, build the right fundamental, cultivate the habit that will help you, not the one that will hurt you.