Estate Planning: Tackling the financial hazards of separation

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on September 3, 2018 - September 09, 2018.
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Following the deaths of renowned fashion designer Kate Spade and celebrity chef and TV personality Anthony Bourdain a few months ago, it was discovered that they had more than one thing in common. Not only had they tragically taken their own lives, they had done so when they were separated — but not legally divorced — from their spouses.

This has given rise to a host of questions on estate planning that must be addressed when a couple decides to start divorce proceedings. According to media reports, Bourdain’s estranged spouse Ottavia Busia, with whom he had parted ways in 2016, was the executor of his estate and legally his next of kin as their divorce had not been finalised.

While their separation was amicable, which means the division of assets when their divorce became final would have been a civil affair, the financial pitfalls of such cases cannot be ignored.

A divorce calls for changes to estate planning matters such as jointly acquired assets, bank accounts and debts, as well as the acquisition or erosion of post-separation wealth. But what happens when a spouse dies before the divorce has been finalised? Can the surviving one still claim spousal rights?

Lawyers whom Personal Wealth spoke with say there are no legal provisions for this particular set of circumstances, but recommend estate planning tools — particularly a will — to prepare for any untoward events.

Francis Pereira, partner at Francis Pereira & Shan Advocates and Solicitors, says when a couple is estranged but not legally divorced, spousal rights are not extinguished. Under the Law Reform (Marriage and Divorce) Act 1976, a spouse may claim maintenance and division of matrimonial assets the moment matrimonial proceedings [under the law, this means either divorce or judicial separation] are initiated for herself and her minor children. The division of matrimonial assets, however, are done by the courts when the divorce has been granted.

“These assets include real property as well as movable assets — for example, money in the bank and shares. The division of matrimonial property depends on the contribution of the parties and this contribution does not have to be in monetary form,” says Pereira.

“For example, a wife who takes care of the family, while the husband goes out to work and invests in property and other assets, may be entitled up to half of the assets’ value as her contribution towards caring for the needs of the family is recognised. Courts, however, would usually leave out property that has been inherited and only look at the wealth the husband amassed during the marriage.”

Nevertheless, the courts would look at the inherited property to see if any improvements were made to it during the marriage and consider that part of the property a matrimonial asset, says Pereira. “An example would be if the husband inherited a plot of land before he married the wife. But during the marriage, a house was built on it with the money he earned. Then, the house, valued independently, would be deemed a matrimonial asset and the wife could be entitled to a portion of the house’s value. Earnings accumulated during the marriage are also considered matrimonial assets.”

Pereira suggests that married couples jointly purchase real assets. If this cannot be the case, a spouse would only be entitled to the entire asset upon the death of the other if it had been bequeathed to him or her in a will. Otherwise, the said property would be divided according to the Distribution Act 1958 and the beneficiaries would include their children and parents.

If a couple is estranged and one of them dies before a divorce, the surviving spouse risks losing his or her entitlement to a matrimonial asset if it was purchased in the name of the deceased spouse and has been bequeathed to another party in a will.

“A will made during the happy days of the marriage can and is usually changed when the ‘bliss’ ends. Entering a private caveat [a formal legal notice that you have an interest in a particular property or land] on a property after the death of a spouse does not protect the living person if that asset has been given to a third party under a will that was freely made,” says Pereira.

The division of assets can be tedious and contentious if the divorce is acrimonious, he adds. He cites a case where a couple’s divorce proceedings took about five years to conclude because of the multiple interim actions filed in relation to ancillary relief regarding things such as custody, access and maintenance.

“The divorce of wealthy couples and long marriages usually take longer to conclude. In the cited case, both spouses refused to leave the matrimonial home as they harboured the fear that they would lose their rights to the house if they did so,” says Pereira.

“The husband, who is the main breadwinner, felt that he should not leave the house as he had acquired the asset financially. The wife felt entitled as she had helped design this dream matrimonial home and raised the family there. So, they lived in that emotionally toxic state for five years out of fear of losing their rights.

“However, this was a misguided view because the courts decide on assets based on the contribution of the parties and not occupancy. In this particular case, the court finally held that the house was to be sold and the value divided.”

Pereira says it is important for everyone with assets to make a detailed will that lists all their assets and how they are to be divided after death, including residuary assets (those acquired after the will was written), all in compliance with the Wills Act 1959. “In every will, you have a testator who makes the will, beneficiaries who inherit the estate and an executor who manages the distribution of assets. There is also a residuary clause addressing all the assets that are not mentioned in the will and how they are to be divided,” he adds.

“The clause also avoids the need to make multiple wills subsequently. A will made, however, ceases to take effect upon marriage or re-marriage of the maker of the will. So, you must make a fresh will upon such events.”

For newlyweds, Pereira recommends making a mutual will immediately upon marriage or at the soonest possible. He says the couple should list out the assets they both own, choose an executor whom they trust and decide who the beneficiaries are.

“A mutual will is actually two wills — one for each spouse — saying that all that they have, they give to their spouse. If there are material differences, changes in their financial state or there are asset acquisitions, make a new will,” he adds.

“You can make as many wills as you like over time. The latest will extinguish all previous wills. You can also add codicils — supplements that explain, modify or revoke a will or part of one.”

A will would not be valid and can be set aside by the courts if it was not freely made or the testator was medically unfit to make it. Pereira says the mental incapacity of the maker would usually invalidate a will.

“So, do not discount will-writing even if you are in a hospital. If the intention of the testator is very clear and he or she had the capacity to make the will as the doctor had said that all of his or her faculties were intact, then the will is deemed valid,” he adds.

Farah Deba Mohamed Sofian, chair of The Society of Trust and Estate Practitioners (STEP) Malaysia, says wills can include the formula for estate distribution in the event of separation. “They can provide in their will that in the event of being estranged from their spouse for a specific duration, the distribution will be changed according to their wishes,” she adds.

Alternatively, one could write a will in contemplation of marriage, says Farah. “You could say that notwithstanding knowing that you are getting married, you want the will to be valid, which means that you are including a ‘contemplation of marriage’ clause,” she adds.

She also says the testator may express this in the will: “If I am estranged from my spouse, nothing shall go to him or her.”

It is important to note that unlike other assets, insurance policies and Employees Provident Fund (EPF) savings are not considered matrimonial assets, and instead require separate beneficiary nominations, says Farah. That is because they are governed by their own laws — the Financial Services Act 2013 and the Employees Provident Fund Act 1991.

She cites a case where a dispute over an EPF distribution of a deceased took nearly five years. In this case, a man who had filed for divorce went to the EPF to replace his wife’s name on the nomination form with that of his girlfriend’s. “He died when the divorce was not finalised yet, so the EPF gave the money to his girlfriend, and not his estranged wife,” she adds.


The importance of identifying  next of kin

Like in non-Muslim marriages, separations have no effect on conjugal rights in Muslim marriages. However, unlike non-Muslims, they may only distribute up to one-third of their estate via a wasiat (will). The other two-thirds would go to the rightful heirs under the Faraid system (Islamic inheritance law).

According to the Faraid, in the event that the deceased does not leave behind any children, a widower would get half the estate while a widow would get a quarter of it. If the deceased leaves behind children, a widower would get a quarter of the estate while a widow would get one-eighth of it.

Apart from designating the portions of the beneficiaries, the purpose of a will is to manage and administer the estate, says Farah. As Muslims are required to adhere to the Faraid for estate distribution, the will is used to appoint their executors (under the Probate and Administration Act 1959).

“After death, there are two things that are looked at — inheritance and succession [who steps into your shoes]. Whether Muslim or non-Muslim, the law of inheritance is about bloodline,” says Farah.

“If you die intestate, the first person who has the right to decide on your burial arrangements [also called the administrator] is your next of kin, which is defined as your spouse, children, siblings, parents — in that order. Your legal representative will be an executor if you have a will. But it is an administrator if you have no will. So, you get to decide who will ‘run your show’ after you are dead.

“For example, initially in your marriage, you appoint your wife as the executor. But when you are estranged, would you want her to touch your assets? Hence, you could put your son’s or daughter’s name. You may also appoint anybody you trust, say, a lawyer or a trust company.”

Farah says non-Muslim testators should address three scenarios in writing their will: death, divorce and separation. For Muslims, a wasiat can be used if a person wants to bequeath more than one-third of his or her estate. But the waris (heirs) must voluntarily agree (muafakat) to the distribution.

“Over and above, in Faraid, the waris may muafakat and follow the wasiat. This is also called a family agreement. In the absence of this agreement, the Faraid prevails,” says Farah.

To understand the inheritance part of estate planning, she suggests using the family tree to identify your next of kin and who could challenge your will. “What will happen if something happens to you or your will is invalidated?” she asks.

“Sometimes, couples draft their wills and out of convenience, they let their spouse become the witness, thinking that they do not need a lawyer. They would think that after all, they are going to leave everything to their spouse anyway after they are dead. But that will is not valid because the beneficiaries cannot be the witnesses.”

Farah emphasises the importance of identifying beneficiaries or heirs using the family tree because for Muslims, the wasiat is considered the deceased’s wishes for distribution, which is subject to the consent of the rightful heirs.

Apart from drawing up a wasiat or revising an existing one, Muslims may also revise their EPF, insurance, Permodalan Nasional Bhd and Tabung Haji nominations to make or change the list of beneficiaries or proportions they will receive if one is involved in an ongoing divorce.

Other instruments that Muslims can consider when they are estranged from their spouses are hibah (bequest) and trust. Farah says after a Muslim dies, his or her liabilities — such as debts, loans, mortgages and other bills, followed by jointly acquired properties with the spouse — are subtracted from the estate.

“After all these deductions, if there is a bequest, the distribution of the balance must follow the will, which is subject to two rules: up to a maximum of one-third of the entire estate can be bequeathed to non-heirs,” she adds.


Protecting the children

When married couples have children who are still minors, it is all the more compelling to write a will because when things go sour between the spouses, the will could safeguard the interests of the children upon the death of the will maker.

Pereira says from a non-Muslim perspective, a spouse could include in his or her will that the estate would be left to a charity or someone else instead of the surviving spouse. He points out that there have been cases where people with large estates who were in strenuous relationships included such a clause in their will, saying that they did not want particular persons — such as their estranged spouses — to inherit their wealth.

“Under the will, the testator is free to give the property to anybody he wants. But to avoid any ambiguity, it is advised that if there are persons who are otherwise expected to benefit, yet you choose not to give them, then include a clause that you are deliberately excluding these persons from inheriting the assets,” says Pereira.

“These days, they sometimes say, ‘I have considered and give you a token sum of RM1’, for example, ‘as you are otherwise a legal beneficiary under the Distribution Act’. This is to make clear should there be a legal challenge to the will, that the testator was clear about his intentions and to bequeath assets to the named beneficiaries.”

Pereira advises married couples to incorporate a trust in their will if they have children who are minors. This is to allow a trustee to manage the assets for the children by taking proceeds from the estate and providing for them.

“If you make a will when your children are still young, you may want to say that at the outset that you are appointing a trustee to look into the needs of your children. If you have income-generating assets, you may want to incorporate a trust into the will for the benefit of your children,” he says.

As for Muslims, it is even more compelling to have a proper will when married couples have children, says Farah. According to the Faraid, a male heir gets double the portion of a female heir.

She suggests using hibah to provide for those who cannot inherit. “Adopted children are not considered heirs. So, if you do not have a will or a trust to provide for them after your death, they will not get anything,” she says.

For Muslim converts who have non-Muslim parents, the testator may state in their wasiat that their non-Muslim parents shall get a portion of their estate, says Farah. “Nobody can dispute this. It is our [lawyers’] duty to tell Muslim converts to write their will to provide for their non-Muslim family members,” she adds.



The effects of suicide on estate planning

Anthony Bourdain and Kate Spade took their own lives and these tragedies have spurred important discussions about mental health and family finances. They also raised questions on what became of their estate plans as they both left behind children and estranged spouses.

Pereira says that in Malaysia, deaths by suicide or unnatural deaths have no effect on estate plans as the distribution would be done according to legal entities such as wills and trusts, as well as distribution laws if a person dies intestate.

Deaths by suicide or unnatural deaths do not invalidate a will or a trust as the common law does not support the general proposition that an attempted suicide or suicide gives rise to a presumption of mental illness — at least not to the extent that would amount to testamentary incapacity (incapacity to write a will), says Pereira.

What shall a next of kin do if there are signs that the estate owner may commit suicide? Pereira says short of an outright transfer of the property, which must be done freely and willingly, nothing else can be done. “If a person’s mental state is not stable, any transaction done on an asset can be found to be void,” he adds.

Wealth management experts concur that estate planning is not affected by suicide, but point out a caveat for life insurance holders. YC Lim, financial coach and managing director of Wings Alliance Sdn Bhd, says if a suicide takes place within a year of signing the life insurance policy, the nominated beneficiaries will not receive a payout from the insurer as it is an industry standard to include a one-year suicide clause in most insurance policies in Malaysia.

After a year, insurance death benefits can be distributed under a will, according to Lim. “You can, in a life insurance policy, specify that the benefits will be distributed according to a will that you made. In terms of will and distribution, a suicide has no effect as the will can be probated regardless of the manner or cause of death,” he says.

Another scenario follows the rules under the Financial Services Act 2013. The Act states that once a policy owner makes a nomination, it creates a trust in favour of the nominee/s. In Schedule 10 of the Act, it states that the policy owner may, through the policy or a notice in writing to the licensed insurer, appoint any person other than himself to be the trustee of the policy money.

“If you are not married and you nominate your parents, or if you are married and you nominate your spouse or children, it falls under a family trust automatically. If your policy already named them as nominees, then you cannot distribute the money according to your will,” says Lim.

“But there are cases where the policyholders nominated their siblings, girlfriend or boyfriend. In these cases, they can still distribute the money under their will.”

It is important to note that any claims for death benefits after a suicide case must be accompanied by a police report. “When a person dies after a year they bought insurance, the insurer will require a coroner’s report to confirm whether it was indeed a suicide,” says Lim.

He also says people who are contemplating divorce should put everything in order when it comes to estate planning. For example, they should get someone else to administer their estate separately instead of a next of kin.

“You may want to reorganise your estate through your will or trust, or apply power of attorney (POA), to appoint someone to look after your estate. Include in all your wills that if anything untoward happens to you, that if you can no longer make estate planning decisions, a person with POA will step into your shoes,” says Lim.

“For example, in your absence due to coma or death, the person with POA has the right to act on your behalf and you can spell out his or her power to distribute your estate. In doing so, however, you will have to express that you are annulling all your previous wills,” he adds.

Derick Tan, CEO of Harveston Financial Group, says at the onset of mental health issues of an estate owner, he or his spouse is encouraged to set up a will or trust for the estate. This can only be done if the owner is of sound mind to make decisions. “However, I would highly recommend that the testator invite his doctor to be a witness to his will to avoid any future disputes.”