This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on March 14 - 20, 2016.
Life is full of ups and downs. Our dreams and goals change as we mature, and what used to be important is not so important anymore.
Like most couples, Ivan, 62, and Karen, 60, worked very hard in the early years of their marriage. Their goals were to provide a comfortable living and quality education for their children, Nick and Nicole. They have achieved these and more. Ivan is a consultant engineer who runs his own consulting firm while Karen was a part-time lecturer at a private college.
I met Karen when I was invited to give a presentation on wills about eight years ago. She wanted to know more about estate planning. We started to work together and have maintained a good working relationship since.
When I started working with Karen, Nick was just about to leave for Australia to complete his medical degree and Nicole was studying in Form 5. As their children were still dependent on them financially, we wanted to make sure that our financial planning addressed this.
Besides writing a will, I set up an education and maintenance trust for the children with a corporate trustee. The trust fund would take care of Nick and Nicole’s immediate needs if both Karen and Ivan passed away. This would give the children peace of mind as their financial needs would be taken care of during probate. A corporate executor/trustee was also appointed to administer the estate.
The only issue was Ivan’s consulting firm. It had about 50 staff and was doing very well. Ivan owned 99% of the private limited company while the remainder was in his staff’s names. Karen is the beneficiary of Ivan’s shares, but due to the nature of the firm, she will not be able to run it if her husband dies. We also had a problem creating a buy-sell arrangement because the staff identified for this arrangement did not have the funds for it.
Ivan was uninsurable because he had undergone an angioplasty five years earlier, so any hope of turning that into an avenue for funding was dashed. There were offers to buy the whole business, but Ivan was not willing to sell it. He had built the company from scratch — it was everything to him. This, of course, irritated Karen, especially when they were on holiday. The phone would ring often and many a time, he would cut short the holiday because of company matters.
I asked Ivan why he did not want to get his children involved in his business so that they could take over when he retired. He told me his children were not interested in engineering. Interestingly, I had the same conversation with his children. This is what Nicole said: “I never really knew what my dad was doing. I only knew he was very busy, always travelling. It irritated my mum when he had to leave us in the middle of our holidays. He never talked about his work and I thought he was a travelling salesman because he always came home with a briefcase.” Nick told me outright that he was only interested in the medical field.
To me, this was intriguing. For all the business owners out there, if you want your children to be interested in your business, if you want to have a successor so that your blood, sweat and tears do not go to waste, talk to them about your work. You might have a better chance of handing over your business to your offspring.
Now, eight years later, Nick has graduated and is working as a doctor in Australia. He became a permanent resident a few years ago and does not intend to return to Malaysia in the near future. Nicole has also graduated and is currently working as a freelance graphic artist. She wants to further her studies but she is not sure what she wants to do. Karen has stopped working and spends a lot of her time doing charitable work.
Ivan and Karen have built up a substantial nest egg for their retirement. They will have no problem funding Nicole’s education if she wants to further her studies. So, what has changed since Karen and I started working together?
Karen and Ivan own many physical properties. Ivan’s shareholding in his company has come down to 55%. Many of his staff are now shareholders. The staff use their bonuses to purchase the company’s shares periodically. Ivan uses the money from selling his shares to buy physical properties.
The couple have properties in Australia, Singapore and Malaysia. With all these assets, Karen has a new problem — the management of these properties. With about 10 rental properties in Malaysia, it can be quite a challenge to manage them herself. So, I suggested that she engage someone to help her. This would give her more time to do the things she loves, her charitable work and travel. Money is no longer an issue, but time is.
We have rewritten the will to take all these into account. A guardian is no longer needed for their children as they have grown up. We have included all the new properties and provided instructions for their distribution. We have changed the maintenance and education trust to a living trust for Nicole. Karen is not worried about Nick, who is a qualified doctor. However, Nicole, who is a graphic artist, might need some time before she is able to fully support herself.
We have also set up a long-term care trust for Karen and Ivan, with pre-determined trigger events. Ivan will continue to own 55% of his company. Until he is willing to let go of the business, this is the most suitable arrangement. Many small and medium enterprises have succession issues and they can be quite sticky. In the early stages of our life, we trade time for money. As we grow older, we trade money for time. Time will tell and money will reveal. We just have to find the most suitable solution.
Irene Lee is a licensed financial planner with CWA.
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