TheWall: Protecting your estate during a crisis

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on August 3, 2020 - August 09, 2020.
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The Covid-19 pandemic has caused many people to contemplate their mortality and prompted them to write or review their wills as well as undertake estate planning.

“What if I am next?” must be one of the most common phrases cited to wealth planners by individuals who are worried that they have not put aside sufficient provisions to protect their legacy, says Harveston Wealth Management Sdn Bhd CEO Derick Tan. 

In the weeks following the implementation of the Movement Control Order (MCO) on March 18, many of those who had not spent enough time reviewing their wealth plans or putting in place any safeguards were becoming increasingly anxious, he notes.

There is nothing like a pandemic to remind people of their mortality, says Farah Jaafar-Crossby, CEO of Labuan International Business and Financial Centre (IBFC) — a mid-shore financial centre that offers a suite of business and financial services. “Coupled with the significant costs of a business disruption, this will mean a very challenging economic situation for many. This financial situation can drastically affect many families.

“With the reality of lockdowns and the impact of the coronavirus starting to settle in, many are having difficult and honest conversations with family and loved ones. This current crisis has focused our minds on preparing for the future.”

Given the unprecedented situation, Tan says it is timely for individuals to start thinking about how the crisis is affecting their lives and to begin planning for future wealth transfers. Moreover, as the number of cases in the initial days of the MCO spiked, so did concerns that anyone could succumb to the disease, which was often more severe in people who are 60 years and above or who have certain pre-existing health conditions, he adds.

“Anxiety and worry were replaced with mounting pressure because it is now possible that they could be susceptible to the infection and even succumb to it. Such thoughts had an impact on many of our clients. They started to realise that life is very fragile and there is no time like the present. 

“We received calls from clients asking us to review their wills, assets and insurance. And now that many of them have the time, they could finally tabulate everything that they may have forgotten to include previously. 

“We have come across many instances where people could not remember all the assets they had. Or in some cases, they had more debts than assets, which would make their net worth negative.”

As the pandemic has wreaked havoc on financial markets globally, it is prudent to review the value of your assets both at home and abroad. “Maybe all you have to do is some restructuring and rebalance the risks to a level that you are more comfortable with,” says Tan.

“If you withdraw all your cash, where will you store it? Will you keep it in your fixed deposit account? That would be counterproductive considering the falling interest rates to keep the cost of borrowing low. Surely, it would be better to keep the money invested in the financial markets or in properties for the time being.”

This is especially true for entrepreneurs and business owners, whose wealth is more often than not intrinsically tied to their business. But since the pandemic has given rise to major cash flow challenges for businesses, it may be advantageous to liquidate non-cash investments such as stocks and properties, says Bernard Yap, private client services leader at Ernst & Young Tax Consultants Sdn Bhd (EY).

“It is important for entrepreneurs to focus their wealth planning strategies on how to better improve their liquidity and cash flow management. Non-business individuals with extra cash may seek investment opportunities in the equity market and real estate as some stocks and properties may offer attractive bargains during the pandemic,” he adds.

“Depending on their investments and risk profile, investors may be looking to diversify their investment portfolios if they are heavily invested in sectors that have been adversely affected by the pandemic, or refocusing their investments into sectors that are proving to be especially resilient.”

There has also been greater awareness of wealth planning among those who were previously too preoccupied to focus on such strategies, especially how they intend to bequeath their estate, says Tan. “There is a common misconception that legacy planning is only for millionaires and billionaires. Today, many people own small businesses and have more than one property, but they do not have wills to bequeath these or any form of estate planning on how they intend to pass on their business to their family when they are no longer around.”

While Harveston has not had any cases where they had to redo wills or reorganise legacy structures for clients suffering from Covid-19 infections, Tan says quarantined customers who want to rework their estate plans will have to undergo a stringent process. Apart from requiring the presence of at least two witnesses — which could be a medical professional, especially if one is quarantined, and the testator — they will also need to obtain permission from the authorities as it is not permissible for wills to be signed via electronic means. Making a will or changing it in such a situation can be precarious as these wills can be contested, he points out.

Sammeer Sharma, managing director and head of wealth management at Standard Chartered Malaysia, concurs. “The key to effective wealth planning is ensuring that the plan is done ahead of time with a clear mind and is reviewed periodically.

“Factors such as family circumstances and health conditions may change with time and so may the perspective on how, what and who should benefit with these changes. It is not advisable to review wealth planning needs only when a crisis erupts in one’s life, be it Covid-19 or otherwise. Planning ahead of time will also help minimise family conflict as well as the administrative and tax costs associated with one’s passing.”

When considering setting up a wealth protection structure, EY’s Yap says it is essential to look at the risk profile of the asset owner and the longer-term intentions for the asset. “In the light of the various changes to international tax and regulatory rules, entrepreneurs and asset owners need to review their existing asset protection structures to assess whether the structures are in compliance with the relevant laws and are aligned with their investment objectives.” 

For example, the Malaysian government announced on June 5 the Short-Term Economic Recovery Plan (Penjana), which included a Real Property Gains Tax exemption for Malaysian citizens on the disposal of up to three units of residential property between June 1, 2020 and Dec 31, 2021. Penjana also allowed a stamp duty exemption under the Home Ownership Campaign on instruments of transfer and loan agreements for the purchase of residential properties priced between RM300,000 and RM2.5 million, subject to conditions.

“Given such exemptions, this would be an ideal time for entrepreneurs and asset owners to revisit their estate planning and asset ownership options,” says Yap.

Local high-net-worth entrepreneurs, family-owned businesses and owners of small and medium enterprises are increasingly setting up family offices to govern their wealth, he adds. “We foresee the development of family offices to be a trend in Malaysia. From our experience, we have observed that businesses and individuals are keen to give back to society by participating in philanthropic activities.

“During the pandemic, many Malaysians have made donations in cash or kind to Covid-19 relief funds. Accordingly, the government has provided tax incentives for donors by way of tax deductions on donations.”

Thus, the introduction of frameworks and governance structures that support the establishment of family offices would be beneficial in the long run, says Yap.

UOB Malaysia managing director and country head of personal financial services Ronnie Lim emphasises the need to review insurance policies. “We have seen how existing job skills can be devalued as well as loss of employment. Therefore, it is essential for people to consider protecting themselves, their families and their loved ones in the event of unexpected circumstances.”

Individuals should also review the terms and conditions of their insurance coverage related to Covid-19 while keeping hospitalisation, old age and retirement, protection needs and emergency funding in mind, he says.

“Whole life insurance with a high sum assured can be part of the solution for estate planning. The sum assured multiplier (the ratio of total sum assured over total premium paid) is generally three times higher. This means for RM1 million in total premium paid over policy tenure, it can generate a legacy of RM3 million for wealth distribution,” he adds.

“We should also encourage customers to appoint their spouse, child or parent as nominees or beneficiaries. They can also immediately create an insurance trust.”

Taxes are another important aspect of estate planning that need to be looked at, says Labuan IBFC’s Farah. What was previously considered efficient wealth planning may no longer be tax efficient in a crisis where the government has to impose extraordinary measures, she points out.

“The impact of Covid-19 has found its way into all aspects of life. With the rollout of stimulus packages in many countries to deal with the repercussions of the outbreak, planning a smooth transfer of wealth becomes even trickier when heirs are living in another country or if there are numerous asset classes to consider,” she says.

“As an increasing number of families become global, they need sound advice on navigating international borders to ensure their legacy smoothly reaches their beneficiaries. If there are assets in multiple jurisdictions, one needs to consider the different regulations, languages, currencies and processes.”

International real estate holdings are popular among Asian high-net-worth individuals, which means a review of one’s succession plan may be necessary, seeing that many countries are offering extensions and relief measures pertaining to capital gains as well as inheritance and jurisdictional taxes. In such circumstances, centralising control via wealth management structures that also allow for a succession plan may be advantageous and efficient such as a private foundation or trust, says Farah.

“The beauty of trusts or private foundations is that the ownership shifts from the natural person setting up the structure to the legal person, which is the structure itself. This allows for transparency and active management of the assets. In addition, the governance structure demands active management, which will have a positive effect on the value of the asset.”

Taking into account that many European countries and the US have taken on considerable debt, taxes in these jurisdictions will need to rise at some stage to pay for it, says Alpadis Group managing director Moritz Gubler. “At the moment, it is too early to tell what individual governments will do, which taxes they will raise and more. 

“In the US, a Democrat victory may well result in higher corporate taxes — Democratic candidate Joe Biden has said as much. But in other countries such as the UK, they may choose to cut some business taxes to drive growth.

“Malaysia has also had to increase spending due to the pandemic and has suffered from economic headwinds, which have resulted in a budget deficit of 6%. We are due for a budget soon and we shall have to wait and see how the government plans to tackle this.”

However, Gubler does not foresee any significant disruptions unless the Malaysian government legislates a wealth or estate taxation law.

But the government is being pressured into taking proactive tax measures such as the reintroduction of the inheritance tax, which was abolished in 1991. 

Nevertheless, individuals are advised to ensure that their wealth protection structures remain robust and tax efficient, says UOB’s Lim.

“Depending on how the new legislation is drafted, the assets that have already been transferred to a wealth management vehicle may still have to fork out the cost of tax. As there is no guidance or formal indication of a potential reintroduction of estate duty in Malaysia, it would be timely for individuals who have been considering wealth management vehicles to take steps in moving their estate planning forward,” says Labuan IBFC’s Farah.

Alpadis’ Gubler says, “If we learn from other countries that have introduced such taxes, the likelihood is that the wealthy will start moving their assets abroad, although this will depend on the rate of taxation introduced. It will also depend on how and when the tax is applied and whether a gift tax is implemented at the same time, which is often the case.”