MPU3353 – Personal Financial

Planning in Malaysia

Topic 14-The Estate Planning

Process
 Learning Objectives

 Understand the importance and the

process of estate planning.
 Calculate and avoid estate taxes.

 Draft a will and understand its purpose in

estate planning.
 Types of Trusts and Taxation

 Avoid probate.

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 Why Estate Planning?

WHAT IS ESTATE PLANNING?

‒Estate planning is a definite plan for the administration
and disposition of one’s property during one’s lifetime and
at one’s death
‒Estate planning is an essential part of retirement planning
and has two components
• Build your estate through savings, investments,
& insurance
• Transfer your estate as you wish at death

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 Why Estate Planning?

 If married, include spouse and children in

estate planning process

 If unmarried, make sure beneficiaries have

information about your estate that they will
need

 Newer lifestyles means different challenges,

which means plan early and get expert help

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 Why Estate Planning?
OPPORTUNITY COST OF RATIONALIZING
‒Many people give little or no thought to putting their
personal and financial affairs in order for
their families that survive them

‒Demands of daily living can keep people from thinking

about death

‒Plan while you are in good health

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 Estate, Inheritance & Gift
Taxes
There is no estate duty, inheritance tax or gift tax
if the deceased died domiciled in Malaysia

If the deceased died domiciled in a foreign place,

inheritance taxes may apply.

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 Real Property Gains Taxes

No Real property gains tax on death even if an

asset has not been owned by the deceased for
more than five years because a disposal on
death is deemed to take place at the deceased
person’s acquisition price, i.e. a no gain/no loss
transaction.

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 Real Property GainsTaxes

 However, if the beneficiary subsequently disposes

of the asset within five years of its transfer to him
he must treat its market value at the time of
transfer as his acquisition price.
 Also, if the executor disposes of an asset of the
deceased, otherwise than to a beneficiary, within
five years of death, that is a chargeable disposal
on which the market value at the date of death is
deemed to be the acquisition price.
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 RPGT Tax Rates (2014)
Citizen or Permanent Non-Citizen or Non-
Holding Period Company
Resident Permanent Resident

within 1 year 30% 30% 30%

within 2 years 30% 30% 30%

within 3 years 30% 30% 30%

within 4 years 20% 20% 30%

within 5 years 15% 15% 30%

Beyond 5 years 0% 5% 5%

RPGT is only payable if property owned is sold off within 5 years from
date of purchase. The payment has to be paid at Inland Revenue
Board (LHDN) within 60 days.
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 Trusts, Gifts, and
Contributions
 Gifts & trusts are established to effectively
remove assets from their owners' estates while
they are alive.
 Trust: a legal document in which one person transfers assets
to another who manages them for designated beneficiaries
-Grantor: the person who creates a trust
-Trustee: the person or institution named in a trust to
manage the trust assets for the beneficiaries

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 Gifts & Transfers
There is no Estate Duty or Inheritance Tax on gifts. However there is
stamp duty payable by the transferor.
Stamp duty at 1% on the first RM100,000 of value, 2% on the next
RM400,000 and 3% on the remainder.
Stamp duty generally applies based on the market value of a property
when a gift is made

No stamp duty on transfers between husband and wife qualify for
complete remission of the duty payable and
transfers from father and/or mother to a child attract a 50% discount

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 Gifts & Transfers

 RPGT may also apply on the disposal of a

property by way of gift within five years of the date
of acquisition.
 Furthermore, no tax will be payable at all where
the donor and the recipient are husband and wife,
parent and child or grandparent and grandchild.
What happens then is that the asset is deemed to
have been disposed of on a no gain/no loss basis.

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 Wills

 A legal document that describes how to

transfer your property to others.
 Designate:
 Beneficiaries – those who are willed property.
 An executor – personal representative who will
carry out the will’s provisions.
 A guardian – who will care for children under the
age of 18.

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 Types of Wills

•A SIMPLE WILL leaves everything to your spouse

•A TRADITIONAL MARITAL SHARE WILL leaves half to
spouse and half to children or heirs. Avoid probate
•An EXEMPTION TRUST WILL passes to your spouse
except for an amount equal to the exemption, which passes
into a trust. The trust can provide a lifelong income
•A STATED DOLLAR AMOUNT WILL
- Should use percentages, not actual dollar amounts

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 Formats of Wills

‒Holographic will
o A will that you write, date and sign, entirely in your
handwriting
o May not be recognized in some states
‒Formal will
o Usually prepared with attorney’s assistance
o You must sign & have two witnesses, neither of
whom can be beneficiaries (people named to receive
property
‒Statutory will
o Type of formal will on a pre-printed form. Has rigid
provisions, may not meet current laws, and may be
invalid if you change provisions
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 Purpose of a Will
 Estate: the assets of a deceased person after
all debts are paid
 Estate planning: the act of planning for how
your wealth will be allocated on or before
your death
 Will: a legal request for how your estate
should be distributed upon your death. It can
also identify a preferred guardian for any
surviving children
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 Purpose of a Will (cont'd)
 Reasons for having a will
 Ensures that your estate is distributed
as you desire
 Beneficiaries (heirs): the persons specified
in a will to receive a part of an estate
 Intestate: the condition of dying without a
will - Court appoints an administrator who
may not make the decisions you preferred

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 Purpose of a Will (cont'd)

 Creating a valid will

 Minimum age—18 or 21
 Mentally competent
 Not under undue influence of others
 Must be signed and dated
 2 or 3 witnesses who are not beneficiaries
 Attorney recommended
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 Purpose of a Will (cont'd)
 Key components of a will
 Distribution of the estate
• Details the distribution to the heirs, usually by percentage

 Executor (personal representative):

the person designated in a will to execute
your instructions regarding the distribution
of your assets
• Collects debts owed to the estate, pays debts owed by
estate, and distributes proceeds of the estate

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Purpose of a Will (cont'd)
 Guardian
• Parents should name a person to be
responsible for caring for any dependent
children
 Signature
• Validates will
 Letter of last instruction
• Describes your wishes regarding funeral
arrangements and tells the location of any
key financial documents
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 Purpose of a Will (cont'd)

 Changing your will

 May be necessary if you move to a state with
different laws or if you marry or divorce
 Major changes may require a new will
 Codicil: a document that specifies changes
in an existing will - Appropriate for minor
revisions

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 Purpose of a Will (cont'd)

Executing the will during probate

 Probate: a legal process that declares a will
valid and ensures the orderly distribution of
assets
 Executor files forms in probate court, provides
a copy of the will, a list of assets and liabilities
of deceased, pays debts and sells necessary
assets - Typically opens a bank account for
this purpose
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 Wills and Probate

 Probate validates the will.

 Probate court appoints an executor,
generally the one designated in the will.
 Once the assets have been distributed
and the taxes paid, a report is filed with
the court, and the estate is closed.

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 Wills and Probate

Advantage Disadvantages
 Validate the will – allow for  Numerous expenses –
challenges and make sure it legal fees, executor fees,
is the last will and testament court costs.
of the deceased.  Slow, time consuming
process, especially if there
are challenges or tax
problems.

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 Probate

 What happen if someone dies without a

Will?
 The estate of the deceased will be frozen.
 The immediate family needs to apply for a
Grant of Probate (GP) or Letter of
Administration (LA) to unlock the deceased’s
estate before able to transfer it to his/her
family members i.e. the legal beneficiaries
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 Probate
In what situation do we apply for a GP or LA?
When there is a Will left behind by the deceased, the immediate
family will apply for a GP. However, when he/she dies without
a Will, the family member have to apply for a LA

LA - An authority given under the seal of the Court for the administration of
the estate of a person who has died without leaving a Will.
GP - A Court order that formally authorizes the executor to administer the
deceased’s estate according to the Will.

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 Probate
 When a person dies without making a will, does all his
property go to the government?

No, it does not.

When a non-Muslim dies without making a will, the property

he leaves behind will be distributed among his family
members according to the Distribution Act 1958. The same
law applies to male and female deceased persons.

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The distribution among the family is shown in
the following table:

If the deceased dies leaving… Parents get… Spouse gets… Issue gets…

• parents only,
whole estate - -
but no spouse and issue

• spouse only,
- whole estate -
but no parent and issue

• issue only,
- - whole estate
but no spouse and parents

• parents and spouse,

1/2 1/2 -
but no issue

• spouse and issue,

- 1/3 2/3
but no parents

• parents and issue,

1/3 - 2/3
but no spouse

• parents, spouse and issue 1/4 1/4 1/2

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 Probate
 If a person dies leaving no parents, spouse and issue, his
estate will go to the following persons in order of priority:

(a) his brothers and sisters

(b) his grandparents
(c) his uncles and aunts
(d) his great grandparents
(e) his great granduncle and grandaunts

 Only when a person dies leaving no parents, spouse,

issue, and any of the above family members, will the
whole estate go to the government.
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 Wills and Estate Planning

Why do you need a will?

A Will Can Without a Will

 Assure that a child with special  The court will appoint a
needs is taken care of.
guardian for any children.
 Make sure property that isn’t co-
owned or in trusts is transferred  The court appoints an
according to your wishes. administrator to distribute
 Make special gifts or your assets.
bequeaths(donates).

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Writing a Will

 Although handwritten and oral wills are

accepted in some states, this is not a
good idea.
 Have a lawyer draw up your will or
review it.
 Wills need to be signed and witnessed.

 Be sure to update it and store in a safe

place.
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 Writing a Will

 A will should contain:

 Introductory statement.
 Payment of debt and taxes clause.
 Disposition of property clause.
 Appointment clause.
 Common disaster clause.
 Attestation and witness clause.

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A Sample Will (cont’d)

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 Updating or Changing a Will
– The Codicil

 A codicil is an attachment to a will that alters

or amends a portion of the will.
 Make sure your will conforms to your present
situation.
 Substantial changes warrant a new will.

 A codicil should be drawn up by a lawyer,

witnessed, and attached to the will.

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Letter of Last Instructions

 A letter of last instructions is generally

written to the surviving spouse.
 It is not a legally binding document.

 It provides information and directions

with respect to the execution of the
will.

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 Letter of Last Instructions

The letter of last instructions may contain:

 Location of the will, legal documents
 Location of financial assets
 Names of those to notify of the death
 Listing of personal property
 Funeral and burial instructions
 Organ donations

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 Selecting an Executor

 An executor has a dual role:

 Making sure your wishes are carried out.
 Managing your property until the estate is
passed on to your heirs.

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 Selecting an Executor

 The executor will:

 Deal with personal matters
 Pay taxes
 Manage the financial matters of the estate
 Distribute assets
 Make a final accounting to the courts

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 Other Aspects of Estate
Planning
 Living will: a legal document in which
individuals specify their preferences
if they become mentally or physically
disabled
 Power of attorney: a legal document
granting a person the power to make
specific decisions for you in the event that
you are incapable

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 Other Aspects of Estate
Planning (cont'd)
 Durable power of attorney for health care:
a legal document granting a person the power
to make specific health care decisions for you

Maintaining estate plan documents

 Need to be kept in a safe, convenient place
 Key individuals need to know where
they are kept

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Other Aspects of Estate
Planning (cont'd)
• Estate planning information
• Life insurance policies
• Retirement account information
• Home ownership and mortgage information
• Ownership of other real estate
• Personal property
• Personal loans

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Other Aspects of Estate
Planning (cont'd)
• Recent personal tax returns
• Bank account information
• Credit card debt information
• Ownership of businesses
• Personal legal documents
• Investment information

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 Avoiding Probate
 Probate is essential to validate your will and
ensure your provisions are carried out. It
can also be time consuming and expensive.
 It is a good idea to avoid probate, and the
simplest ways to do so include:
 Joint ownership
 Gifts
 Trusts

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 Joint Ownership

 Jointly-owned assets transfer to the surviving owner

without probate.
 3 forms of joint ownership:
 Joint tenancy with rights of survivorship – ownership
passes to survivor, bypasses the will.
 Tenancy on common – deceased owner’s shares go to
estate.
 Community property – surviving spouse receives ½ of
all property acquired during the marriage.
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 Trusts
 A legal entity that holds and manages an asset for
another person.
 Is created when an individual, a grantor, transfers
property to a trustee for the benefit of one or more
beneficiaries.
 The trustee can be an individual, an investment firm, or
a bank.
 Any asset can be placed in a trust.

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 Trusts

 Why use a trust?

 Trusts avoid probate.
 Trusts are more difficult to challenge in court.
 Trusts can reduce estate taxes (eg USA).
 Trusts allow for professional management.
 Trusts can hold money for a child with special
needs or until a child reaches maturity.
 Trusts can ensure that children from a previous
marriage will receive an inheritance.
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 Trusts, Gifts, and
Contributions (cont'd)
 Living trust: a trust in which you assign the
management of your assets to a trustee while
you are living
 Revocable living trust: a living trust that can
be dissolved
 Irrevocable living trust: a living trust that
cannot be changed, although it can provide
income to the grantor
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 Living Trusts

Revocable Living Trusts Irrevocable Living Trusts

 Place assets in trust  Trust is permanent.
while alive, withdraw  It becomes a legal
them later if you wish. entity, paying taxes on
 You retain title and gains produced.
have control over  Not part of estate,
assets. bypasses probate, no
 No tax advantages. estate taxes.

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 Revocable trust:
• Also known as a living trust, a revocable trust can help assets pass
outside of probate, yet allows you to retain control of the assets during
your (the grantor’s) lifetime.
• It is flexible and can be dissolved at any time, should your circumstances
or intentions change.
• A revocable trust typically becomes irrevocable upon the death of the
grantor.

• You can name yourself trustee (or co-trustee) and retain ownership and
control over the trust, its terms and assets during your lifetime, but make
provisions for a successor trustee to manage them in the event of your
incapacity or death.

• Although a revocable trust may help avoid probate, it is usually still

subject to estate taxes. It also means that during your lifetime, it is
treated like any other asset you own. 14-50
 Irrevocable trust:
• An irrevocable trust typically transfers your assets out of your (the
grantor’s) estate and potentially out of the reach of probate, but cannot
be altered by the grantor after it has been executed.

• Therefore, once you establish the trust, you will lose control over the
assets and you cannot change any terms or decide to dissolve the trust.

• An irrevocable trust is generally preferred over a revocable trust if your

primary aim is to reduce the amount subject to estate taxes by effectively
removing the trust assets from your estate.

• Also, since the assets have been transferred to the trust, you are
relieved of the tax liability on the income generated by the trust assets
(although distributions will typically have income tax consequences on
the beneficiary).
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 Testamentary Trusts
A testamentary trust is created by a will.

It exists once probate has been completed. The

trust arises when there is an interim period
between:
 the date of completion of the administration of
the deceased estate – ie the residuary estate
is ascertained (or ascertainable), and
 the date the estate property and moneys are
distributed to the beneficiaries and the
legatees. 14-52
 Taxation of Trusts
 A trust is subject to tax in Malaysia only in respect of income
derived from Malaysia. All income derived from outside
Malaysia is exempted from tax when remitted to Malaysia.
 Sources of income include income such as business, rents,
interest, dividends, other income. Allowable expenses
include trustee's remuneration, repairs and maintenance of
rental property, accounting fees, depreciation of rental
assets, annuity to beneficiary. Net Income is subject to 25%
Malaysian tax.

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 Taxation on the Beneficiary
of a Trust
The beneficiaries who receive distribution and
annuities from the trust body are treated as
having a source of income from the trust and
are duly taxable in Malaysia in respect of
such income.

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 Estate Planning
Checklist
 Do you and your family know…
 Location of your will, power of attorney, and living will?
 The name of your attorney and accountant?
 Where to find your letter of last instructions?
 Location of safety deposit box?
 Whereabouts of deeds and titles to property?
 Site of your investments?
 All account numbers?
 Pension and retirement benefits?

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 How Estate Planning Fits
Within Your Financial Plan
 Key decisions about estate planning
for your financial plan are:
 Should you create a will?
 Do you need to establish a trust?
 Should you create a living will or designate
an individual to have power of attorney?

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End of Lecture 14

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