The challenging part for family with young children is, in the event of common disaster, young children cannot inherit parent’s estate before age 18, and when they reach age 18, they inherit a lump sum payout, which create another potential issue, they may not know how to manage a lump sum of money!
Most of the family feel that they don’t have much cash, and hence they don’t need to do planning as what the rich are doing. Is that correct?
Estate Planning is about planning for estate distribution in the event of death, is not about distribution of cash or asset, some of our untouchable assets will become cash when we pass away, eg. CPF, HDB, life insurance and etc. let’s do a simple calculation on how much an ordinary family would have when both parent pass away at the same time
1. HDB
We may not be able to afford Condo, but an ordinary family own at least 1 HDB in Singapore, how much a HDB worth? Easily 500,000, and some of the HDB at prime area are selling at more than 1 million. If you are paying HDB mortgage using CPF-OA, you are required to buy mortgage insurance, and hence, if anything happen, HDB will be fully paid off.
For family with young children, young children will be staying with guardian before Age 18, and to own HDB, proposed owners must be at least 21 years old, and hence, most of the cases, HDB will be liquidated and become part of the estate.
2. CPF
When was your last time to check how much you have in your CPF? For an adult who work more than 10 years, and assume there is nothing left in ordinary account, which is used to pay for HDB downpayment and monthly payment, still there is significant amount in our special and medisave account, which will become cash to our beneficiary if anything happen to us. Let’s assume combination of husband and wife CPF account, 100k in total, fair enough?
3. Life Insurance
It is not easy to have 1 million cash in our bank account, it is not difficult to get a 1 million dollar worth of life insurance nowadays! Depend on age, just need about 30-50 dollar per month to get 500k coverage
4. Dependants Protection Scheme
Dependants Protection Scheme (DPS) is an optional scheme, and also the only life insurance we can pay and own through our CPF-OA, if you never opt out, you should have DPS under your portfolio, 70k coverage for Death, Total and permanent Disability (TPD), and Terminal Illnesses (TI) to age 65.
5. Cash and etc
Let’s assume only have 10,000 left in bank account
The next question is, is our children ready to manage 1.75 million when they reach age 18?
Another question for yourself, what would you do if you know you going to inherit 1.75 million cash when you are 15 years old or younger, would you still study hard to get into university? Or you will just sit there and wait for the day to come?
Instead of lump sum payout, we normally advise our client to give them by monthly when they reach certain age, eg 25 years or when they started working full time.
And the purpose of giving them money, is to provide them a better life, instead of encouraging them not to work, we may set certain criteria in order for them to receive the payout, eg at least graduate as diploma/degree, or have a full time job. Let’s say we wish to give them 3,000 per month out from 1.75 million, how long it take to deplete 1.75 million? 48.6 years!
By doing simple planning, our beneficiary will receive 3,000 per month for the next 48.6 years! 3,000 per month is not a big sum of money to live in Singapore, but if this is additional income for them, on top of their salary? isnt it fantastic?
If settlor can accept the idea of investing, we may go for advance planning
For advance planning, we allocate 550k as emergency fund, which can be used as scholarship, education fee, medical fee and etc.
Another 1.2 million will be invested in lower risk financial products, to give 3-4 % p.a. return, assume 3% annual return, we may give our beneficiary 3,000 per month as well. The difference between simple planning and advance planning is, simple planning distribute monthly income from principle, advance planning distribute monthly income from investment return, which may last perpetual! If anything happen to our primary beneficiary, the payout will be given to secondary beneficiary, or become part of the estate of primary beneficiary.