Based on a recent research study in “The Lancet”, 1.5 million children worldwide have lost a parent or custodial grandparent due to Covid-19.
Closer to home, it was recently reported that 33 children have become orphans due to Covid as of Aug 13 in Malaysia, and would be handed over to relatives or placed at child protection institutions.
Parents need to be mindful of the need to plan for any eventuality. Comprehensive will and estate planning are crucial to protect the interests and welfare of young children in the event of one or both parents’ deaths.
Here are the steps involved in such planning.
1. Appointment of executor and substitute executor
Both parents need to have their wills drawn up and should appoint each other as the executor of each’s estate. A substitute executor must also be appointed, preferably a trust corporation, in the event of a double tragedy or if both die within a short time of each other.
Under the Probate Administration Act 1959, two persons must be appointed as joint executors when there are minors involved. The requirement will be waived if a trust corporation is appointed.
2. Appointment of guardian
Parents should appoint their children’s guardian in their wills, and it is important that the appointment is synchronised in both wills so there won’t be any complications if a double tragedy occurs.
A substitute guardian can also be appointed in both parents’ wills.
3. Creation of a testamentary trust
Parents of minors should create a testamentary trust, where the appointed trustee manages the children’s entitlements for education and maintenance until the youngest child turns 18.
In the case of EPF monies, parents should nominate each other, and this should be mentioned in their wills to fund the testamentary trust for their children.
In the event of a double tragedy, the executor/trustee will hold on to the EPF monies to fund the financial needs of the young children. It is not recommended to declare a minor as an EPF nominee as the child cannot receive the money until he or she turns 18.
Similarly with life-insurance payouts, parents can nominate each other to receive death benefits, and the monies should also be mentioned in the wills to fund the testamentary trust if one or both parents die. The trustee will hold on to the proceeds to meet the financial needs of the children.
It is not recommended to nominate minors for life-insurance payouts as the proceeds will be paid to the Public Trustee in the event both parents die together.
It is also advisable to split the fund assets into movables and immovables. The terms in the testamentary trust can then be customised to provide more precise instructions for the trustee to act upon.
4. Creation of a living trust
There is an alternative strategy to ensure life-insurance proceeds are made available more quickly to fund the financial needs of minors. This can be done by setting up a living trust by virtue of a trust deed, and by appointing a trust corporation as its trustee.
Life-insurance policies of one or both parents can be assigned to the trust corporation, enabling the trustee to file for claims immediately upon the death of one or both parents.
Instructions to be inserted into the trust deed include the purpose of the living trust; quantum of payments to the young children; and investment policies of the trust fund money.
Lee Khee Chuan is a Securities Commission and Bank Negara-licensed financial advisor who has been practising estate planning for over 17 years. He also researches and writes extensively about the subject, besides lecturing for the Certified Financial Planner certification programme.
For more information, visit www.estateplanningmalaysia.com.