Simple Exit Plan That Property Investor Cannot Overlook

In the financial services industry, people like to joke that there are two certainties in life that we cannot run away from, the first thing is of course, taxes; and the second on the list would be, death.

What to check before you invest?
Of course, a property investor will not only look at location alone in making their decision. Besides, they will need to consider how much of down payment they will fork out, which bank is offering more attractive interest package, and also the buying price, potential rental yield etc. Many of these factors that one would consider generally will enhance the potential upside of the investment, and so an investor would look to hunt for a combination of these criteria that will give them a better position to start in the investing venture.

Despite that people are concerned about the conditions that will qualify for their participate in a certain investment, many time people tend to overlook how they will exit one investment, and lack a define, clear and concrete exit plan. It is dangerous if we do not know when to exit, and do not know how to exit. The stakes become even more dangerous when the event that trigger the exit is one of the unforeseen event that will eventually happen any time, ie. Death.

When one person passes away, any assets that are registered under the deceased name will be ‘frozen’. This is applicable on the money in bank accounts, investment money in mutual funds, stock markets; the scope of frozen asset is not exhaustive and extended well to cover immovable assets such as motor vehicles, properties etc. Basically, when our assets are frozen, we are denied the right to transact on the assets, hence making it impossible to sell or exit our holdings.

As such, we have the Distribution Act 1958 to govern how to distribute the deceased assets. Distribution Act 1958 is applicable when a person passes away without leaving behind a will. A will is a document made in accordance with the law, and has legal effect only after the demise of the maker of the will (testator). Simply put, with a Will, we can decide how to distribute our assets after our demise; without a will, the distribution of our estate will be made by following the provisions set under Distribution Act 1958.

There is already an Exit Plan For You
Actually there is already an exit plan for everyone after all, it is either we adopt the exit plan outlined by government namely Distribution Act 1958, or use our own exit strategy commonly name as Will.

Distribution Act 1958 Malaysia (Amended 1997)
 Table 1.0: Distribution according to Distribution Act 1958 (Amended 1997).

What are the advantages of not using the Distribution Act 1958 route? There are many.

When someone dies without leaving a will, it is called intestacy. In order to release the frozen assets, we need to obtain distribution order. There are basically two main routes, that is the High Court route or the non-High Court route. If the deceased have estate with gross value less than RM 600,000 [wholly moveable such as cash, stocks etc.], the beneficiary can apply for Distribution Order (DO) under the Public Trust Corporation Act 1995 by going through public trust such as Amanah Raya Berhad (ARB). This is also applicable even for Testacy (dies with a will). If the deceased estate is consisting of gross value of RM 2,000,000 [combination of moveable and immoveable assets such as property], the beneficiary can go to District Land Administrator, and this is the provision under Small Estate Distribution Act 1955. District Land Administrator path is only applicable for intestacy.

When the gross estate values exceed the provision given by the two act above, the alternative is to go through High Court, where beneficiary (es) will have to apply for the Letter of Administration (LA). The court will appoint among the beneficiary (es) to be the estate administrator and granted the LA to the estate administrator. Before the LA be granted, the estate administrator must obtain two sureties who have assets worth the equivalent of the value of estate. For instance, if the estate size is RM 2,500,000, then the administrator will have to look for two persons who have a combined assets values of RM 2,500,000 to become sureties (guarantor). Most of the time, this represent a huge challenge as no one in their right mind would readily agree to become a surety. However, take note that we can also apply to the High Court to waive this requirement, at the expense of time, and more paper work. .

As soon as Distribution Order or Letter of Administration has been granted, the administrator will be able to distribute according to Distribution Act 1958. The whole process could take from 1 year to two years and above depending on circumstances. Can you imagine how your family and loved one can get through this 2 year period when all your assets are frozen up and they are depended on that?

Assets and Estate will shrink in size if no proper planning was done

The Easier Way
When someone passes away and leave behind a will, the executor of the Will will have to apply to the High Court for Grant of Probate (GP). When probate is granted to the executor, the executor can then distribute the estate according to the instructions outlined in the will. Therefore, the way of distribution is actually following the intention of the deceased instead of following the one-size-fit-all distribution act 1958. Clearly, testacy has an easier route than intestacy. The whole process could take only 6 months to a year depending on circumstances. Apart from saving time, it also allows us to dictate who should inherit which assets that we have, it also avoid disputes amongst our loved ones.

What I Came Across:Mr. Tan has a farther, wife, and a son who is 8 year old, and a house under his name. When Mr. Tan dies of Illness one day, he has got no Will, and his ownership of the house is distributed according to provisions in Distribution Act 1958, whereby the wife inherit 1/4; father ¼ and the son would stand to inherit ½. As soon as the father inherited the share of ownership, he passed away leaving no children or spouse but only 2 siblings who are in their 70s. The ¼ ownership of the house will now be inherited by these two uncles of Mr. Tan and his son. Now the house is owned by Mrs. Tan (1/4); Son (7/12); and Uncles (1/6). If this happens, how can Mrs. Tan sell the property? Does Mr. Tan really intend to allow the uncles to become part-owner of the house? If the uncles shall one day die, does Mr. Tan want his cousins to become new part-owner? All these complications could have been avoided should Mr. Tan have had a Will in place.

In short, a Will allows us to enjoy the following benefits:

  1. Appoint our own executor;
  2. Appoint who to be trustee;
  3. Appoint who should be guardian for our children;
  4. Protect your assets and preserved it for loved one;
  5. Maximize estate values by minimizing leakages and costs;
  6. Save time from long legal procedures and disputes;
  7. Get to decide how to distribute our assets.

When you engage a professional financial planner to help you construct your estate plan, you will also be guided on how to create a comprehensive and holistic estate plan that will cater to and address your concerns.

This article is written by Mr. Kevin Neoh, Licensed Financial Planner from VKA Wealth Planners Sdn. Bhd and was published in Property Insight Malaysia (English) Magazine on September 2014.
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