Lately, I have just revised my will document.
This is done as my previous will was automatically nullified due to my marriage. Back then, I wrote my will as a single, in his 20s, had less wealth and was “super new” to estate planning. So, my previous will was simply an instruction guide to split up and distribute my assets to my beneficiaries. That was it.
But now, it’s a different ball game.
In my 30s, I have more financial assets. But also, I do have my challenges, which includes aging parents and starting a new family. Hence, there is a great need in my circumstance to revise and upgrade my estate plan. This involves including a testamentary trust (TT) in my latest will document.
What is a Testamentary Trust (TT)?
A testamentary trust (TT) is a trust that is created within a will document.
Let’s say I have RM X million in estate. In my previous will, there is no TT. Thus, I wrote it in such a way to split my assets into my designated ratio (50:30:20) to a list of beneficiaries (A, B, and C) and distribute them accordingly. Therefore, the beneficiaries I nominated shall receive their inheritance in one lump sum under my previous will.
It was simple and straightforward.
But now, with a TT in my will, the process is a little different. A bulk of the RM X million in estate shall be handed over to my preferred trustee. Then, my trustee shall keep the RM X million (in FDs) and distribute RM Y thousand on a monthly basis to my beneficiaries for many years to come (20-30 years).
Why Do I Have It?
Imagine leaving RM X million to a beneficiary. On one hand, he or she could use and manage the millions wisely and grow it. On the other hand, it’s possible for the money to be lost due to:
- Mismanagement (excessive & frivolous spending)
- Abuse (scams, PUAs, …)
- Other people’s emergencies (relative or friend’s medical bills)
- Potential Lawsuits
- Business & Investment Losses (due to market downturns)
The point is this: “I can leave behind RM X million but there is no certainty as to how my beneficiaries will use the RM X million inherited”.
So, a TT would enhance such certainty. This is because most of the RM X million would be managed by my preferred trustee in accordance with my trust deed. I find it to be versatile as I can include:
- How long do I want to keep my RM X estate?
- How much do I want to distribute?
- Who are the beneficiaries of my trust?
- What are the conditions for distributing the estate?
and so much more in my TT.
Personally, I use a TT as a vehicle to retain my estates and distribute a fixed sum of money to my beneficiaries for a period of 20-30 years.
Use Dividends to Pay Insurance Premiums
Today, I would say my annual dividends exceed my annual insurance premiums.
What I did was to build a portfolio of dividend-paying stocks, collect a stream of dividends from them, and use that to pay for my insurance policies. To do this, I would invest in stocks that could deliver consistent growth in profits and as well as operating cash flows for the long-term.
Let’s say I’m planning to buy a policy where its annual premium is RM 1,200. So what I’ll do is to invest around RM 25-30k to earn around 4-5% in dividend yield per annum. Of which, the dividends received can support its premiums. Thus, it is about using passive income to protect and preserve my wealth.
The above illustrates the use of a combination of tools to create passive income and use that to fund wealth protection tools that would preserve our legacy for our loved ones. Being money smart isn’t just about making money. Today, it has included the skill to save, invest and protect our money.
By Ian Tai Financial Content Machine. Dividend Investor. Produced 500+ Financial Articles featured in KCLau.com in Malaysia and the Fifth Person, Value Invest Asia, and Small Cap Asia in Singapore. Regular Host and Presenter of a Weekly Financial Webinar with KCLau.com.
