You are about to receive an inheritance
As society becomes more affluent, it is not uncommon for a person to have substantial assets pass on to the next generation. Assume Peter is the eldest son of a family business founder. His father passed away recently, and appointed Peter to be his successor before his death. Besides inheriting the business, Peter has also inherited a valuable commercial office building. When Peter transfers the title deed of the property to his name, his siblings start to question his actions. The relationship between Peter and his siblings has been good thus far good. Thus, Peter wants to re-assure everyone that the property will be preserved within the family, and the benefits shared by all. John, Peter’s younger brother, is concerned that, if no documentation is done, the property might flow to a party outside of the family under the intestacy laws after Peter dies. Another concern is that, if Peter files for a divorce, this valuable property will fall into the wrong hands.
The example above illustrates how, if estate planning is not considered and effective communication between interested parties is not upheld, misunderstandings can easily arise. Instead of viewing such an inheritance as a blessing, many may come to think of it as a curse which has brought more sorrows than joys.
A good starting point is to consider the original purpose of the inheritance. Is the inheritance supposed to be a gift for your own benefit; or was it entrusted to you to preserve it for the next generation (in the meantime, you are entitled to enjoy the financial benefits)?
Estate Planning Implications and Problems
- If the inheritance is for your own benefit, technically speaking, this asset has become your personal asset, thus allowing you to enjoy the financial benefits, and giving you the liberty to decide how to pass the inheritance on to the next generation (if applicable).
- If the inheritance is for you to preserve and pass on, then you need to be more careful in your handling of the inheritance.
- Without estate planning, it is possible that your inheritance will fall into the hands of the wrong party due to the intestacy laws.
- If you do not segregate and ring-fence the inheritance away from potential risks, these assets may become diluted or be destroyed by your personal financial liabilities.
Estate Planning Solutions
- If the inheritance is significant, consider setting up a formal trust to preserve the assets, and segregate the inheritance assets from your personal assets.
- Consider setting up a holding company to own the assets, and ensure that the shareholding is fairly divided amongst your family members. Have a proper shareholder’s agreement to ensure that the shareholders are given the first right if any other shareholder wants to sell their shares. The shareholder agreement should also have an exit clause to allow the surviving shareholders to buy out the shares from the deceased shareholder’s estate.
- Communicate in writing on the existence of this inheritance, including instructions on what to do with it when you die.
- Ring-fence the inheritance assets to minimise dilution from your personal liabilities.