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To most people, what matters is not their own wellbeing but their loved ones’. Whilst it may not be difficult to provide for that during one’s lifetime, it may be virtually impossible to do so when one is gone. It is therefore important to plan ahead to make sure that the loved ones are well taken care of in case of an eventuality.
The law generally states the default position in the absence of any estate planning (e.g. the Intestates’ Estates Ordinance in Hong Kong stipulates that the primary heirs are one’s spouse and children), but it is increasingly common for people to tailor-make their own contingency arrangements. Different tools and devices may be deployed to that end, and a general understanding of the features of different devices is essential to finding the most suitable solution in the circumstance.
1. The various devices
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(1) By Will
If you have ideas on how to distribute your assets, you may make a will and set out your preference. You may designate the inheritee(s) of your estate and the executor(s) who will be handling the distribution of your assets (which will only take effect upon eventuality). Two witnesses are needed to witness your signature of your will and the witnesses cannot be the beneficiary of your estate.
(2) By Trust
You may set up a trust by transferring the legal ownership of your assets to a “trustee” who will manage the assets on your behalf for the benefit of the designated persons as “beneficiaries”. Different types of trust can be set up for different purposes, and the powers of trustee may vary depending on the types of trust. Generally, a trustee may decide how and when the trust assets are managed or distributed.
Trusts are becoming increasingly popular among wealthy families to protect their wealth and pass it on to the next generation. They are often used where the beneficiary may not be in a position to make good use of the gift (e.g. minor / disabled children).
(3) By transfer during lifetime (also known as “Inter-Vivos Transfer”)
If you have already made up your mind on how your assets should be distributed, the most straightforward way is to make the transfer during your lifetime. The transfer may simply be done by way of gifts.
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2. Which device is the best?
There is no one-size-fits-all solution when it comes to estate planning. The above devices come with their own advantages and disadvantages. For example:
(1) It usually takes a few months (at least) to obtain a probate grant to administer one’s estate, whilst generally, a trustee may at his discretion vest trust assets in a beneficiary.
(2) Expenses in administration of trusts are generally higher than in administration of estate.
(3) Inter-vivos gifts are binding and may not be revoked once delivered with intention to make gifts.
It should also be borne in mind that these devices are not mutually exclusive – you may mix and match them as you please to achieve your objectives.
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3. Dispute risks
Whatever device(s) to use, no one wants his / her plan to be derailed. Any risks of challenge to the validity of the device(s) in place by disgruntled dependants need to be managed.
As a general rule, the longer a device has taken effect during one’s lifetime, the less likely it will be successfully challenged when one is gone. Therefore, inter-vivos gifts are relatively least challenged, followed by trusts and then wills. Probably with this in mind, the ultra-rich have recently demonstrated strong preference to divide up their assets among families during their lifetime, even though “abdication” is the consequence.
Estate planning not only gives you peace of mind that your loved ones are protected during a time of extreme stress and grief, but also provides an opportunity for you to reflect upon your priorities. Bespoke estate planning involves a deep understanding of one’s wishes and family situation. It is recommended that guidance and advice from experienced professionals be sought, especially where assets across multiple jurisdictions are involved.