Happy Holidays!
It’s now the end of the year: the time to clear off your leave. For many of you, that means you have time to spare. What should you do, aside from going shopping for Christmas gifts?
Here are some things that a lawyer might suggest for you to do. As you can imagine, lawyers are boring people. So please forgive us as we make some suggestions based on the law.
Important notice: The following is for informational purposes only, and does not constitute legal advice to you. If uncertain, please check with a lawyer before making any decisions.
Having said that, let’s continue.
#1: Make a Will
The first thing that you can consider doing, if you have not done so already, is to make a will. Granted, the law of intestacy (dying without a will) allows for your family members to divide your assets according to a set formula.
If you pass away without a will, the Distribution Act 1958 allocates a certain share of your estate for each category of the following: your parents, your spouse, and your children.
It’s pretty simple if your estate comprises only of money. Each of your beneficiaries gets their percentage according to the Distribution Act 1958.
But what about land and houses, and other properties? Can you imagine having your house being divided among your children, your spouse, and your parents (if they are still around)?
If your beneficiaries can reach an agreement among themselves, they can inform the court that they wish to, either:
a. Give all their share to a certain party;
b. Follow the Distribution Act 1958; or
c. Follow a certain agreement among the beneficiaries.
But if they cannot reach any agreement, then it will be trouble!
One example we like to give is, if the deceased person has 5 children and a wife. He passes away leaving 3 houses. Without a will, each of the houses should be transferred to the 5 children and the wife. It will be difficult for any one of them to deal with the property on their own, as it is collectively owned.
By the time it goes to the second generation, imagine that each of the 5 children’s children will then become part owners of each of the houses.
It can get quite messy.
Far better it is, to arrange for house A to go to certain children, house B to go to certain children, and house C to go to the wife (or certain children). This solves the problem of difficulty in dealing with the property.
So that’s why you should make a will.
It becomes even more important when you’re rich, because there’s going to be a lot of wealth involved.
A will probably won’t cost too much and will provide you with peace of mind.
But if you get remarried, or divorced, you’ll probably need to make a new will.
#2: Make a Pre-Nuptial or Post-Nuptial Agreement
Second on this list is to make a pre-nuptial or post-nuptial agreement.
Pre-nuptial agreements are agreements made between prospective spouses, in which they declare certain arrangements will bind them in case of a divorce.
Post-nuptial agreements are similar except for the fact that the parties make the agreement after the marriage has taken place.
Before you say anything, let us say that we know that both pre-nuptial agreements and post-nuptial agreements have not been tested in the Malaysian courts.
But there’s a trend of cases where pre-nuptial agreements and post-nuptial agreements have been recognised in the UK, Singaporean and Hong Kong courts.
A long, long time ago, pre-nuptial agreements were only used in America. It was not recognised in the English courts.
Then along came the 2012 case of Radmacher v Grantino, which involved a £100m prenuptial agreement. It involved a rich German heiress, who was at risk of losing a sizeable chunk of her wealth to her husband, a banker-turned-researcher.
Fortunately, she had a pre-nuptial agreement in place, and that protected her.
At a recent Private Client Forum in Singapore, this writer learned about how pre-nuptial agreements are now recognised in countries like Italy and Switzerland.
For children of the rich, their parents have a legitimate concern that the family wealth may be split in case of a divorce.
A pre-nuptial agreement would be able to define what is considered part of the family wealth, and not the prospective bride or bridegroom’s personal wealth.
When it is made clear that an individual holds certain assets as trustee for the family, and this fact is signed off in the pre-nuptial agreement, it becomes possible to show the court that those assets should not be part of any marriage settlement.
Because, they were part of the family wealth in the first place.
A pre-nuptial agreement should also have a word of caution to the parties, that their agreement cannot be cancelled off except with proper advice from lawyers.
Another issue which comes to mind from the Radmacher v Grantino case is the settlement of debts incurred by one party. In that case, the husband wanted his very rich wife to pay for his debts, amounting to hundreds of thousands of pounds.
Of course, it needs to be pointed out that the courts decide on the outcome, and courts tend to frown on unfair agreements.
That includes an agreement in which the disadvantaged party will walk away from a divorce with nothing.
It’s good to try to be fair, even when you have the advantage.
Admittedly, pre-nuptial and post-nuptial agreements are prickly things that are difficult to raise in conversation.
One lawyer from Switzerland said that in Switzerland, the pre-nuptial agreement is known as a “little divorce”. The parties talk about the terms of their divorce before the marriage is even concluded — and that can be a real test of their love and affection.
One lawyer from Hong Kong said that the rich Chinese families have a good justification: In Chinese culture it is possible for families to cut off their disobedient children from their inheritance.
A pre-nuptial agreement, or a post-nuptial agreement, should not cost too much as well (in comparison with your wealth, that it protects).
It also cuts down the arguments if a divorce should take place.
And if you should have the bad (or good) luck of bringing your pre-nuptial agreement (or post-nuptial agreement) to court, you will become part of Malaysian legal history.
#3: Buy-Sell Agreement
If you have an insurance agent, you might have heard of this. A Buy-Sell Agreement is made between the shareholders of the company.
Here’s how it works.
The shareholders are often the same people working in the company.
If one of them should pass away, his shares go to his wife, and children.
His wife and children have no interest in the business, but want to share in the profits of the business.
Soon it becomes difficult to carry on the business, with the spouse and children of the deceased shareholder continually harping on issues of profits and responsibilities.
“Where’s my dividends? Don’t ask me to work in the business, I don’t know anything about it!”
The clever insurance companies came up with this scheme, which goes like this.
The shareholders (who are also directors) agree to have an insurance scheme in tandem with a Buy-Sell Agreement among themselves.
The valuation of the company is agreed upon, and with it the valuation of the shareholder’s shares.
The company pays the insurance premiums for each party in the Buy-Sell Agreement.
When one party dies, the insurance company pays his wife and children.
In return, the shares of the deceased shareholder are split among the other shareholders.
The shareholders “buy”, and the deceased shareholder’s family “sells”.
If your company’s continuity is a concern, you might consider the Buy-Sell Agreement.
For family businesses, the Buy-Sell Agreement is an instrument that you should consider when the company gives shares to non-family members.
It might be written in such a way that the “buy” and “sell” portions are triggered upon resignation of the non-family shareholder from the family business.
Some time back I had the privilege of presenting on Buy-Sell Agreements to the board of directors of a family-owned business. They had a minority shareholder who was non-family, but was a childhood friend of one of the directors.
The question they posed was, “What happens if we buy at valuation $X, but after so many years, the company’s valuation goes up 200% or 300%?”
The answer to that is that if the company’s valuation has gone up, the shareholders can “top up” the insurance policy so that the payout will increase.
Without that “top-up”, the payout will not increase.
There might be a problem when some of the shareholders are too old to be insured, or cannot be insured.
You might want to talk to an insurance agent to find out more.
Thanks for Reading
That’s all for this post. Thanks for reading.
We wish you a Merry Christmas and a Happy New Year.
This post was written by Kevin Koo, a partner of the firm.