CPF Money - Should You Nominate Your Kids Or Spouse Directly?
Updated: Feb 24, 2022
The issue with nominating your kids or spouse as beneficiaries of your CPF money and have them inherit a large sum immediately after your passing is that the money may dissipate in the hands of the young person, or get mismanaged in the case of a vulnerable elderly, according to Chiwi Lee, Chief Executive Officer at estate and succession planning firm PreceptsGroup International. We spoke to Lee at a pre-event for the CPF & Your Retirement Forum, about potential solutions to overcome the issues with untimely inheritance.
Name: Chiwi Lee
Company: PreceptsGroup International
Estate Planning Specialization: Trust
Base Country: Singapore
Anything Interesting: Watches YouTube every night to play golf better
Q: Can you tell me more about yourself? How did Precepts come about?
Lee: I graduated from law school and at the later part of my legal career, I was handling wealthier clients. I was looking at the area of succession planning and had the opportunity to do full time in the wealth management and trust sector. It was a mid-life career switch after 16 years in the legal industry.
Rockwills Management Buyout
Precepts was originally Rockwills Singapore. RockWills is a household brand in estate planning in Malaysia and in 2019, we did a management buyout. We rebranded and came up with the name Precepts, which stands for principles or guidelines for families. It is to manifest how we deal with clients and staff.
Q: What’s the road map for Precepts going forward?
Lee: We want to innovate in areas where technology can come in. An example will be our newly launched product called ProviTrust, which is a digital trust for CPF money and caters for the mass market.
But when it comes to the kind of typical business that we operate in, most parts will still require the traditional kind of attention where the client needs to spend time and go through the various facets of their family objectives, the kind of assets they own, and it can be very varied.
Artificial intelligence is not going to take over some of these aspects. If a person is going to leave behind wealth sources from various channels, from property to financial assets and across different countries, it requires bespoke planning.
Q: Can you tell me more about ProviTrust? Why do you need a trust for CPF?
Lee: CPF is a class of asset that many Singaporeans have and would be leaving money that could range from $150,000 to half a million dollars. More people are voluntarily putting in more money into their CPF account because of the returns that they could get.
If you are looking at getting the maximum payout from CPF Life (a national longevity insurance annuity scheme), then the kind of retirement funds that you need to have is probably in the range of $250,000 to $300,000. Eventually the money will need to be passed on to somebody.
Currently, CPF nomination is a simple mechanism where you nominate someone as a recipient and if you pass away, the nominee takes the money. This is where the issue lies.
Minor, Elderly Nominee
You might be leaving a substantial amount of money to a beneficiary who is very young. Can you imagine someone below 18-year-old receiving $200,000 overnight? That's a lot of money.
Some people may name their spouse as the beneficiary and by the time the spouse receives the money, he/she could be an elderly person receiving $200,000 to $300,000 and this could cause a lot of problems. They could be vulnerable, they could be subject to undue influence and they could be cheated when someone knows about the situation and realizes that this elderly person has just received $300,000.
In these situations, it makes sense for someone who can be trusted to be appointed the trustee and hold the money to ensure that the money will not dissipate in the hands of the young person, or potentially leak out in the case of a vulnerable elderly.
There was a situation where the recipient who got the money happened to be an undischarged bankrupt. In the end, the recipient never benefited from the money and it ended up in the hands of creditors.
Protecting Undischarged Bankrupt
In cases like this, where the beneficiary is an undischarged bankrupt, in the midst of some sort of creditor claim or in the middle of a divorce, it makes sense for the trustee to withhold all the money, and only distribute the money at a later time when the adverse situation has passed.
This is where ProviTrust will be appropriate. For people who just want to set up a practical and simple trust, where that $200,000 or $300,000 in their CPF account would be passed on to a trustee to be distributed in a certain manner after they pass on.
Q: Why is nominating minor for CPF an issue? Isn’t it the guardian who will take charge of the minor’s money? Why use ProviTrust to nominate a trustee instead of just giving the money to the minors and have the guardian take charge of the spending?
Lee: If you talk about minors and guardians, that is in the context of the estate, which is distinctive from CPF money. The fundamental difference is that CPF monies cannot be willed away and you have to do a CPF nomination.
If the minor is below 18, the minor cannot receive the CPF money. The Public Trustee will take the money and send it over to the nominee when he/she turns 18 years old. Before the nominee turns 18 years old, the money is held with the Public Trustee.
Read More: Monies held-in-trust for minors
With ProviTrust, the trust can receive the money and the trustee can distribute the money out to the minor or the guardian in the manner that you state.
Q: How is ProviTrust different from the regular kind of trust and why did you come up with ProviTrust?
Lee: What you are referring to is living trust. In a living trust, you can collate all the various channels of money sources, for example, CPF, insurance, properties and others into one trust. The assets may be transferred or are ear-marked to the trust when you are alive.
Cost of Living Trust
Generally, when you set up a living trust, you appoint a professional trustee to be the trustee of the fund. It’s going to cost several thousands of dollars to set up and draft the trust deed, and then there's a yearly administrative fee to manage the trust. The administrative fee could be anything from 0.5% to 1% or even 2% of the asset under management, depending on the service provider.
Downside of Testamentary Trust
An alternative to living trust is to embed a testamentary trust as part of the will. The trust only kicks in after you pass away and the trustee holds on to the money and only gives the money to the beneficiary at a later point in time.
But you can’t appoint the testamentary trust as the nominee for CPF money because it only exists after you pass away and you need to appoint a nominee while you are still alive.
Larger CPF Monies
Over the years, the issue of CPF money seems to be more prevailing. In the old days, when we did wills and testamentary trusts or set up living trusts for clients, when it came to CPF monies, we had to tell the client to do a CPF nomination.
But today, CPF is becoming more of an issue because people are leaving behind more money in their accounts.
What is Standby Trust?
Then, we introduced a trust solution called standby trust, which essentially is a vehicle where the money from the estate, insurance policy payouts, and CPF nomination could go into. The essence of a standby trust is that there is very little money in it.
With us, you only put in $1,000, so there isn't very much for a trustee to do while the trust lies dormant. Because the vehicle exists, you could nominate this trust to receive the CPF nomination. Insurance policies that a client owns could also be assigned to a standby trust, but you cannot do that for testamentary trust.
Birth of Digital Trust
Standby trust is what birthed the idea of ProviTrust, where we explored a digital solution where people could seamlessly set up their own digital trust. We also asked ourselves if appointing professional remunerated trustee of $200,000 or $300,000 made sense.
That may not be feasible if we were to charge our usual fees and that was what birthed the idea that we should facilitate people who simply wanted to appoint other individual persons, such as a trusted relative or friend, to be the trustee of their CPF money which will for many be of modest sums.
Digital vs Non-Digital Trusts
By doing it digitally and allowing people to appoint others as trustees, we bring the cost down to about $600. Obviously, it's quite different from having to come to our office to meet with us and spend an hour to go through the nuts and bolts of what a trust is, and to explain and talk about the pros and cons of setting up a trust.
When we use this digital trust solution, all the information is available online. There are plenty of FAQs for people to understand and create a simple trust document. It is a simple document that is around one to two pages to deal with a single asset class, CPF money.
Q: Is it like an online will where I basically put a person’s name and how I want to distribute my CPF money and then it generates a document?
Lee: Yes. When you make an online will, which is filling in a template, you name beneficiaries and etc and a will is generated.
In the context of what we are doing, the ProviTrust digital trust is also simplified as much as possible. The trustee’s powers are all specified. We have made it in a way where you can state the percentages, how the beneficiary will receive the money, whether they will get it monthly, quarterly, or yearly and etc. It can be easily set up in about 30 minutes.
Q: Anything interesting about you? What do you do on weekends? Any special talents? Lee: I'm an avid golfer. I practically watch YouTube every night on how to play golf better! I also enjoy music and play instruments including keyboard, guitar and violin.
This interview has been edited for length.
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