Malaysia: Caveat Testator

Last Updated: 31 May 2017
Article by Carolyn Oh

Introduction

When one is ready to be a 'Testator' is when one is ready to take a panaromic view of what one has achieved or rather in a word that reflects this material world what one has accumulated. The reality is that the making of "WILLs" and those ready to become testators are now (regretfully) ordinary affairs; regretfully for in the exercise of making a Will do people:

  1. realise the implications of making a Will;
  2. put sufficient thought into making the Will and its adequacy; and
  3. appreciate the fluidity of life and that a Will made today might not be apropos for the years to come

The fact is having the inclination to plan and to make a Will IS a good thing and a more prudent position than leaving intestate.

However, the vogue is to obsess over accumulation and at an appropriate time list it all on paper resting on one's laurels that at the very least one has done something about it. This blasé attitude stems from the fact that to process a Will (post demise) i.e. to obtain a Grant of Probate is not an expensive process requiring only solicitors' and court fees.

Usually one only sits up and focuses when a sizeable and 'painful' amount is possibly charged or levied. Moreover, when one is ready to consider a Will then one must also be ready for the consequence of the Will taking effect which would be upon the demise of the testator and the focus will then be on one's estate.

Taxes and Duties on Estate(s)

Throughout one's life and in the accumulation process, it is inevitable that one's hard earned monies are 'taxed' from several angles – clearly a nation cannot survive on sunshine and the occasional rain.

In Malaysia, some of the taxes which many are familiar with are as follows:

  1. Income Tax – is tax on one's earnings collected pursuant to the Income Tax Act, 1967 (Act 53);
  2. Goods and Services Tax – is tax on the supply of goods and/or services collected pursuant to the Goods and Services Tax Act, 2014 (Act 762);
  3. Real Property Gains Tax – is tax on the gains one makes through the sale of any real property collected pursuant to the Real Property Gains Tax Act, 1976 (Act 169); and
  4. Stamp Duty – is tax levied on a variety of legal, commercial and financial instruments pursuant to the Stamp Duty Act, 1949 (Act 378).

The above taxes have bearings on a testator or an 'accumulator' simply because all of the above goes towards reducing all or any of such accumulation(s) – unavoidable hence accepted.

Currently, Malaysia does not have any form of estate duty which is commonly referred elsewhere as inheritance tax or death tax which is applicable to a deceased's estate. The fact that there is no estate duty means there is no final tax on the accumulated wealth of a deceased individual. This was not the case pre-1991.

History of Estate Duty in Malaysia

Previously, the Estate Duty Enactment 1941 imposed estate duty to be levied against a deceased's estate which meant [in particular for person(s) domiciled in Malaysia] estate duty was chargeable on any of the deceased's movable and immovable property in Malaysia as well as movable property in any other countries. Initially there were 28 tax brackets with scale rates from 0% to 40% the highest rate of which was applicable to estate(s) with values above MYR 5 million. Several reforms took place thereafter and effective from 1984 only three tax brackets were in play with scale rates of 0%, 5% and 10%. Estate duty was not applicable to estate(s) with value below MYR 2 million and the highest rate was applicable to estate(s) valued over MYR 4 million.

Clearly then the non-applicability of estate duty to estate(s) of value below MYR 2 million was aligned with the Small Estates (Distribution) Act 1955 (Act 98) which deemed that properties of a deceased person which in total valued below MYR 2 million as being categorised as a small estate. On a similar note, estate duty was obviously meant to tax upon larger estate(s) i.e. targeting the wealthy.

Historically, estate duty was explained as being:

  1. revenue for a government;
  2. a mechanism to reduce inequality in wealth distribution i.e. income disparity; and
  3. tax on unrealized capital gains that have never been taxed.

Estate duty (then payable) was charged on the capital value of the deceased's estate at the open market value of such accumulated assets less liabilities at the date of the deceased's passing. Allowable deductions included excluded properties, funeral expenses and debts of the deceased.

The Estate Duty Enactment 1941 and various other enactments relating to estate duty were repealed with effect from 1st November 1991 which meant the abolishment of estate duty in Malaysia after that date but estate duty was applicable for cases where the date of death was before the 1st November 1991.

Reintroduction of Estate Duty in Malaysia – A possibility?

In essence a quarter of a century has passed without there being estate duty so much so that in practice the words 'estate duty' has become ornamental. Very regularly do we read in Last Wills and Testament the following clause:

"I give to my Executor UPON TRUST:

i) firstly, for the payment of all my just debts, funeral and testamentary expenses (the expenses of which are to be at the discretion of my Executor) and all legal or estate duties (if any) payable in respect of my Estate; and ..."

The words "estate duties" quite often is never lifted from a regular draft Will and that makes one wonder whether everyone is in trepidation that one day estate duty might return.

The 2017 Malaysian Budget was announced on Friday the 21st October 2016 with a theme called Ensuring Unity and Economic Growth, Inclusive Prudent Spending, Well-being of the Rakyat which all can be summarised as being moves to plug the revenue gap.

Per usual, there were many academic speculation as to the areas which were going to be affected and the reintroduction of estate duty was one that was rumoured to be making a comeback.

The Effect of Estate Duty

  1. Applicability - It is important to note that estate duty in Malaysia is not just applicable to Malaysians. The deceased's domicile is the determining factor. For example, where the deceased was domiciled in Malaysia, estate duty will be chargeable on all movable and immovable properties of the deceased in Malaysia as well as movable properties in any other country. For persons not domiciled in Malaysia, only the movable and immovable properties situated in Malaysia is taxable.

    Currently, even when there is no estate duty in Malaysia, testators who have investments outside Malaysia might also be subject to 'death taxes' in the country where those assets are located.
  2. Duty on Personal Representative – Should estate duty return for an encore then additional burden will be placed on personal representative(s) to ensure that estate duty is duly settled to the relevant authority. For clarity, estate duty must be paid before probate or letters of administration will be granted.
  3. Timeline to comply – In the past, the executor or the intending administrator of every deceased person was required to file an estate duty affidavit and pay the estate duty within six months after the death of the deceased. This is a very short and stringent timeline all the more given that in some estate(s), the families and/or personal representatives do not actually get to dealing with the estate matter(s) for years post the death of the deceased for one reason or another. The courts in Malaysia actually recognises unintentional delays and in fact Order 71 Rule 5(6) of the Rules of Court 2012 states that "Where an application for a grant is ... made after the lapse of three years from the death of the deceased, the reason for the delay in making the application shall be set out in the affidavit in support of the originating summons." Hence whilst the courts may allow tardiness in certain cases, the Collector of Estate Duty seemingly might be less lenient.
  4. "Usurps" from the total value of the estate concerned – It is said that estate duty is meant to tax on the wealthier estate(s) however taking into account the last tax bracket applicable the highest rate was meant to apply to estate(s) valued over MYR 4 million. In this day and age, the total value of an estate exceeding MYR 4 million is common. So, one might surmise that estate duty if reintroduced is meant to tax as many regular estate(s) as possible.

An additional concern would be the possible increase of estate duty rate. The Organisation for Economic Co-operation and Development ("OECD")'s survey of top estate and inheritance tax rates in world ranks Japan in 1st place with a tax rate of 55%, Korea in 2nd place at 50% and France in 3rd at 45%.

The United States of America (US) along with the United Kingdom is ranked at 4th place by the OECD having an estate or inheritance tax rate of 40%. The recent demise of the singer, Prince intestate would have his estate levied at that princely sum of 40% leaving much lesser to his next-of-kin.

The rationale of the return of Estate Duty (in Malaysia) against an international take on Inheritance or Death Tax (US perspective)

After a 25-year hiatus why would they bring estate duty back? The reasoning given is to amass more revenue for the government which apparently is meant to be utilised for public expenses.

However, taking a look at the US position, despite the high rate of 40%, the US also allowed large exemptions resulting in very little revenue and applicability to very few households. Comparing revenue obtained and high administrative costs, repeal of death taxes in US was heralded. On the 26th April 2017, part of the presidential tax reform announcement included the repeal of death tax/estate tax.

Pre-death but Gone Veggie

Not at all a laughing matter but a scenario when one is no longer competent to give instructions or is in a persistent vegetative state but yet has not passed. In Malaysia, the legal status of living wills has yet to be determined nor do we have Lasting Powers of Attorney provisions (which in other countries like England are known as Enduring Powers of Attorney) and like that as found in, for example, Singapore's Mental Capacity Act, 2008.

This means that in Malaysia there are no legal documentation sanctioned by statute which expressly determines matters pertaining to care/living arrangements, financial utilisation and importantly medical treatment or omission when one is mentally incapacitated but still alive. With regards to medical treatment or omission and in the face of not having that 'clear legal document' setting out the parameters of the testators wish, medical practitioners and institutions alike must be overtly cautious as to the steps they can or cannot take.

Soft suggestions onshore are for there to be documents termed amongst others Advance Care/Medical Directive(s) coupled with powers of attorney drawn up to deal with matters as mentioned above. However, the enforceability of the directives without statutory force will have to be tested with time and its acceptability by the various institutions which the ones empowered have to liaise with accordingly. Moreover, the powers allowed to a donee under the Powers of Attorney Act, 1949 (Act 424) besides clearly revoked by the donor's death is similarly revoked should the donor become of unsound mind or the donor has been adjudged to be of unsound mind [Section 5 refers]. Many a times the failure to allow such directives or powers to dictate is as a result of conflicting believes by other kin coupled with conservatism of the medical service providers.

Legally avoiding estate duty & further thoughts to planning proper

Ironically, given US's stance to repeal death tax, wealth planners have speculated whether there might now be less need to utilise wealth planning techniques. On the inverse should there be a reintroduction of estate duty in Malaysia, would it not be wise for people to start looking more seriously into other wealth or succession planning possibilities for otherwise "death" can be very expensive.

On a positive note, one can say that estate duty unlike other taxes can legally be planned to be avoided. For starters, it can be smartly said to not leave all of one's assets to be ripe for the picking in one juicy Will. Moreover, the Will can never be able to deal with such scenarios as described in Paragraph (VI) above.

A Trust would be a good form to consider for in this structure one would convert one's assets and accumulations into interests held by handpicked trustee(s) and the trust document will set out the wishes of the settlor which may include scenarios pre and post death.

Additionally, a trustee's role is of the highest fiduciary standard and if matters of finance can be entrusted to the said chosen trustee then similarly matters pertaining to care/living arrangement as well as medical election(s) can also be placed under the said trustee's purview. In the case of a mature trust, when the said trustee has been exercising his or her role for a significant time, such medical institutions would be familiar and the powers then wielded by such trustee would naturally be less questioned and heeded.

Moreover, a Trust once made sans Will means there is no estate to be dealt with and the probate process can be dispensed with altogether and estate duty (if reintroduced) will not be applicable.

It is ironic that whilst one is ready to be a testator in a form of a Will hence is ready to grapple with the idea of passing, one might not be ready to be a settlor of a trust for in the latter the settlor must indeed relinquish his or her asset(s) to the trustee whom will then be the legal owner of the same. The hesitance to "trust" away stems often from the fact that one is enamoured with one's own assets and accumulations.

The three (3) stark differences between onshore trusts and offshore trusts (using an international business and finance centre such as Labuan as an example) are as follows:

  1. Revocability & Retention of Rights

    Onshore, per traditional trusts once settled there should no longer be any revocation and there are no provisions for retention of rights by the settlor who is deemed to have given the assets away; anything lesser which reflects that the settlor meant himself to benefit sometimes might give rise to a claim of fraudulence.

    Offshore, a testator who might choose instead to be a settlor of a trust can, nothwithstanding having elected to settle his or her accumulations and assets into a trust, still can (under statutory provisions) reserve such rights under the trust for his or her own benefit which might include duties to the trustee vis-à-vis decisions and expenditure towards the settlor's care/living arrangement as well as medical requirements. This reservation also extends to a right for the settlor to revoke the trust should it all seem not to fit accordingly to the settlor's wishes.
  2. Beneficiaries' Rights – Beneficiaries have equitable rights being beneficial owners and armed with knowledge of their rights can band together to remove a trustee from his or her role and claim all the rights to themselves (Saunders -v- Vautier (1841) 4 Beav. 115); offshore, beneficiaries' rights can be curtailed by statutory provisions. This would be vital should the settlor intend the trustee to also be the person who overseas his care/living arrangements as well as medical matters having also named himself as a beneficiary therein. The ability to prevent the other beneficiaries from usurping rights and benefits to themselves too quickly would be achievable.
  3. A Protector's Role - Onshore trusts will not have this under an expressed statutory provision whilst this role is expressedly available in offshore trusts wherein the settlor having settled can thereafter take on the role as 'Protector' to oversee the trustee's management of the trust and in fact it can be a reserved right of the 'Protector' to be the one to effect change of trustee(s) should performance be not up to par.

Conclusion

"Let the Testator beware" that this article seeks to caution on the possibility of the return of Estate Duty in Malaysia and to remind the reader that very often people now fall into "grey" states of health before actually passing.

It is beyond ironic that those with the wherewithal to have been able to elevate themselves to such a wealthy state yet does not explore that extra mile as to other structures beyond the Will which is possibly more suitable for wealth and succession planning in that it allows one maximum control as well as allows one to dictate advance care/medical directive(s) and unlike the Will retains for the intended beneficiaries the maximum of such residue of assets and accumulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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