Why is legacy planning important for retirement?

Although many people associate legacy planning with only the ultra-wealthy battling over inheritances and business interests, in reality everyone needs a solid plan in place to manage what should happen to our assets.

What is legacy planning?

Legacy planning refers to the organisation of your personal and financial affairs to deal with the future scenario of death or possible mental incapacity. A legacy plan can also include your medical or healthcare directives so that you can ensure you receive your preferred treatment when you are ill.

Why is it important?

If you do not have a legacy plan, the management of your assets might go against your wishes after your death.

For example, your money or property could be passed on immediately to children who might lack the maturity to manage the inheritance wisely. Another possibility is your wealth being distributed to unintended third parties in the event of your children’s divorce. 

Moreover, legacy planning reduces the financial impact or burden on your loved ones upon your death or incapacity. 

It may also help to reduce the emotional burden on them — the absence of a will and other directives in place could sometimes stir up hard feelings and difficult conversations among family members.

How is legacy planning done in Hong Kong?

There are four main things to consider when it comes to making your end-of-life plans in Hong Kong.

1. Writing a will

A will is a legal document that contains instructions on what happens to your assets — such as cash and property — and possessions after your death. You can write how your assets are to be distributed to the people you choose, who would be your children’s legal guardian, and who would carry out your will.

Key components

Your will should cover a few key elements:

• Appointment of an executor to manage your estate
• Instructions on distributing assets like property, investments, and personal belongings
• Naming legal guardians for any minor children

2. Enduring power of attorney (EPA)

The EPA is a legal document that allows you to appoint one or more people to help you make decisions about your financial matters on your behalf. The EPA goes into effect only if you lose the mental capacity to make your own decisions.

Why make an EPA

Without an EPA in place, your loved ones may face difficulties in managing your affairs and making decisions for you if you become mentally incapacitated. An EPA ensures your wishes are respected and relieves the emotional burden from family members during already difficult times.

Appoint trusted individuals

When making an LPA, it is crucial to appoint assignees you trust completely to act in your best interests. You can appoint different assignees for personal welfare matters versus property and affairs. Consider their ability to make tough decisions aligned with your values.

Plan ahead

Like other aspects of legacy planning, making an EPA while you have mental capacity is wise. Regularly review your LPA to ensure it accurately reflects your current circumstances, especially after major life events like marriage or divorce.

3. Creating a Trust

A trust is a legal arrangement whereby one person transfers property to another person, the trustee. The trustee holds the assets and manages them in the best interests of your specific trust beneficiaries.

Trusts can be used to manage a family’s wealth and protect personal assets. For instance, you can implement rules on when and how beneficiaries receive their inheritance. Setting up a trust can also help with succession planning, as the trust assets will not be subject to time-consuming and expensive probate proceedings when you pass away.

Types of trusts

There are various trust structures you can choose from based on your specific needs:

• Discretionary trust: Trustees have discretion and flexibility over how to distribute assets and income to beneficiaries.
• Fixed trust: Assets/income split is pre-determined for beneficiaries with no trustee discretion.
• Life interest trust: Assets pass to final beneficiaries only after death of the life tenant.

4. Advance care planning (ACP) and Advance Directives (AD)

Advance care planning (ACP) refers to the process of planning for your future health and personal care. This is so that your doctor and loved ones understand your treatment decisions and care preferences in the event you have a serious illness and are unable to express your wishes then.

Advance Directives (AD), on the other hand, documents your wish to accept or refuse specified life-sustaining treatment (LST) in pre-specified conditions when you are in an end- stage condition and mentally incapable of making health care decisions. A valid and applicable AD is legally binding under common law.

Discuss with healthcare professionals and your loved ones on the details of your ACP and AD, you may also nominate a family member to participate in future discussions when you are no longer able to communicate. These details will be documented in an advance care plan and an AD form, which will be used during an emergency.

Consult with a trusted financial advisor on your retirement planning

By taking the time to create a comprehensive plan now, you're not only protecting your wealth but also sparing your loved ones from potential conflicts and financial burdens. Whether you're approaching retirement or already enjoying your golden years, now is the perfect time to take action.

Besides having a legacy plan in place, you can consider other strategies such as bucketing and decumulation as part of your overall retirement planning.

If you wish to speak with a financial advisor, feel free to schedule a free 1-on-1 consultation our SFC-licensed advisors who would be delighted to help with your legacy and retirement planning.

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