Professional Documents
Culture Documents
Contents
a.
b.
c.
Consume
Store
Invest
Wealth planning
More sophisticated and complicated than financial planning, especially for High Net worth Clients
(HNWC) who have so much surplus in their wealth.
Its used to make sure weve enough in future. Use for long term and need some help from specialized
consultant.
Step of wealth planning :
1) Generate the wealth
First step, how to get the wealth is. It must be through halal ways
2) Expanding/increasing/make it growth
Through the right way according to Shariah
3) Enhancement
Allocate the wealth correctly and properly
4) Preservations
Make protection toward the wealth through insurance/takaful
5) Distributions
Use the wealth in right way (consumption, saving, etc)
6) Purification (redistribution)
Other people right in ours.
Example : waqf, sadaqah, faraid, zakah
Aspect of wealth planning;
Investment planning
Designed to help individuals with investment strategies with the objective of generating
positive return on investment.
Education planning
Object to plan our children education to prepare better life for them.
Since the cost of education has increased over the years, parents should develop a saving
strategy before their children start post-secondary education. For education plan, the earlier
the start it will be better.
Tax planning
The objective is to minimize or defer income taxes payable. The plan should be made through
legal ways by structuring the right mix of investments.
e.g.: by investing in different countries where tax rates are lower
by leveraging on tax laws that allow for tax restructure so that we can pay the tax later
Generally the minimization of income tax can be viewed from two perspectives. While individual is still
alive there are variety ways (in many countries) which will either defer tax of shift income so that annual
income taxes can be paid at some stage and arrangements can be made so that the funds income tax may
come about by leaving specific assets to certain group of taxpayers. At the time of death, it may come
about by leaving specific assets to certain group of taxpayers.
Retirement planning
Plan to ensure that weve enough money to spend when we retire. Depend on what we want to do in our
retirement time (lifestyle, place to live) including the future inflation rates, anticipated cost living, current
retirement asset, current retirement saving, and also investment strategies
e.g. : Insurance policies, investment in properties, saving
Estate planning
It is a lifelong affair planning. It can protect peoples wealth and legacy, helping to grow and preserve asset
to our asset the heir in the future.
-Investment policy statement defines the investors objectives, constraints, amount of funds, investment
methodology.
-Investment policy statement will allow for continuity of policy decisions regardless of change in fiduciaries.
-Investment policy statement long term goal: helps the investor keep sight of objectives and match the
appropriateness of objectives.
-Investments policy statement short term goal: lead to sub-optimal investment performance.
- Based on the investment policy statements planner can make asset allocation decision that suits the investors
investment strategies to make security selection.
Investment approaches based on investment structure are:
-Passive investment approach:-doesnt react to changes in expectations.
-Buy or hold strategy
-Portfolio of securities design to replicate the return
-fixed portfolio
-Active investment approach:- Does react to change in expectations
-changes benchmark or composition portfolio
-positive excess risk-adjusted return or positive alpha
-Semi-active, risk-controlled, enhanced index approach:-react to change of expectation
-managers increase the weightage to make holding profitable.
B) Economic/ market factors:-Forming of capital market expectations
-differentiate between assets in the long run based on level of risks and expected
returns
CREATING THE STRATEGIC ASSET ALLOCATION:
The Execution step:-The manager constructs and revises a portfolio within the guidelines of strategic asset allocation.
-Also used to determined asset allocation
-Investment strategies + expectations= Portfolio
-When the planner used portfolio he should understand the transactions cost includes:
1) Explicit transaction costs (ex-commission)
2) Implicit transaction costs (ex-bid, ask price)
3) Missed trade opportunity costs (ex-lower price)
The Feedback step Diagram
Return Objective:
-Return requirement: is the return level necessary to achieve the investors primary long-term objectives driven
by i) Annual spending ii) Savings
-Return desire: is the return level to achieve secondary goals or objectives
-Approach used is total return which look at investors goal + annual return
-If return objective doesnt meet the level of risk of the investor, the financial planner should eliminate the goals
and objectives
-By the cash flow analysis in the investment policy statement we can calculate the required return.
For the Financial planner must address his investors return objectives by knowing the following
questions:
-How is return measured?
-How much return does the investor say he wants?
-How much return does the investor need to achieve on average?
-How is the return objective set?
For the financial planner to address his investors acceptance level of risk through knowing the following:
-How do I measure risk?
-What is the investors willingness to take risk?
-What is the investors ability to take risk?
-What are the specific risk objectives?
Investment constrains
1)Investors investment
time horizon
(based on liquidation)
There are three ways the
time horizon influence:
a)
4) Legal consideration
and special circumstances
faced by the investor
-ethics, beliefs
The length
b) The policy
decision
c)
Rebalancing
periods
Feature
Markowitz model
Samuelson-Merton Model
Measure of wealth
End wealth
Time
Single period
Multi periods
technique
Specified in advance
Investable
Cleary measurable
Appropriate
Reflective of current investment
Specified in advance.
Capital market expectations: after the manager decides the asset allocation then processes the principle
of diversification. Being by dividing potential investment channels into asset classes .
Capital market expects future return and volatile correlation .
Capital market expectations based on historical returns ( disadvantages
1. Lack of accuracy . 2. Irrelevant data to the presents .)
Long term capital + return / risk objective + constrains = Appropriate strategic asset allocation
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4.
5.
Large Transaction Costs/Indivisible include many costs professional fees- estate agency, legal
fees, registration of interests with relevant authorities, high renovation costs and so on.
Supply limited overall supply of land is virtually fixed.
In real estate there two types of market: open and controlled market.
Open Market
In an open market it is not possible to tell definitely whether the existence of supply result in demand or
vice versa.
There are many factors that affect the price of real estate in an open market. Some of them are as follows:
a) Economic Factors.
1. Regional e.g. Property in Malaysia may be more demanding than Thailand.
2. International e.g. Currency exchange rate - change of oil price affects global economy.
b) Geographical
a. Location e.g. Properties in KL is more demanding than Selayang.
b. Topography e.g. Houses in Hilly area more demanding than low-lying houses or flats.
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c.
Climate Areas where natural disasters like typhoon or earthquakes are less demanding
than other some area of Japan (always quakes) some area of Bangladesh (always
flooded).
d. Communications e.g.: Condominiums with telephone line, broad band and wireless
demand higher price.
e. Services e.g. Proper security, club house, and proper maintained condominiums demand
higher price.
c) Population grow of population demand higher price.
d) Physical Diversely shaped, with uniquely designed, build with special materials with new
facilities, equip with high technologies would result to demand higher price for such properties.
e) Technological or Building Method.
f) Fashion and Trends
g) Occupancy Status
h) Development Approvals Announcement of government plan to develop area would attract more
investors and may increase the price consequently.
a. Tenure and Title Conditions or Restrictions e.g.: Freehold demand higher price than
Leasehold properties.
b. Parties Involved.
i. Valuers or Property Consultant Independent Professional Valuers determine
the price of the real estate by using different valuation techniques or methods.
ii. Real Estate Agents They tries to obtain a reasonable price by bargaining
between the vendor and purchaser.
Control Market
1. Government Policy Controlled Ceiling Price e.g. 30% of houses in particular area should not
exceed RM42, 000. This is to facilitate the middle and lower class of the country to enjoy the
constitutional right to live.
a. New economic Plan Quota on Ethnic Group Purchasers (Discount) e.g. Bumiputra
gets 5-10%. To reduce the unequal of income distribution between two ethnic groups.
Methods of Evaluation
There are five common methods to evaluate real estate:
1. Comparison Method
2. Investment Method.
3. Cost Method.
4. Profit Method.
5. Residual Method.
1. The comparison Method (* Most important method for exam purpose)
In this method you compare similar property in the same area where the market is really stable.
When comparing the two properties the difference must be borne in mind: size of property; the floor
area; the design; the number of rooms; age; and condition of the property.
The problem may arise when the market is not stable and this method of evaluation may not be the
appropriate one.
Note: To understand how the comparison method is done please refer to the table in page 164.
2. The investment Method
This method is used for valuing properties which are normally held as income producing investments.
The formula for investment valuation is (Net income Years Purchase = Capital Value)
Note: To understand how the investment method is done please refer to page 165.
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2.
3.
4.
5.
6.
Town and County Planning Act 1976 - it guide to structure the planning system and formulates a policy
in general.
Local Government Act 1976 It deals with provision of services to the residents and tax assessment
from landlords.
Real Property Gains Tax (RPGT) to control the real estate secondary market to reduce the
transaction of buying and selling of real estate which is done not intended for the primary purpose
dwelling and other business purposes.
Stamp Duty Act 1949 It guide on the assessment and collection of stamp duties according to the
value.
Strata Title Act 1985 It deals with the duties and rights infringed with the property e.g.
Condominiums all the landlords bear the responsibility of maintaining, renovating, of the common
areas of the condominium and swimming pools and other properties by charging maintenance fee and
sinking fund from the landlords or strata title holders.
Conclusion
Proper valuation and examination should be done while acquiring a property.
Investment in real estate today requires complicated researched, tools, and strategies.
We require deep understanding of characteristics, price determination and life cycle of real estate.
We need professional advisors who can advise investors in strategy study, legal study, compatibility
study, market study, marketability study, architectural study, engineering study and financial study.
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about the public image of the company, whether it has maslahah to the Ummah, and the country, haram element
is small enough etc. Each company is reviewed based on its last financial reports.
Debt Instruments: These are the promissory notes issued by the borrower. Sovereigns are the bonds issued by
the governments in order to finance development projects. Private entities issue Private Debt Securities. Bonds
are also classified by their tenor. Short term (less than 1 year) bonds are known as Treasury Bills if the issuer is
the government and Commercial Papers if the issuer is a firm. Long term bonds are called Government Bonds if
they are from the government and Corporate Bonds if they are form firms. Coupon Bonds are bonds that payout
periodic interest.
Callable and Convertible Bonds: In callable bond, the issuer has right to redeem them at a predetermined price
before maturity and in convertible bonds the holder has the right either to receive the face value of the bon or to
convert them to a predetermined number of common stocks of the issuing firm at maturity.
Islamic Interbank Money Market: IIMM was established in 1994 to function as interbank market for Islamic
banks in Malaysia. The money market is where short term debt instruments are issued and traded. Over the 12
years, it has seen the introduction of several new instruments.
Islamic Debt Securities: Sukuk while IIMM instruments are of short tenor, Sukuk are intended to fulfill the
needs of medium and long terms securities. BBA, murabaha, istisna and ijarah are the underlying contracts of
bond in Malaysia. Most famous of them is BBA framework. Industry is moving towards Sukuk ijarah due to the
some concern about BBA.
Hybrid Instruments: These are instruments that have features of both equity and debts. Followings are few of
such instruments:
Preferred Stock Preference Shares: they have a par value, fixed dividend amounts and generally a terminal
maturity (these are the features of debt securities), dividend on preferred stock may be missed [if the company
lacks the financial ability] and are not tax deductible.
Warrants/Transferable Subscription Rights: It is a security that entitles the holders to buy stock of the
issuing company at a specified price. It is typically attached to loan-stocks or bonds issued by the company. The
exercise of warrants/TSRs leads to dilution.
Call Warrants: these are essentially call options issued by a third party, not the issuing company like TSRs. It
doesnt lead to dilution and it is not attached with other securities.
Irredeemable Convertible Unsecured Loan Stock: It is like fixed income debt instrument and then converted
into equity at predetermined dates, at or prior to maturity.
Price Determination:
Pricing/Valuation of Stock: there are numerous factors that influence the movement of stock price, like us firm
specific factors, industry factors, the macro environment, investor psychology, sentiments, performance of other
regional stock markets. One of the modules is Dividend Discount Model (DDM). Stocks price today = present
value of future dividend+ Future selling price of the stock (for more information look, p. 195). Since future price
of the stock cannot be determined today DDM concentrates on earnings from the stocks. Therefore there are
three forms of DDM:
iiiiii-
Zero Growth Model: dividend has no growth perpetually. (p.196) D=2rm, 2rm etc.
Constant Growth Model: Dividend grows constantly (p.196) 2rm, 2.1rm, 2.31rm etc. 10%
growth.
Accelerated Growth Model: dividend grows faster. 1.8rm, 2.16rm. 2.59rm et. (20%, 22% etc).
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The market required rate of return: p=D/(k-g), p=discounted price, D=Dividend, K=The market required
rate of return, G=growth (p.200).
Required Return and Risk: K should increase when the market is riskier.
Pricing/Valuation of Bonds: refer to p. 202.
Bond Yield and Yield Cures: to determine bond price four variables are important; face value, time to
maturity, coupon amount, required yield as discount rate. The yield curve is essentially a locus of points
relating the required yield to the time to maturity for a given risk class of bonds (p. 203).
Interest Rate Change, Bond Yields and Duration: by increasing the interest rate yield curves shifts
upward. The required yields would increase and given the higher discount rate cause bond and other assets
prices to fall (p. 204).
Coupon and Yield To Maturity: the coupon of the bond is the interest paid on the bond YTM is the
required return for the bond. This two elements impact bond prices. If the coupon of is equal to YTM then
the bond sells at par (market price equals its face value or par value). If the coupon is the lower than YTM,
the bond would sell at discount to par (p.205)
Pricing of Islamic Accepted Bills: pricing of Islamic Interbank Money Market instruments is based on
same logic of conventional instruments (discounting model). The prices are determined by discounting
future amounts receivable using market required yields.
Risk Elements: following are the major sources of uncertainty or elements of risk in investment:
Business Risk: Uncertainty of income flows caused by the nature of a firms business.
Financial Risk: increase in uncertainty because of fixed-cost financing, (possibility that a bond issuer will
default).
Liquidity Risk: The risk that arises from the difficulty of selling an asset due to the insufficient secondary
market for that specific asset.
Currency Risk: Risk arises from the changes in exchange rate.
Country Risk: risk arises from the possibility of major changes in the political or economic environment of a
country.
The Capital Asset Pricing Models (CAPM):???
Law Relating to Securities: Banking and Financial Institutions Act1989 (BAFIA) BNM supervises
financial institutions under this act.
Security Commission Act 1993: The role of SC is to promote a strong securities and future market and to
ensure the orderly development of the capital market in Malaysia.
Security Industry Act 1983: It provides a regulatory framework of the securities industry in Malaysia.
Securities Industry (Central Depository) Act 1991: it regulates the central depository relating to the deposit,
holding and dealing in securities deposited etc.
Future Industry Act 1993: It provides regulatory framework of the future industry in Malaysia.
Insurance and takaful are instruments that create an instant estate. The word takaful is derived from the Arabic
root word kafala which means to guarantee. The Takaful Act 1984 of Malaysia defines takaful means a
scheme based on brotherhood, solidarity and assistance.
Insurance plays a great role in protection of assets. Planning for the unexpected today may help you avoid
unpleasant surprises in the future. Insurance reimburses people for insured losses in the event of an untoward
incidence such as illness, accident or death. At the same time it can provide investment capital, lend money and
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help to reduce anxiety for individuals and society. In general insurance provide financial security against
premature death and disability.
Life insurance, payable when one dies, can provide a surviving spouse, children and other dependents the fund
necessary to help maintain their standards of living, help repay debt and fund education tuition costs.
Factors affecting the need for insurance and takaful:
(a) Income-replacement needs: income that is lost and value of benefits thatd have been provided to
the family had the client been alive
(b) final-expense needs: related to burial, expenses such as burial plot, washing, embalming and
transportation
(c) readjustment-period needs: when client dies and his wife is unable to work, wealth planner should
conduct an actual financial needs the clients wife during the adjustment period
(d) debt-repayment needs: include loans on houses, cars, business loans, personal loans, etc.
(e) College expense needs: for families who dont have a college fund
(f) Government benefits: social security survivors benefits like the Employees Provident Fund in
Malaysia and pension funds also affect the need for insurance
(g) Existing insurance and assets: families and individuals will build up some level of savings
earmarked for retirement, travel or college funds.
Important aspects of takaful according to the Working committee for the establishment of Islamic insurance in
Malaysia:
the company doesn't assume the risk but it is the various participants who mutually cover each other
company doesn't have any rights to the takaful benefits
all contributions paid by participants will be accumulated in the Takaful Fund
all payment of takaful benefits will be paid by Takaful Fund (money credited to the fund can be
invested in areas approved by Sharia)
surplus from the operation would be shared with the participants by company
company which acts as the mudharrib is entitled to part of the surplus according to a pre-agreed ratio
Under the Takaful system the contribution by each participant should be with the intention of tabarru and not
exchange of goods. Self interest motivated by material gain has no place in takaful scheme.
Bilateral relationship between the operator and the participants is based on (1) mudharabah (profit-sharing) or
(2) wakalah (agency) contract.
Mudharabah contract can be divided into (1a) pure mudharabah and (1b) modified mudharabah contract.
(1a) Pure mudharabah contract: the operator and participant share direct investment income only and the
participants is entitled to a 100% share of surplus
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(1b) Modified mudharabah contract: the investment income is reinvested into the takaful fund and the operator
share with the participants the surplus from the fund
There are also two types of wakalah contacts: (2a) pure wakalah and (2b) modified wakalah.
2. Risk management mechanism:
(1) Risk control mechanism: when client is known to have a serious illness such as diabetes. Steps need to be
taken to minimise claims by suggesting participant to take medical insurance or takaful
(2) Risk retention mechanism: insurance or takaful company takes up all claims and has no resource to claim
from any third party
(3) Risk transfer mechanism: transfer of part of risk to reinsurance or retakaful company
(4) Risk sharing mechanism: share the risk with another insurance or takaful company under a co-insurance
arrangement
Basically there are two types of insurance and takaful products: the life and general for insurance and family
and general for takaful.
1. Life insurance products
There are 4 major types of life insurance: (1) term, (2) whole life, (3) endowment and (4) investment-linked.
(1) term (or temporary) insurance pays only when death occurs during coverage and no payment at the end
of the term. The term is 1, 5, 10, 15, 20 or 30 years. This is the cheapest and can be renewed at a higher
premium. Instead of specifying the number of years the policy is stated in terms of age such as up to
age 65 or 80. and there is no renewal guarantee.
(2) whole life insurance covers the insured's entire life or very long terms such as up to age 88 or 100.
Whole life cash values arise as a by-product of the method selected for paying the premiums. A (2a)
straight life contracts is one where premiums are payable as long as the insured lives. In a (2b) limitedpay life policy premiums are paid for a specified period of time such as 20 years until age 65. Instead of
paying in instalments the premium can be paid in one lump sum and is called (2c) single-premium life.
If insurers terminate their whole life policy before death they will get refund (cash value).
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(3) endowment is similar to whole life, but it provides death benefits for a specified time period. It has
cash values and the policy holder is paid the contract's face value at the end of the protection period.
(4) Investment-life insurance divides the premium into two parts: investment account (belongs to the
insured) and risk account (used to manage the fund). In the event of death the insured will get the face
amount plus whatever in his investment account at that time.
2. Family takaful products are similar to investment-linked insurance. It has two accounts: the Participant's
Account (PA) and Participants' Special Account (PSA) which is based on tabarru. If participant dies before
maturity date he will receive whatever he has contributed up to the date of death plus his portion in the PSA
including the profits from investment.
Products related to insurance and takaful are mostly bank products.
Suppose a customer dies before he has finished paying of his loan. Under these circumstances the customer
should have taken a Mortgage Reducing Term Assurance (MRTA) or mortgage takaful. Some banks require
their clients to take up fire insurance. Bank products like savings or investment products, credit card products,
etc. can attach insurance or takaful products.
The laws governing the insurance and takaful industries are the Insurance Act 1996 and the Takaful Act
1984. The governing body for both is Bank Negara Malaysia.
Differences between the Insurance Act and Takaful Act:
the requirement of Sharia Advisory Council (SAC) under Takaful Act
provision of insurable interest in the Insurance act to eliminate gambling elements. Takaful Act is silent
on this
under Takaful Act a person below age of 18 and under Insurance Act a person below 16 is under no
capacity to participate in takaful or insurance
Takaful Act doesn't require any letters of administration to make payment to claimants
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1. WILL - is the declaration in a prescribed manner of the intention of the person making it with regard to
matter which he wishes to take effect upon or after his death (Halsbury's Laws of England).
The Will is a written document that forces a person to recognize the people he wishes to provide for. It describes
the list of assets and liabilities and their detailed description, executor to effect his wishes, guardianship of
minors and rewarding a friend or relative who is not legal heir.
Purpose of a will is for the making of dispositions of property to take effect on or after the testator's death and
appoint executors to manage or assist in managing his estates.
The appointment of an executor or administrator is one of the essential clauses in a will. Testate person is
who leaves behind a valid will, otherwise he dies intestate and his estate fall under the ambit of the
Distribution Act 1958. A person will be considered intestate if he leaves a will but fail to name an executor.
Section 3 of the Probate and Administration Act 1959 provides that the appointment of an executor may be
expressed.
Wills Act 1959, Section 3, 4, 5 of the Act claims that the will shall comply with the requirements:
(5) testator reached the majority age of 18
(6) testator of sound mind
(7) will is written in the language preferred by the testator
The Wills Act requires two witnesses other than the lawful beneficiaries to confirm the signature of testator and
that he was of sound mind at time of affixing his signature. The Wills Act doesn't apply to Muslims, inheritance
for them is outlined under the Sharia and is administered by the State Islamic Administration Enactments.
The Probate and Administration Act 1959, which is applicable for Muslims and Non Muslims, lays down the
procedural rules with regards to obtaining the Grant of Probate for the deceased's estate.
Petition is non contentious when the deceased has left a Will and named an executor, Order 71 of the High
Court will apply. Contentious proceedings occur when the deceased has not left a will and not named an
executor, Order 72 will apply and also third parties (creditors) can file a caveat vide Form C to register their
interest.
Small estate is defined as immovable properties not exceeding RM 600,000. Land Office under the Small
Estates Act 1955 is the authority to hear such cases. When a person has died intestate leaving a small estate, any
parties claiming an interest can lodge a petition to the Collector of Land Revenue for distribution of the estate.
2. TRUST refers to the legal relationship created by a person when assets have been placed under the control of
a trustee for the benefit of beneficiary or for a specified purpose. Its characteristics are (1) the assets constitute a
separate fund and are not part of the trustees' own estate; (2) title to the trust assets stands in the name of the
trustee; (3) the trustee has the power to manage assets (According to the Hague Convention on the Recognition
of Trusts). Trusts are usually created for the education, maintenance of children, aged parents, and disabled
dependents and for benefit of charities.
Elements of Trust:
time of coming into being of trust relationship
duties connected with the office of trusteeship
remedies
Types of Trust:
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1.
2.
3.
4.
5.
Express trust: (1) public (charitable) trusts and (2) private trusts which are divisible into (2a) fixed and
(2b) discretionary. The purpose is to benefit fixed people in a particular class
Implied trust
Resulting trust
Constructive trust: doesn't require formalities for its creation
Trust funds in the higher sense: cover governmental obligations
Power of attorney is an instrument created by the person granting the power of attorney (Donor) in favor of a
people named by Donor in the instrument (Donee). The purpose is to grant the Donee with the authority to
represent the Donor in certain transactions with regards to the Donor's affairs as if the Donor himself is carrying
out all the acts the Donors intends to effect. It can be (1) general (Donee is fully authorized to represent the
Donor in all matters) and (2) specific (Donor specifically mention which area of representation is required) by
nature. Most power of attorneys is specific.
Tenor is restricted by a time period. The instrument may be revocable or irrevocable. The requirements for
registration are specified in Section 4 and 9 of Power of Attorney Act.
Representative is a person appointed to act on behalf of the others person. May be known as personal
representatives, executors or administrators. Part V of the Probate and Administrator Act details the
powers, rights, duties and obligations of representatives. Duties of representative in the Administrator of Estate
are outlined in Part VI of the Probate and Administrator Act.
Beneficiary means a person or body of people, corporate or incorporated those benefits as a result of a Will
(According to Selangor Wills Enactment 1999). Non contested beneficiaries are named by the deceased in the
will. Contested beneficiaries (who may challenge the will if there is no adequate provision): spouses, unmarried
daughters, infant sons and mentally or physically disabled minors.
Beneficiaries entitled to receive property:
children, including illegitimate and adopted
mental patient
Protective Trust which protects the property to the bankrupt beneficiary
pet animals
Organizations such as clubs, societies irrespective of whether they are charitable or otherwise.
Rights of beneficiaries:
remove an executor on the basis of fraudulent acts
examine the accounts of estate
ensure that the investment made was upon due diligence
Ensure that executor makes choices of preference would not jeopardize the interests of estate and
beneficiaries.
Laws related to estate management:
Presumption of Survivorship Act 1950
Small Estates Act 1955
Distribution Act 1958
Probate and Administration Act 1959
Wills Act 1959
Inheritance Act 1971
Trustee Act 1949
Public Trust Corporation Act 1996
Labuan Trust Companies Act 1990
Trust Companies Act 1949
Faraid as a foundation of estate planning.
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Faraid means something that has been predetermined. From Quran (4:7) From what is left by parents and
those nearest related there is a share for men and a share for women, whether the property be small or large, a
determine share. Prophet saw encouraged us to study faraid because of its importance.
According to a classical interpreter of the Quran, Imam Ibn Kathir, there 3 main verses that explain the laws of
distribution (faraid, law of inheritance): 11. 12 and 176 verses of 4th chapter which explain in detail the portions
inherited by mother, father, wife or husband, brother and sister.
Eligible heirs:
(1) On the male side:
son
son's son and agnatic descendants
father
father's father and agnatic ancestors
brother
brother's son except in the case of a son of a uterine brother
father's full and half brother
son of above
surviving husband, not divorced nor repudiated
(2) On the female side:
daughter
son's daughter and other female descendants of a son
mother
grandmother
sister
surviving wife, not divorced nor repudiated
If the eligible heirs are present only the husband/wife, father, mother, son and daughters are eligible, while the
rest are excluded from the inheritance.
3 tenets of inheritance:
(1) deceased: death of deceased must be either certain or pronounced by court
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(2) heir: must be alive at time of death of the deceased and relationship is known. There are 2 types of
relationship: (2a) by marriage or (2b) blood relations
(3) estate: Baitul Mal may inherit the estate whenever there is a balance after distribution to the various
eligible heirs.
2 things impede inheritance (eligible heirs are not entitled to the estate):
(1) if a person kills his father in order to inherit his father
(2) difference of religion
2 types of exclusions:
(1) mahrum: the heirs are barred from inheritance although they are eligible
(2) mahjub: heir is excluded from inheritance because of another heir who is nearer in relationship.
Jabari's rule for determining of nearness:
(1) first to order
(2) next to degree
(3) lastly to the strength of the blood tie
The shares in estate distribution are determined by verses 11 and 12 of Surah An-Nisa (Chapter on Women):
Quranic Heir
Share
Conditions
Husband
(1/2)
(1/4)
(1/4)
(1/8)
(1/2)
(2/3)
(1/3)
(1/6)
(1/6)
Wife
Daughter(s)
Mother
Father
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Assumptions:
Changes in the cost of living will be reflected by changes in the individual's income
The post-retirement income needs can be estimated from the individual's pre-retirement income
Standard of living prior to retirement is therefore the determining element in the standard of living
post-retirement
b) Expense Method
Construct a budget for post-retirement living, that consists of:
- Housing costs
- Food
- Clothing
- Medical expenses, etc
Advantages
Disadvantages
More accurate in determining retirement
It is a tedious exercise to compute the
needs
final figure
May be more convincing as actual costs
Some assumptions may not be accurate
are being worked out
i.e. not all expense item inflate at the
same rate
Tendencies to miss out some peculiar
expense item which may not be obvious
in the present times
3) Analyze Information and calculate savings needed to meet the objectives
Calculation of retirement fund, in order to meet the objectives is based on:
Various funding sources
The workings of current asset / future cash flows
Time value of money
Work out on:
a) Determination of required amount for retirement goal, info needed:
A cash flow statement showing the client's current annual sources and uses of cash
An annual budget listing present income and projected income at retirement
Review all available assets that will be utilized to meet retirement needs.
On the worksheet, list out the categories of asset that will be valued:
- Real estate: determine the value taking consideration of inflation rate and appreciation
value based on location factors, RPGT.
- Investment Assets: currently owned which will be sold during the retirement. It includes
unit trust funds or stocks and bonds or equities in non-listed companies.
- Retirement income sources i.e. EPF, pension or annuity. This include, deferred
compensation payment, monthly income from company sponsored plans or Trust etc
- Savings program: Fixed deposits, Wadiah account, Amanah Saham Bumiputera(ASB),
Tabung Haji, Cash value from Takaful or insurance.
b) Calculate the future value amount of current funding vehicles-rate of return would vary.
o EPF
o Endowment policies
o Shares
o Properties and other invested assets, which are used to fund the amount in (a)
c) Analyze results:
(b) > (a) sufficient funds to fulfill the retirement needs
(b) < (a) short of funds
review the client's financial health
- meet the shortfall
Other factors need to be considered:
Long term assumed inflation rate
Duration of time before the retirement date
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1) Modern Portfolio Theory (MPT) - concept of diversification as a tool to lower the risk of the whole
portfolio without giving up high returns.
The key concept is BETA (Variance)
- a measure of how much a financial instrument such as changes in price relative to its market,
i.e. stocks moves 2% on average, when the KLCI moves 1% would have a beta of 2.
- A measure of investment riskiness. The higher the absolute value of Beta, the riskier the
investment.
This theory constructs portfolios where stocks with different +ve and ve Betas are mixed to give a
portfolio with minimal Beta for the whole group.
Capital Asset Pricing Model (CAPM)
used to select investment for a portfolio.
- Using Beta and the concept of risk-free return (e.g. short term US treasuries, government
bonds)
- Used to calculate a theoretical price for potential investment.
- An attractive candidate for portfolio - If the potential investment is selling for less than the
price.
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4) Asset Allocation is the process of determining optimal allocations for the broad categories of assets
invested in one investment fund.
- The choice of allocation will depend on the following factors:
a) Time horizon
b) Risk profile
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c) Taxation
Property as an asset class- one of the most popular investment for retirement because :- more tangible,
less risky, satisfying feeling of ownership, income from rental, capital appreciation, demand is always
there.
- Characteristics
a) Types of return : i- capital appreciation
ii- regular rental
b) Level of returns- depends on location
c) Leveraging tool buying a property via a bank loan
- Consequences i) multiply his return
ii) multiply his losses
- Risks in property mkt:a) Market risk
b) Specific risk
c) Financing risk
RETIREMENT SCHEME
Types of Retirement:1) Pension scheme pension s a regular payment made by the state or a former employer to a person who no
longer holds office due to retirement or disabled.
a) Defined contribution pension scheme - Both employee and employer contributed a defined amount of
contributions to the funds.
- Also known as "money purchased pension scheme"
- Can be defined as % of the salary or on a fixed lump sum.
- If stipulated in the service agreement or allowed by law, the fund is portable where
new employer can continue with the same scheme.
b) Defined benefit Pension Scheme
- pension benefit is pre-determined at the inception with
consideration of the post retirement standard of living of retiree.
PROVIDENT FUND AND OTHER RETIREMENT FUND SCHEMES
1) EPF
Compulsory saving known as KWSP under EPF Act 1991. Aiming to provide a measure of security for old
age retirement. Savings are made in form of monthly contributions credited into his EPF account. 2
contributions from the employer12% and the employee11 %( the latest is 8%). Three types of accounts
(Account I-retirement at age 55, Account II-housing and education at age 50, Account III- health and
medical critical illness) serve different types of purpose.
STREAMING RETIREMENT INCOME
Definition
o Income stream is simply a term used to cover any range of products that bring forth a steady stream of
income.
o Vehicles providing the income streams :Pension
EPF
Govt servants receive a monthly pension after
1) At age 50- Retiree may make partial
retirement, calculated as a percentage of a last
withdrawal of up to the balance
drawn salary. In the event of death of the
standing in his account II
retiree, pension continues to be paid to the
2) At compulsory retirement age 55deceased spouse
lump sum withdrawal of the whole
their balance.
Annuities
Lump sum amount which is invested to give
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B)
Principles
1) Certainty
2) Fairness (Equity)
3) Efficiency
4) Simplicity
5) Flexibility
Attributes
- All tax liabilities should be certain, definite and predictable
- Public Rulings & guidelines (by Inland Revenue Board (IRB):
b. to inform & clarify tax laws
c. to give interpretation of tax laws and practices of the revenue authority
d. guide taxpayers and practitioners to comply with laws in computing tax
e. Priority for topics requiring explanation:
- transfer pricing rules
- ascertainment of bad debts (allowable as a deduction under Income Tax Act (ITA)
f. Reduce uncertainty, promote uniformity, increase transparency and enhance compliance
- Burden of tax should correspond to benefits received by taxpayer
- Horizontal and vertical equity
- Tax laws will not influence economic decisions
- Tax should not unnecessarily distort or modify choices
- Tax system: fair and non-arbitrary administration, understandable
- Minimum compliance & system administration costs
- System can be varied easily to have immediate impact in achieving econ objectives
- Fundamental guiding principle of all tax policies should be its neutral stance
Country
Japan
China, New
Zealand
Australia,
Bangladesh,
Brunei,
Indonesia,
Myanmar,
Papua New
Guinea,
Thailand
Corporate Tax
Rate (Jan 2005)
(%)
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Commentary
- Corporate Tax:
a. Corporations with paid-in capital in excess of Y100mil = 37.5%
b. Corporations with paid-in capital of Y100mil or less
= 28%
c. First Y8 mil of annual taxable income
= 37.5%
New Zealand:
- Efficient Goods & Services Tax (GST) system. GST Rate = 15%
Thailand:
- Corporate tax rate imposed on Co.s net profit
= 30%
- Small company with net profit < Baht 3mil or RM 272k = 20% or 25%
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Malaysia
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Malaysia vs UK Tax
1. - Malaysia:
a. ITA definition of allowable deductions for business expenses is narrower
b. Only all expenses incurred during the period in production of income
2. - UK:
a. c. allows any expenses wholly and exclusively lay out or expended for the purposes of the
business (sec 137)
b. expenses in production of income during the period + expenses associated with maintaining
and enhancing earning capacity of business
__________________________________________________________________________________________
D) Sources of Tax Revenue (WPM Pg 322)
1. Direct Taxes- corporate, personal income, petroleum income, and other direct taxes
2. Indirect Taxes
3. Non Tax Revenues- Investment income, licenses, permits, registration fees, service fees,
petroleum royalties and gas payments fine and forfeitures
__________________________________________________________________________________________
E) Scope of Income Tax (WPM Pg 324)
- Scope: limit or parameters within which income would be taxable in a country
- Income Tax = charged upon income of any person / entity
- must be verified against receipt of income nature
Malaysia
- Income accruing in or derived from within Malaysia or received in Malaysia from abroad would be subject to
tax (sec 3 ITA)
- But foreign income received by Non-resident exempted
- Since 2004, income remitted into Malaysia from abroad exempted
__________________________________________________________________________________________
F) Scope of Taxation (WPM Pg 325)
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Item
Employment Income
(Chargeable to tax
under Section 4(b)
ITA)
Section
13(1)(a)
Income
13(1)(b)
Benefits-in-Kind
13(1)(c)
Accommodation provided
by Employer
13(1)(d)
Receipts from
Unapproved Pension &
Provident Funds
13(1)(e)
Compensation for Loss
Employment
Chargeable Income
(page 3 of this
summary)
Individual Tax Rates
and Rebates
Description
- wages, salary, remuneration, leave pay, fee, commission,
bonus, etc.
a. Benefits convertible to cash:
- employers may issue employees shares or grant options to
purchase shares in the future.
b. Share options
- companies offer employees with a share option scheme
(ESOS) for an option to acquire shares in the company at a
concessionary price.
- gross income from employment includes an amount equal to
value of employees use or enjoyment over any benefit or
amenity (not convertible into money) provided by or on
behalf of employer.
- Among benefits in kind exempted from taxation:
a. Medical or dental treatment or child care facilities
b. leave passages within Malaysia and for travel purposes
d. benefits in connection with performance of duties
e. New computer provided by employer
*Refer to Appendix 9.1, page 358 for guideline on valuation
of Benefits-in-Kind
- Amount of the use or enjoyment over living accommodation
in Malaysia provided by employer, rent free or otherwise.
- Computation can be referred to in Sec 32(2) ITA
- Section 38(1)(b) on Deduction of Expenses
= Assess tax on withdrawn sum from an unapproved
provident fund.
- Sum normally withdrawn at time of retirement or resignation
- relates to any amount received by employee whether before
or after his employment ceases by way of compensation for
loss of employment
- Exemption (para 15, schedule 6) if termination due to ill
health
- Otherwise RM6k exemption each service year with same
employer
Schedule 1, ITA
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d) Double Deductions:
i. Employment of disabled employees
ix. Expenditure for approved training
ii. Insurance premium for import of cargo x. Expenses incurred in international trade fairs
iii. Training of handicapped persons
xi. Fees incurred in packaging design
iv. Export credit insurance premium
xii. Expenditures on advertising Malaysian products
v. Freight charges
xiii. Expenses on promoting brand names
vi. Research expenditure
xiv. Contributions to low cost housing fund (cash)
vii. Contribution to approved research institutes
xv. Expenses to promote export of services
viii. Overseas expenses for promotion of tourism
xvi. Interest on loans to small business
e) Zakat and Labuan Offshore company
- Effective 2004, tax rebate granted to Labuan offshore company for any zakat payment subject to
maximum tax charged (3% of audited net profits or RM20,000 upon election)
- Excess (rebate > tax charged) cannot be carried forward
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41
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5.
Taghyir gives the founder the right to replace use of the waqf revenue
Tabdil gives the founder the right to change the waqf property itself
e.g. : page 386
Istibdal (substitution) and Ibdal (exchange)
Istibdal : purchase of another property to replace the former waqf property
Ibdal
: actual selling of non-profitable waqf property.
The disadvantage : the large lump sum received by the waqf department had to be spent on
reconstructing and renovating the waqf property for the benefit of the lessee with a nominal periodic
rent
-
Al istibdal (substitution)
Because the waqf property cannot be sold, it can be exchanged with another property or for money in
order to renovate the old ones. If the waqf property becomes incapable of producing services or
revenue either because of its location or because of its age, it can be replaced with the new ones with
exchanging them.
The advantage : its provide liquidity, which is needed in order to renovate part of the waqf property
The disadvantage: either it lost half of the waqf property or its good location
Al mursad
Advanced lump sum is paid by the lessee to be credited by the waqf department toward the agreed
upon periodical rent applicable after reconstruction.
The advantage : the waqf land is developed
The disadvantage : the lessee will claim his ownership of the land after a long time
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Movable waqf
In case of the waqf property is not in liquid form, according to the views of Imam shafii. Imam Malik, and
Imam Ahmad bin Hanbal, everything whose sale is valid and which can be renewed from time to time by its
usufruct or otherwise, can be validly dedicated.
According to the view of Muhammad bin Abdullah al-Ansari, measurable and weighable waqf property could
be sold and its proceeds can be invested in mudharabah, i.e. changing its status from crops to cash waqf.
In the case of liquid form (cash waqf), the mudharabah partnership has been recommended by Muslim jurists.
According the view of Imam Zufar , he clarified that the money deposited as waqf can be invested in
mudharabah and the return to be used for pious purpose.
History of Cash Waqf (refers to page 389-403)
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Act 1984. BNM announced the regulatory framework for licensing of Financial Advisers in 2005 which is
expected to help promote the orderly development of the WPM.
In Singapore, the sole governing body is Monetary Authority of Singapore (MAS) (1 January 1971) with the
objective of to conduct monetary policy, issue currency, supervise banking, insurance and securities and to
promote Singapore as an international financial center.
In UK, Financial Service Authority (FSA) regulates WPM industry. This is an independent non-governmental
body given statuary power by the Financial Service and Market Act 2000.
Ethics & Code of Conduct: Almost all major WPM organizations have adopted some kind of code of ethics.
As for Islamic WPM ethics are derived from Islamic teachings. The two most comprehensive code of conduct
are: FPSB codes of conducts that issues CFP designation which is called Code of Ethics and Professional
Responsibilities, and SFSP code of conduct which is called Code of Professional Responsibilities.
Seven principles mentioned in FPSB code of Ethics: Integrity, Objectivity, Competency, Fairness,
Confidentiality, Professionalism, Diligence.
In SFSP principles which are called Canons are somehow similar to the FPSB principles.
Islamic Ethics and code of conduct are very similar to the conventional ones; however, few certain
characteristics are added that should be adopted by the Islamic WPM professional. These characteristics are
knowledgeable, sincerity, truthfulness and trustworthiness since there is immense emphasis in Quran and
Sunnah on these characteristics.
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