Publication: DNA Mumbai; Date: November 13, 2006; Section: Personal Finance; Page: 6
Increased awareness among corporates, individuals and media will help create models
“Who would take care of our son Armaan should something happen to us?” was the key question burning in Rajesh & Arti Malhotras mind when I met them. Malhotras have a 5-year-old talented autistic child.
Rajesh is a corporate executive in his early 40s and his wife Arti a housewife. These were some of the several questions that the Malhotras were thinking about:
Who can be trusted to ensure the safety, health, and financial well-being of their son when they are not there?
Is there a common forum or self help/support group available?
Are there any benefits from the government available?
Will the child be able to work and handle financial responsibilities alone?
What if the physical or mental impairments worsen over time?
We then discussed Malhotras goals and came up with the following
Income of Rs 50,000 per month for son Armaan starting 2024.
Retirement income of Rs 100,000 per month for Malhotras starting 2024.
Corpus for medical expenses of at least Rs 1 crore by 2024.
A detailed assessment of their current cash flow and net worth statements revealed the following.
The contingency fund was very comfortable but on the higher side. They had a lot of liquid assets in their saving accounts and low interest fixed deposits. Even with the interest rates at 8 % their post tax return was around 5.3 %.
Though Malhotra has a high rate of savings, he has been unable to build a structured and balanced portfolio in alignment with his goals. Most of the assets are in debt and cash form. Given that his goals are long term (18 years time horizon) in nature, exposure to equities is very low and restricted to 2 stocks and 2 mutual funds.
Surplus cashflow is not being channeled into appropriate investments every year hence a lot of money is in savings account. At the same time adhoc purchases based on new product launches or sales pitches to him, inputs from friends, broker and his relationship manager were the preferred route.
Except for home loan, he does not have any debt.
Malhotra has 2 endowment plans and & 2 pension plans. Based on the life insurance need analysis, he is highly underinsured.
Malhotras investment portfolio is heavily skewed towards employees provident fund(EPF) gratuity and public provident fund (PPF). Most of these are employment related investments. 57 % of his investments are in debt form while 39 % of the investments are in cash and around 3 % of the assets are in equity. Together cash and debt form around 96 % of the portfolio.
We came up with the following recommendations
Besides the tax deductions under Section 80C , Section 80D (deduction in respect for medical insurance premium) and the home loan interest under Section 24, that Malhotra has been utilising , we decided to also utilise all the deductions available to him under Section 80DD (deduction in respect of maintenance including medical treatment of a dependant who is a person with disability).
We created a cashflow management strategy to ensure that surplus funds are invested in appropriate investments according to the plan and not on an adhoc basis. We developed an investment policy for the client which defined the asset allocation , money management approach and how he should view the investments from a volatility perspective (Given his risk tolerance)
We suggested that a Malhotra Private Trust should be created with the sole intention of using the trust funds for the benefit of Armaan. We framed a trust deed with explicit provision for:
Appointment of trustees
Resignation/death of trustee and filling up the vacancy
Objects of the trust
Powers of trustees
Obligations of trustees
Property of the trust – movable and immovable
Dissolution of the trust.• Rajesh , Arti , Shekhar (Rajeshs brother) and Anuj (family friend and lawyer) were made the trustees of the fund.
Based on the needs analysis we found out that the Malhotra was short of at least Rs 2 crore of insurance. We suggested he opt for a term insurance plan of Rs 1.5 crore. We also decided to go ahead with Jeevan Aadhar which is a policy from LIC for special dependants.
This policy was structured in a manner to provide a lumpsum amount as well as an annuity. We decided on making the trust the nominee for this particular policy. Premium under this policy is deductible under section 80DD of the Income Tax Act up to the ceiling mentioned therein.
We created a will with Arti as the sole executor of Rajeshs estate. In case, Arti dies before Rajesh, then we decided that Shekhar and Anuj would be the executors of the trust and the estate on Rajeshs demise.
One of the most important issues in this case is one of the one of guardianship. A guardian is a person who assumes the care and protection of another person. The guardian takes all legal decisions on behalf of the person and their property.
All parents are the legal guardians of their children till the child turns 18. After that parents are no longer the legal guardians. This means that they cannot take any legal decisions on behalf of their child, or legally represent their child.
In this case it is imperative that the parents be the legal guardians of Armaan post 18 as he would require someone to take prudent decisions whether legal, financial or otherwise on his behalf. Before the National Trust Act, parents of such offsprings with named disability were not empowered to become the legal guardians of their children after they were 18 years of age. Parents had to approach the courts to get the guardianship of their child in special circumstances.
The National Trust Act for the first time enables the person with cerebral palsy, mental retardation, autism and multiple disabilities to have a guardian representing her/ him throughout their life.
The parent can now get legal guardianship of their son or daughter with disability and represent them even after they are 18 years of age. This should be done on Armaan turning 18. It should also be include in the will who his guardians would be should something happen to the Malhotras Given the fact that very little can be expected from the government, families will do well by forming and strengthening self help groups dedicated to this cause.
Increased awareness, corporate, individual and media help will go a long way in creating sustainable long-term models to address this very critical issue.
Disability can strike anyone and can come unannounced. Every family should explore and address the possibility of disability in a thorough manner. If we dont, in the blink of eye, we could overlook a crucial detail that might have disastrous consequences.
myplan@fpsbindia.org
(The Case Study is only a model for educational purposes)
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