Device to kick the vice
QUESTION: I have read your article entitled “Addressing the estate of your nation” (July 9, 2014). Can you tell me a bit more about estate planning in simple terms? posted on PFA’s “ask a friend, ask Efren” service at www.personalfinance.ph.
Answer: Everyone has a propensity to take it easy. Sometimes though, this attitude can turn into a vice that, in turn, can lead to undesirable consequences. And when it comes to estate planning, such consequences are not only limited to unnecessary levels of estate and donor’s taxes. Other ill-effects of taking the “mañana attitude” towards proper estate planning are the prolonged and costly settlement of an estate as well as leaving the estate vulnerable to lawsuits and unfavorable judgments.
The following is a cursory description of just some of the estate planning devices that a person can use.
The objective is to leave more for heirs. After all, it’s theirs.
But do remember that there is far more to estate planning than just saving on estate taxes (which range from 5 percent to 20 percent of the net estate on top of certain fixed amounts depending on the size of the estate).
Donations – Donations to charitable institutions can be deducted from the donor’s gross income and can also be exempt from donor’s tax.
Donations to educational institutions, provided that the donation is intended exclusively for educational purposes, can also be exempt from donor’s tax.
Donations in amounts below P100,000 a year may also be exempt from donor’s tax.
Please note, however, that there are other provisions that need to be complied with for the donation to be deducted from gross income and the donation itself to be exempt from donor’s tax.
There are also other monetary and non-monetary costs that the donor will need to contend with in making the donation, one of which is the documentary stamp tax.
A person with sizeable assets may choose to pass on wealth through donation (instead of passing on assets as part of his net estate at the point of death) because donor’s taxes are cheaper than estate taxes. Donor’s tax ranges from 2 percent to 15 percent depending on the size of the donation. Do remember that donations to a stranger are taxed a 30 percent donor’s tax.
Gradually donating so that the amount of donation falls below P100,000 a year, and simply donating properties in parts per year to afford lower donor’s tax are allowed. But this is not as simple as it looks and a person would be well-advised to consult an estate planning expert on the matter.
Sale of property – You can transfer real property to your heirs by simply selling it to them. The tax to be applied is the capital gains tax of 6 percent on the actual selling price or the fair market value as determined by the Bureau of Internal Revenue, whichever is higher. Again, there is more to this than meets the eye. Consult an expert on the matter.
Sale of stocks in a family corporation – You can also house your assets in a non-exchange listed family corporation and sell the shares to your heirs. While the standard taxes on capital gains apply, please note that the Bureau of Internal Revenue now requires that the assets and liabilities of a corporation be adjusted to fair market value in determining the selling price.
Irrevocable life insurance policy – Perhaps one of the simplest ways to neatly assign your assets to your heirs is to buy a life insurance policy and make your heirs irrevocable beneficiaries.
When there is a payout of a death claim on a life insurance policy to irrevocable beneficiaries, the proceeds are exempt from estate taxes. You just have to choose the life insurance policy that is right for you.
Irrevocable trusts – Similar to irrevocable life insurance policies, the proceeds from an irrevocable trust arising from the death of the trustor are not subject to estate taxes provided that the applicable donor’s taxes had been paid in the process of creating such irrevocable trust.
The following are just some of the devices to kick the vice of procrastinating on estate planning. There are many more, with each device having its own set of intricacies. You will need to consult an expert on the matter.
If you want to learn more about the details of estate planning, there are now several books covering Philippine laws and regulations on the matter that you can buy.
You may also want to learn directly from an estate planning lawyer at one of the 2014 EnRich™ Estate Planning training runs happening in Cagayan de Oro (September 5), Iloilo (September 12), Angeles (September 19), Cebu (September 26), Davao (October 3) and Manila (October 10).
Email [email protected] or SMS 0917-505-0709 for the details. Details for the training may also be found in www.personalfinance.ph.
(Efren Ll. Cruz is a Registered Financial Planner of RFP Philippines, personal finance coach, seasoned investment adviser and bestselling author. Questions about the article may be sent by SMS to 0917-505-0709 or emailed to [email protected]. To learn more about the RFP program, attend a FREE orientation on Aug 7 , 7pm at the PSE Center. Email [email protected] or text <name><e-mail><RFP> at 0917-3464126 to register.)
