Introduction to Estate planning
If you thought that financial planning was simply a question of saving as much as you can offshore and being heavily insured, think again.
Designing a long term financial plan to meet your future costs of both the expected and the unexpected is a core part of financial planning. However there are other equally important considerations in planning for the long term financial security of a client, especially those with families.
Estate planning:
Estate planning is essential to ensure that death taxes are minimised and also that the estate of the dearly departed passes to the intended heirs.
As a Financial Adviser working with expatriates, I meet and work with people whose circumstances are vastly different to those who choose to live and work where they were born. Many of my clients have multiple bank accounts and investments, spread across different countries and continents and for many different reasons. It is often necessary to restructure and simplify these arrangements to ensure a smooth transition of assets to intended beneficiaries.
Investment vehicles offered by Financial Institutions are designed to be very flexible and will sometimes incorporate all of a client's financial planning needs, including long-term tax planning. However the personal circumstances and long term plans of individuals sometimes require additional financial planning tools to ensure maximum asset protection.
Tax planning:
Long term tax planning should be a core consideration in any form of financial restructuring. A person living outside of their home country may be currently free of the burdens of taxation, but future changes in personal circumstances may mean that tax could once again become an issue. This applies not just to those who are planning to return home but also, in some cases, to those who do not plan to return to their home countries.
Inheritance Tax:
I meet few people who actually enjoy paying tax, but of all the forms of taxation Inheritance Tax is probably the most uniformly despised. It is a tax on the assets of a deceased person, assets accumulated from income and gains that have usually already been taxed and so in a very real sense this represents double taxation.
For those countries that continue to levy this form of tax, it is politically challenging, to say the least, to abolish a tax that many perceive as a tax on the ‘rich' and so it is probably here to stay.
Unfortunately the rules regarding Inheritance Tax are not uniform amongst those countries that still collect it.
UK assets are always subject to UK Inheritance Tax, regardless of the nationality or place of residence of the owner. UK domiciled persons, which includes non UK citizens who have spent at least 17 of the last 20 years in the UK , are subject to Inheritance Tax on worldwide assets, regardless of where they lived prior to death and indeed where they die.
In the UK , Inheritance Tax is only charged on that portion of the estate that exceeds the tax-free threshold of around $ 500,000, (the price of a modest family home in London and surrounding areas). The excess is taxed at a rate of 40%. However, it is permissible for individuals to give away unlimited amounts of money and other assets during their lifetime, without triggering immediate tax liabilities. This can result in the value of a decedent's estate being below the taxable threshold. For this reason, UK Inheritance Tax is often described as a tax on stupidity, as it is completely avoidable provided the donor survives at least seven years beyond making a gift.
For expatriate U.K. citizens, Inheritance Tax planning will often involve transferring assets out of the estate of the client, using a variety of legitimate strategies, as well as making provision against potential tax liabilities if they do not survive the necessary 7 years beyond the asset transfer. The actual financial plan will of course depend on the assets and circumstances of the client.
American death duties are known as Estate Tax. American citizens are treated rather more generously than their British counterparts as they currently enjoy an exclusion amount of $ 1,500,000. However, unlike UK Inheritance Tax, US Estate tax cannot be reduced by gifting assets away. In addition, once an individual's cumulative lifetime taxable gifts exceed $1,000,000 US citizens are required to pay Gift Tax on the excess. This is effectively an advance payment of Estate Tax.
As well as the U.K, many other European countries still retain their own forms of Inheritance Tax legislation. Some countries charge lower rates but with taxable thresholds far lower than even the U.K, meaning that in some instances, a person in one country pays more Inheritance Tax than a person with a higher valued estate in another country.
Professional financial planning must take account of both the current as well as the future potential tax position of the client. This will depend on the client's intended place of long term residence (and in some cases citizenship), personal asset type and value, as well as their intentions regarding the ultimate dispersion of their estate.
The main goal of Inheritance Tax planning is to legitimately reduce the value of the residual estate of the client. As taxable thresholds, tax rates and gift tax provisions vary considerably between countries, the planning strategies will be highly personalised and are best designed by a professionally qualified and regulated adviser.
Minimising tax:
There are legitimate steps that can be taken to ensure that the maximum possible estate is passed to your intended heirs.
For those who want to minimise the impact of Inheritance taxes but also wish to maintain some level of control over their assets during their lifetime, formal trusts can be used. Trusts have the effect of taking legal ownership of assets from the donor, whilst providing him or her with the flexibility to alter the allocation and distribution of estate assets.
Another estate planning option is to use a foundation. Foundations also allow for the transfer of assets out of your estate although the structure is different.
Your financial adviser will be able to assess whether a trust or foundation are appropriate to your circumstances and needs. Trust and foundation planning will be the subject of our next two articles.
Planning for non-tax matters
Reducing your liability to taxes is not the only reason for comprehensive estate planning. Tax planning will ensure there is more left for your loved ones, but you still need to ensure that this money goes to those that you choose.
Probate:
In addition to the potential Inheritance Tax burden, dying with assets located in an onshore Western country involves probate. This is the legal procedure for obtaining the release of an estate and distributing it to the beneficiaries. For surviving expats, this is at best a time consuming and frustrating process at a distressing time. But many of our clients are married to foreign-born wives, with sometimes a very basic command of their husband's native language. It is important to understand that for some countries, until Inheritance Tax is paid and in full, the estate cannot pass to the rightful heirs.
Probate can be avoided by using an appropriately structured trust or foundation as part of your estate planning.
Forced Heirship
Some countries have laws that prevent disinheritance of children and spouses.
The effect of this is that a will can be challenged and overturned if it does not meet the minimum statutory legacy requirements. Such laws can only be applied to the legal assets of the deceased. Assets that have been legitimately transferred to a legal trust or foundation are no longer the property of the deceased and so can be placed beyond the reach of such laws. The assets placed into a trust or foundation can then be applied in accordance with the wishes of the Settlor, for the benefit of those selected by the deceased and not those nominated by the Government in their country of origin or death.
Where there's a will there's a way
Everyone should make a will. It eliminates misunderstandings, ensures that your wishes are carried out but more importantly it avoids family strife.
In many countries, Western or otherwise, if you have made a will and subsequently get married, that existing will becomes legally invalid and so you need to draft a new one. This should be done in both Thai, or whatever your wife's native language is and your native language.
But when is a marriage not a marriage? I have attended many wonderful religious marriage ceremonies, but in many countries, these are not legally recognised until the marriage is registered at the requisite Government office. To be doubly sure, you can register your overseas marriage with your local Consulate or Embassy, which is then recorded in your home country.
If you are not legally married then, without a will, at best your estate may be subject to the laws of Intestacy, meaning that the love of your life does not receive all that you intend for him or her. At worst, particularly for those with ex-wives and families, your current spouse and children, may be left with little more than the family home here in Thailand.
A protected inheritance
One of the most consistently overlooked aspects of financial planning is the provision of effective financial management for the surviving partner/family and/or other beneficiaries. Whilst beneficiaries may be more than capable of managing their financial affairs effectively and wisely, this is not always the case. Most trusts and foundations with beneficiaries under the age of 18, whether or not children of the Settlor, contain provisions that prevent them from taking ownership of settled assets until they at least reach majority. At the same time, other provisions will usually ensure that such beneficiaries receive income from the trust for their day to day living expenses and education. Restricting access to trust or foundation capital for beneficiaries is sometimes prudent regardless of age.
Sometimes the greatest legacy that can be left is the legacy of a protected inheritance.
Avoidance and evasion
It is the task of tax collecting authorities to extract all of the tax to which they are legally entitled. It is your right to part with no more money than you are legally obliged to pay, which for some expatriates is nothing.
Long term planning
In addition to recommending appropriate investment vehicles your Financial Adviser should be able design flexible structures that can change and grow with you, providing as much benefit at the end of your life as during.
It's your money and your peace of mind.
Article was written by Richard Colburn, Montpelier Thailand
