Estate Planning in global context

Question 1

Estate planning

Answer 1

• Process of disposition of one’s estate on death and making other arrangements

Question 2

Estate

Answer 2

Property of an individual
- Property - financial assets + immovable assets + tangible assets + intangible assets

Question 3

Will

Answer 3

• Document outlining the right others will have over one’s property after death

Question 4

Probate

Answer 4

Legal process to confirm the authencity of the will.

Question 5

Legal system effect

Answer 5

Civil Law: General abstract rules or concepts to a particular case
Common Law: Draw abstract rules from past cases

Question 6

Forced Heirship Rules

Answer 6

Children have right to a fixed share of a parents estate

Question 7

Community Property regime

Answer 7

“each spouse has an indivisible one-half interest in income earned during marriage”

Question 8

Separate Property regime

Answer 8

“ach spouse is able to own and control property as an individual, which enables each to dispose of property as they wish, subject to a spouse’s other rights”

Question 9

Wealth transfer taxes

Answer 9

Two primary ways of transferring assets:
1. Gifting during one’s lifetime -lifetime gratuitous transfer- intervivos transfers - Gift tax may or may not apply depending on the jurisidiction
2. Bequeathing assets upon one’s death - testamentary gratuitous transfer. Depends on residency of the donor/recipient, type of asset , location of the asset
Taxes may be applied either to donor or recipient and also depends on the relationship between the two.

Question 10

Core capital

Answer 10

“The amount of capital required to fund spending to maintain a given lifestyle, fund these goals, and provide adequate reserves for unex- pected commitments is called core capital”

Question 11

Excess Capital

Answer 11

Assets> Liabilities on life balance sheet
Assets: Explicit + Implicit = Financial assets, real estates etc+PV of the employment capital (human capital)
Liabilities: Mortgages, margins, loans etc+Capitalized value of the investor’s desired spending goals.

Question 12

Estimating core capital using mortality table

Answer 12

See Pg 269+270 in text

Question 13

Estimating core capital using Monte Carlo

Answer 13

Creates a portflio needed to meet the expenses
Check text pg 276

Question 14

Relative value of tax free gift made during one’s life time compared to bequest is

Answer 14

Given by formula on page 278
Families should take benefits of the annual exclusions on gifts .

Question 15

Taxable gifts

Answer 15

Given by formula on page 279

“many believe that transferring highly appreciating assets during one’s lifetime and bequeathing lower return assets reduces transfer taxes.”

Question 16

Strategies

Answer 16

“Another common strategy for wealth managers managing an aggregate family portfolio is to gift assets with higher expected returns to the second generation or, in general, position assets with higher expected returns in the portfolios of the second generation, leaving the first generation to hold assets with lower expected returns.”

Question 17

Location of Gift Tax Liability

Answer 17

Gifting becomes attractive if the gift tax is paid by the donor. See equation on Page 282

Question 18

Generation Skipping

Answer 18

Transferring the excess capital from first gen to third gen and skipping second gen can help in saving the tax

Question 19

Spousal Exemptions

Answer 19

Some jurisidications allow exclusion of tax when transferred to spouse

Question 20

Valuation Discounts

Answer 20

Shares in small companies and minority stake results in valuation discounts. It is better to transfer family limited partnership interest to the following generation and hence saving the tax

Question 21

Charitable gratuitous transfers

Answer 21

See equation on Page 286
Charitable offer the following advantages:
1. No transfer tax
2. No income tax on
3. No tax on investment returns

Question 22

Trust structure

Answer 22

Settlor/grantor - transfers assets - trustee
Trustee - manages for beneficial owners - according to the terms of trust.

Question 23

Types of Trusts:

Answer 23

Revocable - settlor can rescind the trust and get back the assets. and in this case, the creditors of settlor can have claims on the assets.
Irrevocable- settlor cannot revoke the trust.

Question 24

Life Insurance as a means of tax benefit

Answer 24

-Death proceeds to the beneficiaries are tax exempt
-Premiums paid not part of the estate at the time of death nor subject to grautious transfer tax.
-Income tax advantages
- Loan against life insurance

Question 25

Tax system

Answer 25

Source jurisdiction - relationship between country and the source of income
Residence jurisdiction - relationship between country and the residence of the person

Question 26

Income tax

Answer 26

Persons on residence juri - taxed on their worldwide income

Question 27

Taxation of wealth and wealth transfers

Answer 27

Source - if the asset is situated in the country
Residence - all assets transferred by the donor.

Question 28

Double taxation

Answer 28

Credit
Exemption
Deduction

Question 29

Credit Method

Answer 29

Residence country reduced the tax liability paid to a foreign country exercising source jurisdiction
Limiting the liability to the amount the tax payer would pay in a domestic country.

“TCreditMethod =Max⎡⎣TResidence,TSource⎤⎦”

Question 30

Exemption Method

Answer 30

• Residence country imposes no tax on foreign source income

“TExemptionMethod =TSource”

Question 31

Deduction Method

Answer 31

-Residence country allows the taxpayer a deduction of the tax paid to the source country.

“TDeductionMethod =TResidence +TSource (1−TResidence ) =TResidence +TSource −TResidenceTSource

Question 32

Transparency and offshore banking

Answer 32

• Information exchange increasing
  If the current generation try to use the flaws in the system for their benefit of saving taxes etc, the future generation will suffer due to the increase transparency in the systems in the future.