Estate Planning in global context Flashcards
a discuss the purpose of estate planning and explain the basic concepts of domestic estate planning, including estates, wills, and probate; b explain the two principal forms of wealth transfer taxes and discuss the impact of important non-tax issues, such as legal system, forced heirship, and marital property regime; c determine a family’s core capital and excess capital, based on mortality probabilities and Monte Carlo analysis; d evaluate the relative after-tax value of lifetime gifts and t
Estate planning
- Process of disposition of one’s estate on death and making other arrangements
Estate
Property of an individual
- Property - financial assets + immovable assets + tangible assets + intangible assets
Will
- Document outlining the right others will have over one’s property after death
Probate
Legal process to confirm the authencity of the will.
Legal system effect
Civil Law: General abstract rules or concepts to a particular case
Common Law: Draw abstract rules from past cases
Forced Heirship Rules
Children have right to a fixed share of a parents estate
Community Property regime
“each spouse has an indivisible one-half interest in income earned during marriage”
Separate Property regime
“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”
Wealth transfer taxes
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.
Core capital
“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”
Excess Capital
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.
Estimating core capital using mortality table
See Pg 269+270 in text
Estimating core capital using Monte Carlo
Creates a portflio needed to meet the expenses
Check text pg 276
Relative value of tax free gift made during one’s life time compared to bequest is
Given by formula on page 278
Families should take benefits of the annual exclusions on gifts .
Taxable gifts
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.”
Strategies
“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.”
Location of Gift Tax Liability
Gifting becomes attractive if the gift tax is paid by the donor. See equation on Page 282
Generation Skipping
Transferring the excess capital from first gen to third gen and skipping second gen can help in saving the tax
Spousal Exemptions
Some jurisidications allow exclusion of tax when transferred to spouse
Valuation Discounts
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
Charitable gratuitous transfers
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
Trust structure
Settlor/grantor - transfers assets - trustee
Trustee - manages for beneficial owners - according to the terms of trust.
Types of Trusts:
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.
Life Insurance as a means of tax benefit
-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
Tax system
Source jurisdiction - relationship between country and the source of income
Residence jurisdiction - relationship between country and the residence of the person
Income tax
Persons on residence juri - taxed on their worldwide income
Taxation of wealth and wealth transfers
Source - if the asset is situated in the country
Residence - all assets transferred by the donor.
Double taxation
Credit
Exemption
Deduction
Credit Method
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⎤⎦”
Exemption Method
- Residence country imposes no tax on foreign source income
“TExemptionMethod =TSource”
Deduction Method
-Residence country allows the taxpayer a deduction of the tax paid to the source country.
“TDeductionMethod =TResidence +TSource (1−TResidence ) =TResidence +TSource −TResidenceTSource
Transparency and offshore banking
- 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.
