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.”