Three Simplified Options for Estate Planning
Accumulating wealth also comes with the responsibility to protect and properly disposing it.
IT is such a disheartening scene for family members to quarrel over inheritance. That some even result in lawsuits, “word wars,” and worse, violence.
The final stage and the most neglected part of wealth management is estate planning. It is the orderly process of arranging the disposal or distribution of one’s assets to beneficiaries or heirs.
A lot of Filipinos are caught off-guard on laws and tax policies related to inheritance and distribution of assets. This usually results in financial penalties and shattered relationships among family members and relatives.
Estate planning can be a complicated legal setup, but it can be simplified through these three options.
Do Nothing
This option may probably be the most convenient for the asset owner, but the most inconvenient and expensive for the beneficiaries or heirs. This is the part where owner leave everything to chance and have beneficiaries struggle on estate-distribution laws and policies in case the asset owner was “taken out of the picture.” Heirs, if they wish to acquire their inheritance, need to shell out large amount of money to settle estate tax. And if they failed to pay the estate tax within six months of decedent’s death, civil penalty of 25 percent of the amount due is imposed plus 20-percent interest per year delayed on settlement.
Aside from monetary consequences, you also place the relationship of heirs at risk. An unplanned distribution of the estate could very well be the source of tension among families or relatives.
Transfer While You Are Still Alive
This option is considered as the most convenient for heirs, but not necessarily cheap. This is the part wherein you dispose your assets either by selling, giving, or donating. But whatever your option for disposal, it will never be tax-free. The biggest advantage of this option is that you could supervise the distribution of your assets to their rightful place and as an owner, you could mediate any disputes and prevent tearing relationships among family since you are still alive.
If you plan to give your assets as a gift or donation, the donee (who accepts it) need to settle the donor’s tax. Relatively, donor’s tax is cheaper than estate tax, but still not considered cheap. If you plan to give away one of your property worth P5 million, donor’s tax will be equivalent to P404,000. Compared to estate tax in which for the same gross estate of P5 million, gross estate tax will be equivalent to P465,000. For liquid assets (i.e., cash, savings account, time deposit), you may slowly transfer assets to beneficiaries in denominations of P100,000 every year to be exempted on the donor’s tax.
Another option to dispose your asset is to sell it. However, most of the time the children (or beneficiaries) doesn’t have the financial capacity to buy the asset. Due to this disadvantage, there are others who engage in “simulated selling” which is completely illegal. Simulated selling is the act of selling the property wherein there is no real cash transaction involved.
In this option, timing is essential. Transfer it too soon, you provide the risk of mismanaging your asset. Unfortunately, no one could predict on when you will “run out of time.”
Creating a Will and Getting a Life Insurance
This option is considered as the most cost-effective among all other options. A will is a legal declaration of a person’s intention to be performed after his or her death. A life insurance is an investment product that provides significant financial benefit to the beneficiaries in case of the person’s death in exchange for a very small premium.
An attested will could allow an organized and “peaceful” distribution of assets to heirs. If written and prepared properly, it will be difficult to contest by family members or those involved in a last will and testament.
With the distribution of assets placed on proper direction through a well-written will, your life insurance will be used to cover estate tax, lawyer fees and all other probate-related expenses. With the small amount you are paying for your life insurance premium, this what makes it cost-effective.
Unlike a donor’s tax, gross estate can be subjected to allowable deductions (i.e., funeral, judicial and medical expenses) that can significantly reduce your estate tax
If you have any ounce of concern for your heirs, clearly, “do nothing” is the worst option you could choose for the distribution of your assets or estate. Remember that accumulating wealth also comes with the responsibility to protect and properly disposing it.
Jake Lingan is a Registered Financial Planner of RFP Philippines. He also holds a qualification of Certified Investment Solicitor. He is currently Unit Manager and MDRT member of one of leading insurance companies in the Philippines.
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