When cash is not king
Remember that while blood is thicker than water, money can be the blood solvent.
Question: I guess I have no choice but to pay taxes once my assets are transferred to my spouse and children when I move on to the next life. But could I just set aside cash in the bank to pay for such taxes? I don’t want my family to have to worry about the tax payment themselves—asked at EnRich™ Estate Planning training program
Answer: What are the odds of picking the winning combination in a 6/42 lotto game? They are approximately one in 5.2 million. And mind you, we are not yet talking about the amount to be won as the prize money is shared by as many people who bet on the winning combination per game.
How about the odds of winning in the 6/45, 6/49 and the all popular 6/55 lotto games? They are approximately one in 8 million, one in 14 million and one in 29 million for the 6/45, 6/49 and 6/55 games, respectively.
So what do these odds have to do with setting aside cash for paying estate taxes? Cash in bank accounts is frozen once the account owner dies. Heirs can use the cash only after estate taxes have been settled. As a solution, some resort to the strategy of maintaining “or” accounts and having pre-signed account withdrawal forms ready for filing with the bank shortly before or after the death of one of the joint account holders.
Or, with the advent of online banking, they can now transfer funds from one joint account to another bank account in just a matter of seconds. All that is needed is to share usernames and passwords.
Here lies the problem. Many things can hinder the surviving joint account holder from executing the withdrawal shortly before or after the death of the other account holder.
If the joint account holders are closely related, like husband and wife, the spouse to be left behind may be too distraught in seeing his or her loved one go. The emotional burden may be too great to even think of making that timely withdrawal or assigning the withdrawal to an authorized representative.
There will also be too many chores (e.g. hospital bills, funeral arrangements, updating relatives, care for children) competing for the surviving spouse’s attention within a very short period of time. What are the odds of these things not happening? I would say very slim.
If the bank already knows of the death of one of the joint account holders, not even close relations with the bank branch manager will get the latter to override the freezing of the account. Apart from not wanting to ruin his career over just one withdrawal, the bank branch manager will adhere to guidelines in banking, which have been getting stricter in line with the goal of both industry players and the Bangko Sentral ng Pilipinas to apply global best practices. So what are the odds of these not happening? I would say very slim.
In addition, recall the withdrawal slip of banks. There will always be a statement that more or less says that whenever one of the joint account holders withdraws or effects funds transfers from their joint account, he or she is doing so on the basis of a continuing declaration and representation, under penalties of perjury, that all the joint account holders are still living as of the date of the withdrawal or funds transfer.
Maintaining an “or” account also runs the risk of a joint account holder withdrawing the cash without the knowledge of the other account holder for reasons other than for payment of estate taxes, a case of premature transfer.
Many estate plans have suffered dire consequences from such premature transfers. Remember that while blood is thicker than water, money can be the blood solvent.
If you want a great way of preparing funds for payment of estate taxes, try ordinary life insurance with the beneficiaries designated as irrevocable, a great variation of which is the limited pay variable unit linked policy. It’s simple; you just put up a small amount for a big payout when death occurs. But life insurance is just one of the devices available.
If you want to learn more about estate planning devices, grab a copy of any Filipino-authored estate planning book. You may also want to learn directly from an estate planning lawyer at one of the 2014 EnRich™ Estate Planning training runs happening in Cebu (Sept. 26), Davao (Oct. 3) and Manila (Oct. 10). E-mail info@personalfinance.ph or SMS 0917-505-0709 for the details.
Efren Ll. Cruz is a Registered Financial Planner of RFP Philippines. He is best selling book author of Pwede Na! (A Complete Guide to Personal Finance) in 2004, and is the chairman and president of the Personal Finance Advisers Philippines Corporation.
Source: http://business.inquirer.net/179291/when-cash-is-not-king
Comments
3,102 total views, 1 views today
Social