12 estate planning in a global context
basic concepts
estate-estate planning: disposition
all of the property a person owns or controls
financial / tangible personal assets / immovable & intellectual property
will / testament
outlines the rights
probate:
legal process to confirm the validity of the will
ways of property in an estate
sole ownership / joint ownership / partnership / trust / life insurance
legal systems
common law
civil law
trusts
restrictions on testamentary freedom
forced heirship rules
spouses have marital property rights
community property regimes
indivisible one-half interest
separate property regimes
own and control as an individual
taxes on wealth transfers
lifetime gifts / lifetime gratuitous transfers / inter vivos transfers:
are made during the lifetime of the donor
testamentary gratuitous transfer:
upon one's death
core capital
excess capital
life balance sheet
explicit assets
implied asset
explicit liabiities
implied liabilities
human capital / net employment capital
expected pension benefits
can be readily liquidated
capitalized value of desired spending goals
such as mortgages or margin loans
core capital
excess capital
liabilities + adequate reserves for unexpected commitments
assets - liabilities
estimating core capital with mortality tables
PV of anticipated spending over remaining life expectancy
incorporate inflation
estimating core with Monte Carlo
fully captures the risk inherent in capital markets
PV(spending need)=∑p(survival)spending/(1+r)^j
p(survival)=p(husband)+p(wife)-p(h)p(w)
r - real risk-free rate
safety reserve
based on subjective assessment of the circumstances
incorporate factors:
recurring spending / irregular liquidity needs
taxes / inflation
exp return -
market expectation of the assets comprising the protfolio
asset allocation
→exp return and volatility
→the sustainability of a given spending rate
volatility decreases future accumulations
interaction of periodic withdrawals and return sequences
→diversification
transferring excess capital
lifetime gifts and testamentary bequests
gifts lowering value of taxable estate
tax-free gifts
- started early and implemented over long periods→appreciation tax-free
- falling below periodic / lifetime allowances
taxable gifts
location of tax liability
liability on the donor
gift tax paid by the recipient
higher exp returns → second generation
lower exp returns → first generation
decrease the size of the taxable estate
→partial gift tax credit
generation skipping
avoid a layer of double taxation
transferring capital in excess of the second gene to the third
spousal exemptions
some taxing authorities imposing special tax on skipping
allow bequests and gifts to spouse without tax liability
valuable to take advantage of any estate tax exclusions
valuation discounts
tax mitigated by assets that qualify for valuation discounts
lack of liquidity
lack of control associated with min interest
intentionally create illiquidity and lack of control
in a family limited partnership FLP
eligible for valuation discounts
pooling assets of multiple family members:
→gain access to min invest requiring
→share in a pro-rata fashion
deemed dispositions
as if the property were sold
tax levied only on the unrecognized gains
charitable gratuitous transfers
most donations not subject to tax
permit income tax deductions for donations
exempt from taxing on invest returns
estate planning tools
trusts - a arrangement / a relationship
settlor or grantor / trustee / beneficiaries
foundations - legal entity - for particular purpose
life insurance
company and controlled foreign corporations
revocable trust - rescind relationship and regain asset
irrevocable trust - greater protection from claims against settlor
fixed trust - distributions prescribed at certain times or amount
discretionary trust - enabled the trustee to determine
control - without yielding complete control
asset protection - irrevocable / discretionary trust
must established in advance of a claim
to avoid strict forced heirship rule
tax reduction
tax:
death benefit paid are tax exempt
premiums not subject to tax
tax deferred
generate liquidity to pay gratuitous transfer tax
transfer assets outside forced heirship rules
asset protection
CFC rules - deemed distribution
cross-border estate planning
The Hague Conference
tax system
source jurisdiction or territorial tax system
residence jurisdiction
exit taxation - impose on individuals giving up citizenship or residency - deemed dispositon
double taxation
conflict
foreign tax credit provisions
credit method: T=max(residence,source)
T(residence)=T-T(foreign source)
exemption method: T=T(source)
deduction method:
T=T(residence)+T(source)-T(residence)*T(source)
Double Taxation Treaties
transparency and offshore banking
tax avoidance / tax evasion