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

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taxable gifts

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location of tax liability
liability on the donor

gift tax paid by the recipient

higher exp returns → second generation
lower exp returns → first generation

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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

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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