Why do estate planning?
PNB Trust under Atty. Joji Jolejole recently sponsored an Estate Planning Seminar with Atty. Serafin Salvador as main speaker. So what is estate planning? Estate planning is the process of arranging for the distribution of the owner's estate according to his personal wishes and requirements. Estate planning is for everyone who wishes to make certain that their families and loved ones are provided for adequately.
Estate tax is a tax on the privilege of the deceased to transmit property based on his gross estate or the market value of his properties at the time of death. What are included in the gross estate? All the properties owned by the estate owner at the time of death such as real property, bank accounts, stocks and other securities, personal property such as car, jewelry, works of art, life insurance proceeds and retirement benefits based on fair market value
Are there any deductions allowed to determine the taxable net estate? Yes, some of the deductions allowed are:
1.Standard deduction - R1,000,000.00 without need of documentation;
2. Actual funeral expenses - equal to 5% of the gross estate but not to exceed R200,000.00 (mourning apparel, food and drinks, cost of burial plot, interment or cremation fees and charges, etc.)
3. Judicial expenses of Testamentary or Intestate proceedings incurred in the inventory taking of assets comprising the gross estate, attorney's fees, broker's fees, etc.;
4. Valid claims against the estate such as unpaid mortgage and taxes due from deceased.
5. Family home - equal to R1,000,000.00, the excess shall be subject to estate tax;
6. Documented Medical expenses - not to exceed R500,000.00, such as medicines, hospital bills, doctor's fees.
When should the estate tax be filed? Where the gross value of the estate exceeds R20,000.00, a written notice of death to the Commissioner of Internal Revenue, the Estate Tax Return must be filed within 6 months from death.
Atty. Jun Salvador mentioned some of the common estate planning tools available:
A. Donations made during lifetime
Gifts up to R100,000.00 on a year shall be tax free and in excess of which will be taxable.
It is important to know the following are not subject to any gift tax:
1.Donations not exceeding R100,000.00 for every year;
2. Donations propter nuptias - dowries in consideration of marriage before its celebration or within one year thereafter;
3. Gifts made to or for the use of government
4. Gifts in favor of non-stock, non-profit, charitable or religious corporation
The donor's tax return shall be filed within 30 days after the gift is made.
By the way, the tax rate for a stranger is 30%. A stranger is a person who is not brother, sister (whole or half blood), spouse, ancestor, relatives by consanguinity up to 4th degree and donation made between business organizations and those between an individual and business organization.
The advantage of donating to heirs during the donor's lifetime is that the tax rate is 25% lower than estate tax. The estate tax starts at a minimum of 5% up to a maximum of 20% while the donor's tax is from 2% to 15%. Because of the relatively lower gift tax, further gift tax savings can be realized by programming gifts of smaller amounts each year than bunching the gifts in one year.
The estate tax is based on the fair market value of the property at the time of the death of the taxpayer while the gift tax is imposed on the market value of the property at the time of donation.
The important thing to remember is that to be able to exclude one's property from the gross estate the transfer by gift should be real - there must be present surrender of possession and control and a promise to transfer is not enough.
B. Outright gift or gift in trust
If the trust approach is chosen, it is recommended that the property be transferred to an unrelated, independent trustee who will hold and manage the property for the beneficiary.
C. Life Insurance
Considered as one of the best tools by which the liquidity of the estate can be maintained. In order that proceeds from life insurance will not form part of the estate at death, which estate is subject to payment of estate tax, the beneficiaries of the life insurance must be irrevocably designated.
The head of the family who has own business or gainfully employed by another company, with dependents, or a spouse who does not work should give life insurance a serious consideration. If the head of the family prematurely dies, a life insurance proceeds can help the family pay for daily cost of living, pay mortgage, etc. Indeed, the primary purpose of life insurance is to replace the income the family depends on when the head of the family dies.
Life insurance allows one to guarantee that a lump sum of money will be available upon the death of the policy holder (insured) to be directed in a way that will provide benefit to the estate.
D. Family Owned Corporation
Another popular tool in estate planning is the incorporation of a family owned assets and business. The individual stockholders will be taxed only on the amount distributed to them as dividends at 10%. Dividends distribution can then be programmed so that they are declared and spread over many number of year. Another advantage of a family corporation is that it assures continuity of ownership in the hands of the children. The Articles of incorporation can include certain provisions limiting the ownership only to family members.
An attractive feature of a corporation lies in the recognized limited liability of its stockholders whose exposure to risk is limited only to the extent of their subscriptions to the capital of the corporation - a corporation has a legal personality of its own separate and distinct from the stockholders.
Someone said "if you got assets, it's a problem. If you have none, well, it's a bigger problem." Atty. Jun Salvador advised: while still strong, write down your desires and check each one when done and hopefully it's all checked before you die so you see your wishes done. It's a very good advice as "death can come like a thief in the night "when we least expect it. It's better to be prepared, for as they say, where you can cheat death sometimes, we can never get out of this world alive".
Ms. Tarriela is the Chairman of Philippine National Bank and a FINEX Director. She was formerly Undersecretary of Finance and the First Filipina Vice President of Citibank N.A.