Basic Estate And Family Wealth Planning PDF

Basic Estate And Family Wealth Planning 10/05/2024 What is Estate Planning ⚫ Arrangement – Orderly – Systematic – Comprehensive – Legally acceptable – Cost-efficient ⚫ Of/over estate owner’s affairs, assets and liabilities 10/05/2024...

Basic Estate And Family Wealth Planning 10/05/2024 What is Estate Planning ⚫ Arrangement – Orderly – Systematic – Comprehensive – Legally acceptable – Cost-efficient ⚫ Of/over estate owner’s affairs, assets and liabilities 10/05/2024 2  What is Estate Planning ⚫ To achieve the goals he set for himself and his beneficiaries – comfort and security during his lifetime provide for those entitled to his support; provide for those enjoying his love ⚫ Lifetime and after-death planning ⚫ The Estate Owner is the Estate Planner 10/05/2024 3 The Need for Estate Planning ⚫ Provide for the needs of beneficiaries ⚫ Minimize property transfer costs ⚫ Maximize the utilization of property ⚫ Assure continuity of management ⚫ Protect assets against unnecessary diminution ⚫ Avoid family dissension 10/05/2024 4  Agents of Erosion of Estate The Estate COST OF ADMINISTRATION LIQUIDATION POOR MANAGEMENT TAXES/TRANSFER LOSSES A carefully made out plan will not completely eliminate erosion, but it can keep the erosion within reasonable proportions. 5 10/05/2024  Agents of Erosion of Estate Estate may lose its value or suffer erosion due to/arising from– 1. Unnecessary income/other taxes which can be avoided/reduced within the limits of tax laws; 2. “Transfer losses” - payment of maximum estate/transfer taxes and other expenses necessarily incurred when the estate is settled; 3. “Liquidation losses” - premature or forced sale of some of the estate’s assets to meet obligations at the time of settlement; 4. “Mismanagement losses” - lack of management experience on the part of the heirs and the consequent loss of earning power; 5. Cost of administration. 10/05/2024 6 The Real Question: ⚫ Not: Whether or not you have an estate plan? ⚫ But rather: Whether you want the Plan that has been made for you by law ? Or the Plan that you make for yourself? 10/05/2024 7  The Plan Made By Law: ⚫ First Class Heir: The Government – 6% of net estate (consider deductibles) ⚫ Second Class Heir: Your Creditors and Service Providers – Lawyers, Accountants, Etc. – Their share: ? ⚫ Third Class Heir : Your Relatives – (Intestacy law) – Limited to blood relatives – descendants, ascendants, brothers and sisters, nephews and nieces, other collaterals up to 5th degree e.g. 1st cousins, (exception –barrier between legit. & illegit.*) , spouse & state 10/05/2024 8 The Plan Made By Law: ⚫ Love, flows like the river – priority, downward (descendants), then upward (ascendants), then spreads out (siblings, collateral relatives) ⚫ The nearer degree excludes the farther – the nearer in degree to the deceased, e.g., parents of deceased exclude grandparents; children of deceased exclude grandchildren ⚫ Equality among members of the same class – e.g. legitimate children belong to one class, will share equally in the estate of deceased. 10/05/2024 9  Summary of the Generic Plan The State, in life and in death, is the number one beneficiary Next in line are the creditors, those whom the estate owner owes At the end of the line are the estate owner’s relatives Everyone else gets nothing 10/05/2024 10  SOME CARDINAL PRINCIPLES OF INTESTATE SUCCESSION Even if there is an order of intestate succession, the compulsory heirs are never excluded. (Partial Intestacy) The intestate shares are either equal to or greater than the legitime (otherwise a good way to decrease the legitime would be by dying intestate) The nearer excludes the farther without prejudice to the right of representation no right of representation in the ascending line there is right of representation in the descending line 10/05/2024 11  SOME CARDINAL PRINCIPLES OF INTESTATE SUCCESSION The right of representation in the collateral line - Only to children of brothers and sisters of deceased, Not to children of brothers/sisters (grandnephews and grandnieces) Not to children of first cousins The right of representation is true only in legal succession, never in testamentary succession because a voluntary heir cannot be represented. There is barrier between the LEGITIMATE and the ILLEGITIMATE family. Illegitimates of legitimates cannot represent because of the BARRIER, but illegitimates (and legitimates) of illegitimates 10/05/2024 can represent 12  Barrier Between Legitimate and Illegitimate Heirs *An illegitimate child has no right to inherit from the legitimate children and relatives of his father or mother, nor shall the legitimate children or relatives of his father or mother inherit from the illegitimate chilfd. The barrier applies also to testamentary succession insofar as the legitime is concerned because succession to the legitime is also succession by operation of law. Succession in intestacy is by operation of law. 10/05/2024 13 Barrier Between Leg. & Illeg. A– Parent/Deceased B Leg. Child C Illeg Child. E Illeg. G Illeg. D Leg. Child F Leg. Child Child Child 14 10/05/2024  Barrier Between Leg.& Illeg. (A) has a legitimate child (B) and an illegitimate child (C). (B) B has a legitimate child (D) and an illegitimate child (E). (C) Has a legitimate child (F) and an illegitimate child (G). If (B) and (C) PREDECEASE/die ahead of (A), and surviving are the four grandchildren, (D), (E), (F) and (G) : (D) can represent his father (B), because a legitimate child (B) can be represented by his own legitimate child (D); (E) cannot represent (B) in the succession from (A’s) estate because an illegitimate child (E) has no right to inherit from the legitimate.children and relatives (A) of his father (B) 10/05/2024 15  Barrier Between Leg.& Illeg. Both children of (C) - (F), his legitimate child, and (G), his illegitimate child, can represent their father (C) in the succession to the estate of (A) of which (C), an illegitimate child of (A) is an heir. Although (G) is an illegitimate child of (C) because the right of (C) to estate of (A) – as an heir of (A) – is transmitted to both (F) and (G). The transmission of this right of (C) to his children (F) and (G) removes the barrier between (G) and (A). In case (E), an illegitimate child, dies and his father (B) died ahead of (E), (D), a legitimate child of (B) cannot inherit from the estate of (E), because of the barrier. 16 10/05/2024  SOME ILLUSTRATIONS OF HOW THE LAW DIVIDES THE INTESTATE PIE AMONG YOUR RELATIVES 10/05/2024 17  SIMPLER TABLE OF INTESTATE HEIRS Ill. Children - 1/2 Surv. Spouse - 1/2 Surv. Spouse – 1/2 Brothers, Sisters, 2 or more Leg. Childrn Nephews, Nieces - 1/2 Surv. Spouse - Ill. Children - 1/4 Consider Spouse Surv. Spouse – 1/4 Ill. Child Alone - ALL as 1 Leg. Child and Leg. Parents – 1/2 divide estate by Ill. Parents Alone - ALL total number Ill. Children - 1/2 Leg. Parents – 1/2 Surv. Spouse Alone – ALL Leg. Parents – 1/2 Leg. Child Alone - ALL Surv. Spouse – 1/2 1 Leg. Child - 1/2 Ill. Parents - 1/2 Surv. Spouse - 1/2 Surv. Spouse – 1/2 10/05/2024 18  WITHOUT WILL NET ESTATE = P 1.0 M 125000 125000 75000 125000 75000 125000 75000 75000 125000 75000 10/05/2024 19  SHARE OF SURVIVING SPOUSE IN NET CONJUGAL ESTATE / AS AN HEIR TO THE INTESTATE ESTATE OF DECEASED SPOUSE Net Conjugal Estate – P12M Net Estate of Deceased – P6M 20 10/05/2024 When decedent is survived by the spouse only All Surv. Spouse alone 10/05/2024 21 When the decedent is survived by a legitimate child only All Leg. Child alone 10/05/2024 22 When the decedent is survived by an illegitimate child only All Ill. Child alone 10/05/2024 23 When decedent is survived by legitimate parents only All Leg. Parents alone 10/05/2024 24 When decedent is survived by illegitimate parents only All Ill. Parents alone 10/05/2024 25  When decedent is survived by illegitimate children and spouse 1/2 1/2 Ill. Children Surv. Spouse 26 10/05/2024  When decedent is survived by his spouse and legitimate parents 1/2 1/2 Surv. Spouse Leg. Parents 10/05/2024 27 When decedent is survived by spouse and illegitimate parents 1/2 1/2 Surv. Spouse Ill. Parents 10/05/2024 28  When decedent is survived by spouse and nephews and nieces 1/2 1/2 Surv. Spouse Brothers, Sisters, Nephews and Nieces 10/05/2024 29  When decedent is survived by One legitimate child and the spouse 1/2 1/2 1 Leg. Child Surv. Spouse 10/05/2024 30  When decedent is survived by an illegitimate child, the spouse, and legitimate parents 1/4 1/4 1/2 Ill. Child Surv. Spouse Leg. Parents 10/05/2024 31 When Decedent Is Survived By Legitimate Children And Spouse ⚫ One unit goes to each legitimate child ⚫ One unit goes to the spouse ⚫ Then estate is divided by total number of units 10/05/2024 32 When decedent is survived by legitimate children and spouse ⚫ Net Estate of Deceased: P6M Leg. Child 1 - 1 Leg. Child 2 - 1 Surviving Spouse - 1 --- 3 P6M/ 3 = P2M/ heir 10/05/2024 33 When Decedent Is Survived By Legitimate Children, Illegitimate Children And Spouse ⚫ One unit goes to each illegitimate child ⚫ Two units go to each legitimate child ⚫ Two units go to the spouse ⚫ The estate is divided by the total number of units 10/05/2024 34  When decedent is survived by legitimate children, illegitimate children and spouse Net Estate of Deceased - P80M Illeg. Child 1 - 1 unit Illeg. Child 2 - 1 unit Leg. Child 1 - 2 units Leg. Child 2 - 2 units Survng. Spouse - 2 units ----------- 8 units (P80M/8= P10M/unit) Each Illeg. Child = P10M Each Leg. Child, Surv. Spouse = P20M (P10M x 2 units = P20M) 10/05/2024 35  Why An Estate Owner May Want to Amend ⚫ He may think 6% is still too much for the gov’t Tax savings through avoidance, not evasion ⚫ His service providers were paid in his lifetime, why pay more when he dies? Reduce the need for their services People of his blood may not necessarily be those whom he loves After paying what he owes by blood, give to his love 10/05/2024 36  Why An Estate Owner May Want to Amend ⚫ The one nearer to him in degree may not be the one nearest his heart Pamper the grandchildren, rather than the children ⚫ What is equal is not always equitable Give more to the needy child/heir ⚫ The law of gravity that rules the river need not be the rule to govern his generosity Benefit his parents/ascendants, together with children 37 10/05/2024 Tools For A Customized Estate Plan ⚫ Life insurance ⚫ Wills and testaments ⚫ Inter-vivos gifts ⚫ Sale ⚫ Trust & other fiduciary arrangements ⚫ Close corporations & partnerships ⚫ One Person Corporation ⚫ Deposits and other bank products 38 10/05/2024 Life Insurance ⚫ Function – Protection – Savings – Method of Property Transmission (proceeds are not subject to collation for the purpose of computing distributable estate/legitime) ⚫ Limitation – No management mechanism for the proceeds – Minor beneficiaries need legal guardians 10/05/2024 39 Tax Treatment of Insurance Proceeds ⚫ Proceeds are not income to beneficiaries ⚫ Premiums return are not income ⚫ Proceeds payable to irrevocable beneficiaries not part of gross estate ⚫ If proceeds payable to estate (revocable or irrevocable), part of gross estate 40 10/05/2024 LIFE INSURANCE PLANNING Factors in Choosing Life Insurance Product ⚫ Affordability/financial status of insured (cost of premium) ⚫ Dependents/Beneficiaries (special needs) ⚫ Age (of insured and beneficiaries) ⚫ Health (of insured and beneficiaries) ⚫ Purpose /goals (simple insurance vs. risk; as investment vehicle; es) ⚫ Features of life insurance product 10/05/2024 41  FACTORS THAT AFFECT ELIGIBILITY AND PREMIUM COST Age – cheaper premiums for younger Current health - higher premium if with medical concerns (medical tests by insurance), including family medical history; Gender – higher premium for female (relatively live longer than male); Lifestyle (history of smoking, engaging in risky activities) – higher premium Occupation – higher premium for higher occupational risk/hazard 10/05/2024 42  LIFE INSURANCE TRUST Insurance policy is in the name of trustee in trust for designated beneficiaries Avoids requirement of guardianship of beneficiaries who are minors or legally incapacitated; Efficient claiming of insurance proceeds (trustee bank vs. insurance company; Ensures management and distribution of proceeds to beneficiaries in accordance with insured’s wishes; 10/05/2024 43  LIFE INSURANCE TRUST Minimizes/avoids lapsed insurance policy as trustee can undertake monitoring and payment of premiums; The LIT can be funded, where cash and other assets form part of the LIT for trustee to invest pending maturity of policy; may be the source for funding premium payments; The LIT can be unfunded, i.e., pending maturity of policy when proceeds/benefits would be collected and distributed to beneficiaries in accordance with the trust agreement. 10/05/2024 44  TYPES OF LIFE INSURANCE Two main categories: Term life; Permanent life (whole life) Understanding the essential differences between these two main categories can be helpful in making coverage decisions according to the needs and goals of the would-be insured. 10/05/2024 45  TERM LIFE INSURANCE Most simple, straightforward coverage; easiest to approve specially if young and in good health Less expensive than other types; generally lower premium costs; premium will remain the same for the duration of the term Coverage lasts for a specified period, such as 1, 5, 10, or sometimes as much as 30 years, and expires when that period ends; depends on length of need (e.g. mortgage, children graduate from college, etc. 10/05/2024 46  TERM LIFE INSURANCE A payout (death benefit) only happens if the insured's death occurs during the specified period. Death benefit is paid to the designated beneficiaries as a lump sum or annuity. ⚫ A death benefit can replace the income which the insured would have earned during a set period, such as until a minor aged dependent grows up. Or, it can pay off a large debt, such as a mortgage, so that a surviving spouse or other heirs won't have to worry about making the payments. 10/05/2024 47  TERM LIFE INSURANCE Does not build/accumulate cash value; not as investment. Premiums go towards payout, making costs for policyholders comparatively lower than for permanent life insurance. However, some insurers have created term life products with a "return of premium" feature, returning a portion of the premiums already paid if a claim is not filed before the end of the coverage term. These policies can be more expensive upfront than standard term life insurance. 10/05/2024 48  PERMANENT LIFE INSURANCE Does not expire; effective during entire life of insured Pays death benefit upon death of insured; same death benefit as in term policy Accumulates cash value ▪ -can borrow against cash value; death benefit decreased by loan outstanding at time of death of insured - access cash value by cancelling the policy entirely Premium remains the same during entire life of insured Premium typically significantly more expensive than term life insurance due to the longevity and the ability of the policy to accumulate a cash value. 10/05/2024 49  PERMANENT LIFE INSURANCE A good alternative if there is desire to be insured for entire life - Concerns over future insurability (e.g, age, health) As a tool for estate planning - To make sure that insured leaves heirs with inheritance in the amount that he wants them to Cash value component can be used to save or invest. But because cash value policies have more expensive premiums, limited investment options, and offer relatively low rates of return, they’re not a great primary savings vehicle. 10/05/2024 50  Table of Compulsory Heirs PRIMARY COM. HEIRS SECONDARY COM. HEIRS (1) Legitimate children and their descendants (legit) (4) Legitimate parents and ascendants (leg.) (2) Surviving Spouse (legit.) They inherit only in DEFAULT of No. (1) (3) Illeg. Children and their descendants (5) Illeg. Parents (no (legit./illegit.) other ascendants); They inherit only in DEFAULT of Nos. (1) and (3) 10/05/2024 51  SIMPLER TABLE OF LEGITIMES Ill. Children – 1/3 Ill. Child Alone - 1/2 Surv. Spouse - 1/3 Leg. Child Alone – 1/2 Leg. Parents Alone - 1/2 Ill. Children - 1/4 1 Leg. Child – 1/2 Surv. Spouse - 1/3 Surv. Spouse – 1/4 Leg. Parents - 1/2 Illeg. Parents Alone - 1/2 2 or more Leg. Child – 1/2 Ill. Children - 1/4 Surv. Spouse Alone - 1/2 Surv. Spouse – same as for Leg. Parents - 1/2 - if married in 1 Leg. Child articulo mortis; or -death of spouse Leg. Child – 1/2 Leg. Parents - 1/2 within 3 mos. Illeg. Child – 1/2 share of Surv. Spouse - 1/4 after marriage - 1/3 a Legitimate -lived as H and W Child Ill. Parents - 1/4 w/o marriage for Surv. Spouse – 1/4 more than 5 yrs. - 1/2 10/05/2024 52  SHARE OF SURVIVING SPOUSE IN NET CONJUGAL ESTATE / AS AN HEIR TO THE TESTATE ESTATE OF DECEASED 10/05/2024 53 WITH WILL NET ESTATE = P 1.0 M 125000 125000 125000 125000 375000 125000 10/05/2024 54  Tax Treatment of Property Passing Under a Will ⚫ Estate Tax - Flat rate of 6% of net estate (prev: 5-20%); ⚫ No DST ⚫ Standard deduction – P5M (prev: P1M) ⚫ Exemption on Family home – P10M (prev: P1M); if conjugal, only ½ exemption ⚫ Withdrawal of any amount from bank deposit of deceased – 6% final withholding tax 10/05/2024 55 Tax Treatment of Property Passing Under a Will Notice of death not required Tax Identification No. of Estate (not TIN of deceased during his lifetime) Filing of estate tax return – 1 yr. from death (prev: 6 mos.), BIR of place of domicile at time of death Payment of estate tax by installment – within 2 yrs. from due date, without civil penalty and interest 10/05/2024 56 Tax Treatment of Property Passing Under a Will Limited tax-saving opportunities Charitable donations Generation skipping arrangement Son - Donee (Usufruct); Income Tax ⚫ Estate Owner /Donor Grandson – Donee – Donor’s Tax (Principal) – Estate Tax 10/05/2024 57 Inter-Vivos Gifts ⚫ Function – Removes the gift from the taxable estate – Fixes the identity of the recipient and reduces possibility of fighting over specific properties – Diverts taxable income away from estate owner ⚫ Limitation: – Similar to limitations on giving by will – Subject to legal revocation or reduction – Could arouse family jealousy and intrigue 10/05/2024 58  Tax Treatment of Inter-Vivos Gifts Donor’s Tax – Flat rate of 6%, related or strangers (prev: flat rate 30% - strangers related - 2-15%) P250,000.00 exempt (prev: P100,000.00) Subject to DST 1.5% (P15/1,000) – Savings opportunities Income-splitting Gift-splitting 10/05/2024 59  Tax Treatment of Inter-Vivos Gifts Income Splitting Income of donated property is taxable to the donee Gift-splitting Conjugal property – each spouse may avail of the first P250,000.00 exemption; separate Donor’s Tax Return Split donation cross-over one year – P250,000 exemption per year 10/05/2024 60 Gift Splitting October 2024 5,000,000 Less: Exempt 250,000 4,750,000 Donor's Tax (6% of P4,750,000) 285,000 2024 2025 October 2024 2,500,000 2,500,000 2,500,000 Less: Exempt 250,000 250,000 250,000 2,250,000 2,250,000 2,250,000 Donor's Tax (6% of P2,250,000) 135,000 135,000 135,000 Add Nov. 2024 2,500,000 5,000,000 Less: Exempt 250,000 4,750,000 Donor's Tax 285,000 Less Tax Oct. 2020 135,000 Tax Due Nov 2020 150,000 10/05/2024 61 Gift-splitting ⚫ Conjugal property: P1,000,000 Less: 250,000 Donor’s Tax P45,000 (6% of P750,000) ⚫ Per Spouse: P500,000 less 250,000 Donor’s Tax Per Spouse : P15,000 (6% of P250,000) Total Donor’s Tax : P30,000 10/05/2024 62 SALE In general, consider - ⚫ An estimate of the income potential of the estate as a whole both during lifetime of estate owner and after his death; ⚫ An estimate of estate owner’s earning power. Thus, may be able to determine which assets are to be disposed of and the timing. 10/05/2024 63 Which Asset to Sell / When to Sell ⚫ “Dead”, therefore for liquidation or write- off (e.g., real estate property within the earthquake fault line; impending gov’t expropriation, normally at low price); ⚫ Readily marketable, and therefore productive of cash (e.g. blue chip shares of stock); 10/05/2024 64 Which Asset to Sell / When to Sell ⚫ With income-producing power and the extent of such power (real estate property for development into an industrial estate; ⚫ Tax laws, valuation of asset (increase/decrease in tax rate or valuation of asset will affect transfer cost, marketability. 10/05/2024 65  Tax Treatment of Sale ⚫ 6% Capital Gains Seller habitually engaged in real estate – 5% CWT; if used in business but not habitually engaged in real estate – 6%CW; if not used in business- 6% final (Exception: sale of and reinvestment in principal residence); VAT: 12% if held primarily for sale to customers ⚫ Doc. Stamp Tax – 1.5% ⚫ Local Transfer Tax up to 2%. 66 10/05/2024  Trust & Other Fiduciary A/Cs ⚫ Function: – Primarily separates legal from beneficial title; provides continuity of management – Serves as a will-substitute for the free portion (conditions for distribution of assets constituting the free portion, to the designated beneficiaries are stated in the trust agreement) 10/05/2024 67 Trust & Other Fiduciary A/Cs ⚫ Limitations: – Institutional trustees avoid managing non-cash estates (e.g., administration of real estate property; trusteeship of family heirloom pieces for delivery as is to beneficiaries) – Extremely regulated trust departments (protection for both customer and institution) 68 10/05/2024 Tax Treatment of Trusts ⚫ 20% final income tax for regular bank trusts ⚫ 15% final income tax on EFCDU trusts (prev: 7.5%) ⚫ Non-cash trust treated as an individual 10/05/2024 69 Corporations & Partnerships ⚫ Function – Removes assets from the estate – Retains control and enjoyment in the owner ⚫ Limitation – Only the character of the asset held is changed (e.g. shares of stocks in exchange for real estate transferred to the corporation) – Could invite father-son rivalry, sibling jealousy, problems of succession, division between those working in the business and those who are not 70 10/05/2024 Tax Treatment of a Corporation – Tax-free transfer if under Sec. 40(C)(2)(C) – Minimum Corporate Income Tax (reduced to 1% under CREATE, from July 1, 2020 to June 30, 2023, back to 2% effective as of July 01, 2023 – Improperly Accumulated Earnings Tax - 10% ⚫ Note: Amendments on corporate tax system under Package 2 (CREATE – Corporate Recovery and Tax Incentives for Enterprises, formerly named CITIRA/TRABAHO), passed into law March 26, 2021. 10/05/2024 71  ONE PERSON CORPORATION Taxability: treated as a regular corporation subject to corporate income tax; 30% tax on income received; Liability: the single stockholder is liable only to the extent of its capital contribution to the corp. Purpose: to promote ease of doing business in the Phil.; to encourage micro, small and medium (MSME’s) enterprises to register their business, by allowing a sole owner to register his/her business as a corporation without needing a minimum number of shareholders. 10/05/2024 72  ONE PERSON CORPORATION R.A. No. 11232, Revised Corporation Code of the Philippines An OPC is a corporation with a single stockholder. Who are allowed to form OPC: 1. A natural person of legal age (If a foreigner, subject to the applicable capital requirement and constitutional and statutory restrictions on foreign equity in certain investment areas or activities) 2. Trust – not the trust entity but the subject being managed by a trustee; submit proof of authority 3. Estate 10/05/2024 73  ONE PERSON CORPORATION Perpetual term of existence Trust or estate – existence co-terminus with the existence of the trust or estate No minimum authorized capital stock, no portion of it required to be paid up The single stockholder is the sole director and president; can be the Corp. Treas. but not as the Corp. Sec. Convertible to regular corporation or vice versa. 10/05/2024 74 “And”, “Or” Deposits/ Bank Products ⚫ Function – Enables surviving co-holder to automatically own the account ⚫ Limitation – Owner necessarily dilutes his ownership and control – Commissioner may inquire into account despite R.A. No. 1405, as amended. (Pending lifting of Bank Secrecy Law) 10/05/2024 75 Tax Treatment of bank deposits and bank products ⚫ Commissioner may inquire into account despite R.A. No. 1405, as amended. (Pending amendment of Bank Secrecy Law) Bank should allow withdrawal of any amount by heir/administrator - subject to 6% final withholding tax unless estate tax has already been paid. 10/05/2024 76 Tax Treatment of bank deposits and bank products Bank should allow withdrawal of any amount by heir/administrator - withdrawal within 1 yr. from death of depositor amount not included in the gross estate in computing estate tax ⚫ Income is subject to 20% final tax 10/05/2024 77 Points of Special Interest: A New Focus Insurance – When it takes effect Wills – A new look at living probate Donations – Do not forget the formality Trusts – Choose trustee Corporations – Consider the Close Corp Bank Accounts – Ruptured veil of secrecy 10/05/2024 78  Importance of Being Alive When Life Insurance Takes Effect ⚫ Common Attitude: “After paying the premiums and passing medical, I am done. My agent will take care of the rest.” ⚫ Legal Pitfall: “Minds must meet”. The estate owner might have some conditions or plans for the distribution of proceeds to heirs, other than the conditions stated in the policy. 79 10/05/2024 Advisability of Living Probate ⚫ Problems of Post-Death Probate – Publicity of opposition – Unleashed temerity of heirs ⚫ Advantages of Living Probate – Settled issue of formality – No diminution of ambulatory nature- Testator can change will anytime and have the latest will probated 80 10/05/2024  The Formality of Giving ⚫ Legal Principle: Virtue of Selfishness (e.g. disposition not to defraud donor’s creditors, reserving adequate assets for the benefit of the donor) ⚫ Consequence: Generosity must be in the proper form (Deed of Donation Inter- Vivos, Wills) 10/05/2024 81  Tax Treatment of Waiver of Share in Estate of Deceased ⚫ Renunciation by the surviving spouse of his/her share in the conjugal partnership or absolute community after the dissolution of the marriage in favor of the heirs of the dceased spouse or any other person/s is subject to donor’s tax. ⚫ General renunciation by an heir, including the surviving spouse, of his/her share in the hereditary estate left by the decedent is not subject to donor’s tax, unless specifically and categorically done in favor of identified heir/s to the exclusion or disadvantage of the other co-heirs in the hereditary estate. Waiver must be in a separate document or in the settlement agreement itself among the heirs. 82 10/05/2024 Watch Choice of Trustee, He is only Human / Human Organization ⚫ Old Wisdom: Do not put your trust in money; but put your money in trust ⚫ Wake Up Call: Recent Trust Failures 10/05/2024 83  Ruptured Veil of Bank Secrecy ⚫ Exceptions to R.A. 1405 (Bank Secrecy Law: Written permission of depositor Impeachment Court order in bribery, dereliction of duty, of public officials, money deposited is subject matter of litigation ⚫ Anti-Graft prosecution – R.A.3019 as amended by RAs Nos. 3047, 10910 ⚫ Ombudsman examination- R.A. 6770 84 10/05/2024 Ruptured Veil of Bank Secrecy ⚫ BIR Commissioner for estate tax ⚫ Incidental to Unclaimed Balances Act ⚫ Anti - Money Laundering Act of 2001 as amended by Republic Acts Nos. 9194, 10167, 10365, and 11521 (effective Feb. 8, 2021) Note: Pending amendments/lifting of Bank Secrecy Law ? 10/05/2024 85  Consider the Close Corporation ⚫ The easy way to incorporate: Express lane ⚫ Unanswered Concerns of a Standard Corp. – Control – complicated issues on management – Flexibility – subject to limitations and formalities ⚫ Benefits of a Close Corporation – Less formalities – More suitable to family way of doing business 86 10/05/2024 The New Focus : Beneficiary in Need ⚫ From : Estate Owner’s Wishes ⚫ To : What his loved ones need 10/05/2024 87  Errors in Estate Planning 1. Failure to obtain an accurate asset and liability inventory before doing the estate plan; 2. Failure to investigate all pertinent documents before new wills or trust are made or established; 3. Failure to coordinate the Will with the other trust instruments; 4. Failure to ascertain the effect of payment of liens on estate assets; 88 10/05/2024  Errors in Estate Planning 5. Failure to provide adequate funds to pay death costs; 6. Failure to provide sufficient flexibility in the estate plan to meet the requirements of the unforeseeable future; 7. Failure to use trusts for management benefits – not primarily for tax savings; 8. Failure to subject plan to periodic review. 10/05/2024 89 Events Which Cause Estate Plan and Wills to Become Obsolete / Example of Action Plan 1. Births – add as beneficiary 2. Deaths – exclude from estate plan/Will 3. Change in civil /marital status – additional for support 4. Change in attitude towards beneficiaries – reward worthy beneficiary; disinherit an heir in the Will for cause specified by law for disinheritance 5. Change in type of assets – consider mode of disposition; revise Will to reflect the description of asset as changed 6. Change in asset valuations – consider when to dispose and how 7. Change in tax laws – consider when to dispose and how 10/05/2024 90 Updating An Estate Plan ⚫ Estate owner can seek advice from estate planning advisors (Trust Department of banks; financial advisers) on how to plan his estate and use the services of members of the planning team. ⚫ Estate plan should be reviewed at least once every five years, preferably once in three, or occurrence of any event that may make estate plan obsolete. 10/05/2024 91 OPTIONS FOR ESTATE OWNERS ⚫ If an estate owner is set in adopting the Generic Plan or the Plan made for him by law, then estate planning is not for him; ⚫ However, if he does not, he may modify it, but not completely; ⚫ Saving on taxes though a good objective should not overshadow other purposes.. 92 10/05/2024 Points of Special Interest: ⚫ Comprehensive Tax Reform Program (CTRP) RA 10963 TaxReform for Acceleration and Inclusion (TRAIN) : ❖ Package 1 - personal income tax, estate and donor’s tax; ❖ Package 1B – Tax Amnesty Bill (on estate tax, all unpaid internal revenue taxes) Except: with corresponding waiver of bank secrecy laws in the availment thereof, and delinquencies), Lifting of bank secrecy laws, Automatic exchange of information. (Pending) 10/05/2024 93 Estate Tax Amnesty Coverage: Estate of deceased who died on or before May 31, 2022 (prev. Dec. 31, 2017) or prior years, with or without assessments duly issued before, whose estate tax/es have remained unpaid or have accrued as of May 31, 2022 (prev. Dec, 31, 2017); Estate Tax Amnesty Rate: 6% each decedent’s total net taxable estate at the time of death, without penalties at every stage of transfer of property; P5M minimum estate amnesty tax at every stage of transfer if the allowable deduction applicable at the time of death exceeds the value of the gross estate; 94 10/05/2024  Estate Tax Amnesty If an estate tax return was previously filed with the BIR, the Estate Tax Amnesty rate of 6% shall be based on the net undeclared estate; When to Avail: Until June 14, 2025 (2nd Extension) 1st Extension (Until June 14, 2023); Orig. June 15, 2019 to June 14, 2021 Amnesty can be availed of prior to/pending settlement of estate; Removed requirement for presentation of proof of settlement of estate before BIR can accept payment for the Estate tax. 95 10/05/2024 CONCLUSION ⚫ Lowered and harmonized estate tax, donor’s tax and capital gains tax may seem to render estate planning not as crucial. It will not matter anymore if the estate planner donates inter vivos or mortis causa, or dies intestate, or wants to simply transfer a property, say by sale. ⚫ But tax consideration is just an aspect of estate planning. There is more to it: Asset planning and management; how best to utilize assets and distribute to beneficiaries in an orderly and efficient manner; what is most beneficial or advantageous to the family business; and preserving assets. 10/05/2024 96  Thank You 10/05/2024 97