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How many people do you know has applied for Insolvency? I doubt if you’d know much, if any at all. For most of us who earn a simple living and are modest wage earners, we think that having an estate is more of a dream than a reality. We think that our lifetime is too short to catapult our present financial plight into the coveted bracket of lifestyle bliss. In the Philippines, insolvency is seldom heard. We have grown to become apathetic. We should start to realize that building an estate is not exclusive to the rich and famous, to the executives, to the tycoons of the business world or to the demigods of multinational empires. It is for everyone who has the resolve and prudence of a thinking and financially conscientious man. The philosopher Nietzsche said, “Fight! Do not Work!” This does not mean that we should create a labor union and destroy the capitalist which is what Karl Marx declared in his treatise, the “Manifesto.” This only means that we should create not go along with things that are already created. Build more, and not just remain contented with the idea of what to build or what has been built. Indifference about insolvency… does this mean that we are good asset managers? Perhaps we are. Even the ordinary man knows that nobody can be sent to jail for not paying debts. But the state of being insolvent is not all about your liability to creditors. It is about your liability to yourself, the potential to amass resources, to achieve prosperity. That does not end there. By no stretch of imagination would you want to see your good and hard-earned resources go down the drain and drag your family along with it. Perhaps, you were able to manage properly your investments including the fruits of your labor – your properties. You are now prepared to leave this productive life of yours. As that fateful day has arrived, your properties are transmitted to your heirs – your spouse and children. However, can you still guide your children on how to manage or use the properties you transmitted to them? Are you sure your wealth will not be spent in senseless parties,
Estate planning will help you have peace of mind that you will indeed leave a lasting legacy. “A good man leaves an inheritance for his children’s children. Estate planning is a good tool to minimize. estate planning has been relegated to the merely inheritance taxes. • It is a strategy for leaving property to loved ones and minimizing the impact of Estate Tax. it really goes beyond taxes. • Estate Planning is the process of controlling your assets. both during your life and after your death. While estate planning helps you transfer your assets in a cost-efficient manner. and interest that you have in the property you own. • It is a plan by which one arranges to transmit his wealth to appropriate times to parties of his choice in order to meet his own objectives in the most effective manner. titles. if not eliminate uncertainties in the proper distribution of your estate. . which includes all the rights. • It is the process of determining what you want to happen to your estate. good estate plans foster family harmony. In this country. A good estate plan will help you ensure that what you originally intended for your estate can actually happen even without your physical presence. Further.” – Proverbs 13:22 Estate Planning defined.gambling. drinking sprees and incessant shopping? A good life and estate plan would keep you from having to roll inside your grave. but a sinner’s wealth is stored up for the righteous. How many families do you know ended up fighting each other because of their estate? The intentions of the patriarch/matriarch in leaving an estate is help their children and leave a legacy of love – not strife. • Estate Planning is the process by which a person arranges to transmit his property to person of his own choice in order to effectuate his wishes and objectives in the most appropriate manner.
b. 1. To minimize the amount of taxes. fees. you must plan for the payment. and court interferences associated with settling your estate. the state / court will do so as part of probate. 2. People who think they may be disabled – You need to appoint a . e. d. People who want to determine how their assets will be divided among their heirs – If you don’t specify how you want to divide your assets. A. Objectives and Benefits of Estate Planning Estate Planning is the process of controlling your assets. and 3. You want to be sure you have enough liquid assets to avoid the forced sale of estate assets. People who will have to pay estate taxes – If your estate is large enough that taxes will need to be paid upon your death.II. both during your life and after your death. some degree of planning will be necessary. You normally make these provisions in your will. Even though you may not be wealthy. If it is to be sold. People with minor children – You need to specify who will care for the children upon the death of their parents and how will you provide for the care financially. People who own a small business – You must determine what should be done with your interest in that business – whether it is to be passed on to your heirs or sold. surrogate maker as part of your estate planning. Here are a few examples: a. Your surrogate will be able to make medical and financial decisions for you. Who needs Estate Planning? Just about everyone. with three primary objectives in mind. you must be certain that your interest in the estate will be marketable at the time of your death. To make certain that your assets go to the people and / or organizations of your choice. c. To ensure that your assets will always be sufficient to provide for you and your family’s lifestyle.
Otherwise. joint tenancy. or a grandchild whose education you want to assure? You can establish a special trust fund for family members who need support that you won't be there to provide. are educated. a court will appoint a guardian of the person and estate of your minor children without your input. If you and your spouse should die before your children grow up. If it is. a living trust or other means. Provide for other relatives who need help and guidance Do you have family members whose lives might become more difficult without you. Without estate planning. and this accounting can be costly and could prevent your children from enjoying the style of living you prefer for them. 3. and even take steps to protect your property from creditors. and worship. you can avoid or simplify probate through insurance. such as an elderly parent or disabled child.B. make sure you've selected a competent person to settle the estate and protect your property while the estate is being settled. your beneficiaries will get less and they'll get it later. The guardian of the person will decide where your children live. your will can assure your children's education and upbringing by nominating personal guardians for them. and using simplified or expedited probate. . particularly for spouses who don't work outside the home. Get your property to beneficiaries quickly You want your beneficiaries to receive promptly the property you've left them. Probate may not be a problem in your jurisdiction. Ease the strain on your family Ease the burden on your grieving survivors by planning your funeral arrangements when planning your estate. You can pass your property on to your spouse and other members of your family. and provide for your body to be cremated or given to medical science after you die. What are the Benefits of Estate Planning? Developing your estate plan is perhaps the most important financial step you can take. Provide for your immediate family You can provide for your surviving spouse through life insurance. 2. 10 Things Estate Planning Can Do For You 1. The court-appointed guardian of the children's estate (or property) will be required to account to the court for the administration of the child's estate. It creates focus and puts you in charge of many aspects of your finances. 4. You can also limit the expense of your burial or designate its place.
either during your lifetime or upon your death. and one’s intentions may be frustrated substantially-or even entirely. avoid paying for a bond. Even though estate planning primarily benefits those you love and care about.5. Some states permit you to designate a personal guardian. 10. Make your retirement years easier. you can also coordinate your estate plan with retirement. 9. Make sure your business goes on smoothly If you have a small business. health care and other benefits to help you achieve the most comfortable final years while still providing for your loved ones. unnecessary taxes and other forms of diminution will erode what goes to the beneficiaries. 8. . and other charitable causes. Plan for incapacity Health-care advance directives. you can provide for an orderly succession and continuation of its affairs by spelling out what will happen to your interest in the business. 7. living wills and durable healthcare powers of attorney enable you to decide in advance about life support and pick someone to make decisions for you about medical treatment. and simplify administration of your estate. Otherwise. reduce the burden on your survivors. Minimize expenses Good estate planning keeps the cost of transferring property to beneficiaries as low as possible. Choosing competent executors/trustees and giving them the necessary authority will save money. Help a favorite cause Your estate plan can help support religious. and at the same time take advantage of tax laws designed to encourage private philanthropy. Reduce taxes on your estate Every dollar your estate has to pay in estate or inheritance taxes is a dollar that your beneficiaries won't get. educational. 6. C. HIDDEN TRAPS IN ESTATE PLANNING The objective of estate planning-the transmission of as much of one’s wealth as possible to chosen parties in the most appropriate manner-requires the avoidance of many traps and pitfalls. It also will reduce a court's involvement and. A good estate plan can give the maximum allowed by law to your beneficiaries and the minimum to the government. Disability insurance can protect you and your family if you should become disabled and unable to work. in many states.
mother/daughter. For example. and inevitably the property was taxed as part of his estate when he died. generally have to be in writing. Avoidance of strings may have to be a part of one’s planning. some policies may be exchanged on a tax-free basis. even though he/she parted with the assets and is not exercising any control over them. Or an insurance agent. transfers of real estate. 3. A tax specialist should check the . Since he retained his right to change the beneficiary. The seller of an insurance policy may claim that the transaction can be arranged so that the proceeds will exempt from federal estate tax. naming his mother as beneficiary. He plans to change the name of the beneficiary when he marries. For others. But not all types of insurance. Reliance upon the wrong “experts”. 5. In addition.. the father became mentally incompetent. and a designated office. endowment or annuity contracts may be exchanged tax-free. by which time the father felt that he would know enough about the financial and other strengths of each child to make a final decision. unless the executor can prove otherwise. to be state law. He could not release the retained power.Major Traps Proper planning can anticipate the traps lurking in these principal areas: 1. True. That statement isn’t good enough for the Internal Revenue Service and the courts. he gives the policy to his bride but does not release the right. 4. so the policy reserves for the insured the right to make such changes. 2. even after his wife has become the owner. may recommend to his/her client that certain policies or contracts be exchanged for others. The holding of property in joint ownership. For example. as part of an estate plan. But before that date arrived. A young man may take out insurance on his life. No one could do anything about it. After marriage. in proper format. This can be disastrous if the parties become estranged and hostile. a father may have transferred assets to a trust for the benefits of his minor children. the proceeds will be includable in his federal gross estate and may be taxable. compliance valid under recorded in The making of gifts of other transfers in good faith. the IRS will include the full value of the property in the estate of the first coowner to die. i. and in with estate laws.e. Unwitting possession of incidents of ownership of insurance on the decedent’s life. Retention of some form of control over property so that it is deemed to be a part of the transferor’s gross estate when he/she dies. reserving the right to allocate trust property to each child until the youngest reached age 21. the Internal Revenue Service includes half the value of the property in the gross estate of the first co-owner to die if the co-owners are husband and wife.
and prudence. Errors and omissions made by the fiduciary can be very costly to the estate and to the beneficiaries. he deviated from her instructions and had the mutual-fund company draw up a trust in which his mother would retain the right to take trust income and principal if she needed funds. to qualify for the maximum martial deduction. But they should not be the only matter considered. An estate plan may have been devised solely on the basis of tax considerations. and (b) that any property remaining after her death will go to the children or other designated parties. probably the single most important element. A person may seek to save an inexperienced relative from the consequences of his/her unfamiliarity with the subject by providing in the will that the executor won’t be required to make good for his/her failure to exercise reasonable care. so the principal was included in her gross estate-even though she had no intention of retaining any strings on her gift. hold that such a provision in a will is void. This could be a very bad mistake. since she didn’t need the money. in fee simple. 6. She learned of his deviation only when she began getting money from the trustee. who may have to make good from his/her own pocket. One woman told her son. that she wanted to make a gift to her six children. however. under certain circumstances. 7. Even if (a) states that the property is to go to her outright. But not frequently a will contains a basic contradiction providing (a) that all remaining property will go to the surviving spouse. the martial deduction is available only where property passes to the surviving spouse. An inexperienced executor or executrix. both from the points of view of the estate and of the fiduciary. 8. hampering at least some of the testator’s wishes. She ordered her son to conform to her original intention that the trust be irrevocable with no reservation to herself. For example. But he had not done this by time she died. She gave him a substantial sum and told him to invest the money in a mutual fund in such a way as to set up trust funds for the children. The martial deduction may be lost because the property did not go to the surviving spouse either outright or as qualified terminable interest property. which at its own discretion sent her checks. She may have . The terms of a will may be contradictory. For example. the remaining principal to be apportioned among the surviving children when she died. Frequently. Some state laws. although. a husband names his wife or adult to serve as executor executrix. diligence. Fearful that his mother would not have sufficient income. a practicing lawyer. Failure of an attorney to follow instructions. 9.Internal Revenue Code requirements in order to ascertain whether ordinary income tax is payable upon the exchange. to be apportioned equally. for sentimental reasons or as a gesture of confidence. it is executor who is held personally liable for his/her mistakes. Taxes are an important element of estate planning. a husband may leave his entire estate to his surviving spouse. (b) could contradict that.
Use of unqualified appraiser: A competent appraiser can save considerably on estate taxes. so he lists the property at such a high figure that there will be no buyers. Acceptance of a general power of appointment can be very costly. it is dangerous for the corporation to own insurance on his life to fund such an agreement. When he was 10 years old. the value of the trust property was included in his gross estate. also beware of a formula clause so complicated that the survivor of a deceased shareholder can demand an accounting or otherwise put the corporation to great trouble. 12. The IRS claimed that these shares should be valued at more about the company than anyone else. or other persons he would like to see provided for. an incompetent one is liability. 11. Throwing out records relevant to the establishment of tax liability. In one case. one individual’s parents set up a trust his benefit to last 21 years. Sometimes a person lists real estate for sale with a broker so that he can deduct insurance and maintenance charges as being in connection with property held primarily for sale. If a shareholder owns enough stock to name a corporation’s president and directors. Although not so labeled. This may be a perfect place to use and integrate the unified credit and bypass tax with a gift to his children by a former marriage. Actually. this amounted to a general power of appointed. The IRS is apt to value the property at the inflated figure that he himself had set to discourage buyers. Implementation of such a buy-sell plan may concentrate stock ownership of a corporation with non-operating income in so few hands that undistributed income may be subject to a special personal-holding-company tax. Destruction of records (by surviving spouse. A decedent’s instructions or acts may result in excessive estate tax valuations. The fact that he never knew he had a general power of appointment was irrelevant. the values set by the executor’s appraiser were far lower then those set by the IRS’s appraisers. for example.no need-or-desire-for more wealth. he doesn’t really want or intend to sell but only to claim some deductions. he or his legally appointed guardian could terminate the trust or withdraw any of its principal or accumulated income. Despite their advantages. Often the existence of such power isn’t recognized by the parties. Here the proceeds might be includable in his gross estate. In a buy-sell agreement. The court accepted the latter because crossexamination revealed that the executor’s appraiser had once failed the American Institute of Real-Estate Appraiser’s examination. 10. and hence his estimate of its worth was more reliable than that of outsiders. when he/she wants to straighten out the house) can result in higher taxes because . 13. One individual left instructions to his executor to retain a certain stock despite its ups and downs in the stock market. 14. buy-sell agreements may contain many traps for the unwary. At any time. So when this person died at age 28.
Situations change. The greatest trap of all complacency. you need expert advice. Provide for contingent or residual beneficiaries so that your property will go to persons of your own choice even though it may be a second choice. Incidentally. concise. 17.and estate-tax return can’t be substantiated. Inflation can make your planned disposition unrealistic.proper claims and deductions on income. 16. Beneficiaries who became non-beneficiaries because of death prior to the testator’s or refusal to accept what had been left to them. Be sure your directives and documents are clear. There are many traps for the unwary. . When dealing with retained rights versus completed gift involving such things as life insurance rights and/or buy sell agreements. the belief that all of the pieces will automatically and satisfactorily fall into place. It can have everlasting consequences. and properly drafted. an individual who prematurely destroys evidence needed in a tax audit is subject to personal penalties. therefore updates and reviews should be systematically scheduled and followed through. 15. Don’t wait.
creditors. 4. 2. e. the protection of assets and the minimization of tax. intentionally or inadvertently. with progressive and ongoing changes to the way personal. a person's Will has become just one (usually. estranged or unethical children or other relatives. 6. 7. Objectives Circumstances Funding Options & Impediments Strategy Implementation Review Traditionally. 3. There seems little point diligently accumulating wealth if the wrong person ultimately benefits. or to implement. it is important that estate planning be properly addressed and regularly reviewed. It can even result in benefits passing to the wrong beneficiaries.PROCEDURES OR STEPS IN ESTATE PLANNING To preserve and enhance the value of a person's wealth (whether owned personally or via other means such as superannuation or family trusts) and to avoid adverse consequences for intended beneficiaries in the event that the person dies. a Will was the major focus for documenting a person's estate planning. Crucial estate planning decisions are now often made. 5. in the choice of financial products such as superannuation and insurance and in the ownership structures chosen for investment and business assets. Failure to give attention to. These days. legal and other professional advisors. Failure to take estate planning considerations into account can also lead to beneficiaries taking potentially successful actions against financial. investment and business wealth is owned and taxed. Essentially that means that the planner and the planner's advisors need to ensure that 7 keys steps are undertaken: The Essential Steps 1. but not always important) part of the process of implementing and achieving estate planning objectives. .g. former spouses. estate planning can lead to a reduction in the wealth passed on to intended beneficiaries or even cause unnecessary tax liabilities or the foregoing of pensions.
superannuation. eg medical practitioners Where possible potential changes to circumstances should be catered for. eg if they are very young. A checklist of issues that frequently need to be addressed in each of those steps is set out below: STEP 1 . Wealth accumulation and preservation plans. eg ensuring that business assets such as goodwill will retain value on the death of a business principal. Sources of funding include: Existing assets.particularly important if the beneficiaries need protective arrangements. and Identify any specific objectives. legal and non-legal. Retirement plans. and . business and/or business succession plans. Essentially there are 7 steps for estate planners and their professional advisors. retirement.Ascertain adequacy of SHORT and LONG TERM FUNDING for achieving objectives The extent of the funding available will determine to what extent the estate planner's objectives can be achieved. eg the support of a spouse in retirement. eg if a person dies or loses the capacity to make independent decisions. the care of a young or otherwise vulnerable relative. joint tenancies. asset protection.how are assets ultimately owned or controlled. infirm. need to undertake. cross ownership of insurance.Assess current and likely future CIRCUMSTANCES Of the estate planner . career. estate planning needs to be consistent with a person's formal or informal wealth accumulation. eg family home.To be successful. the education of children and grandchildren. financially at risk or personally vulnerable. or Whose business or profession carries significant risk. the future control of a family or other business. STEP 3 . Beneficiaries who are financially at risk include people: Who have given significant personal guarantees. particularly as documents and decisions may be irreversible. family trusts. STEP 2 .Identify and priorities OBJECTIVES Who (or what) does the estate planner want to benefit? In what order of priority. Asset enhancement plans. etc. Of the intended beneficiaries .
circumstances. Income tax will also limit the effectiveness of other options. Eligibility for means tested pensions can be impacted by the choice of a surviving spouse as the executor of the estate and by benefits paid to beneficiaries. eg to fund pensions or testamentary trusts. a strategy can then be worked out for identifying what can be achieved for the estate planner and how best to achieve the estate planner's wishes: .Formulating the estate plan Once the objectives. the absolute discretion of those superannuation fund trustees not subject to binding death benefit nominations. Life insurance cover for death or incapacity to ensure beneficiaries are provided for or that a business can continue to operate. Capital gains tax laws will further the choice of ownership of assets associated with a business. eg business premises. eg the ability of hostile members to challenge the terms of Wills. to achieve asset protection or to pre-empt challenges to a Will or the payment of superannuation benefits. as there are significant concessions for "active" assets. For superannuation funds.Assess OPTIONS and identify IMPEDIMENTS The ability of the estate planner to transfer wealth effectively will be constrained by legal constraints. Ownership of assets may need to be changed. Asset protection issues are often a priority for people concerned to ensure that as far as possible the wealth they pass to their intended beneficiaries is retained in the event that there is a breakdown of the intended beneficiary's domestic relationship. STEP 5 -The STRATEGY . family trust elections and deferred tax liabilities. the ability and feasibility of family members to take over those businesses. (For estate planners with family controlled businesses). eg on retained profits passing to shareholders. STEP 4 . the capital gains tax rate of 10% that otherwise applies does not apply when the fund is paying pensions. options and impediments have all been identified. Other trust assets are usually particularly attractive for assets that are likely to appreciate. Asset protection issues are also often a priority for people whose occupation carries a financial risk or who have intended beneficiaries with that risk. funding. eg restrictions on the terms of non-arm's length loans.
The preparation of enduring and possibly other powers of attorney. Implementation may involve a number of actions or the use of a number of products. Ensuring that life and other insurance proceeds generate excepted (concessionally taxed) income. STEP 6 . (Where appropriate and possible) taking out life and other forms of insurance cover. eg: The immediate or progressive building up of an investment portfolio. and It can be very useful for a written estate plan to be prepared . Arranging for other people. eg an adjustment clause to cover unequal superannuation or non-estate distributions.IMPLEMENTING the Estate Plan Without implementation. eg a switch from cross to self or superannuation ownership of personal life insurance so that a testamentary trust or pension can be funded. the provision for a suite of testamentary trust options. The immediate or provisional (eg irrevocable on death) winding up of family trusts. Realignment of the beneficial ownership of insurance policies . If appropriate. A switch to a self managed (excluded) or other superannuation fund if there is concern about how the existing trustee might exercise its discretion. eg children. pre nuptial or pre relationship or other agreements.and for the estate planner's accountant and lawyer providing input and feedback.often drafted as part of a wider financial plan by a financial planner . The preparation of Wills .it is important that the estate planner ensures that key attributes are included. to become members of a self managed superannuation fund so that assets can remain in the fund after a member dies. a gearing clause. Changing joint asset ownership. and . estate planning is a waste of time. this can include the establishment of a savings or wealth accumulation strategy (often as part of wider asset protection or retirement planning). nomination of preferred advisor (if any). The binding or advisory nomination of preferred beneficiaries to the trustee of a superannuation fund. Amendments to the trust deeds for both self managed superannuation funds and family trusts to ensure that future control and powers of appointment are properly exercised (eg if 2 or more children are to share control). The "tidying up" (with the concurrence of the relevant beneficiaries) of unpaid trust allocations. The preparation and funding of business succession. eg from joint tenancy to tenancy in common. superannuation funds and other entities.
particularly where professional advisors such as financial planners. accountants and lawyers are not aware of what each other is advising. Conjugal properties b. family trusts or superannuation. career. STEP 7 . (Sometimes) the immediate or progressive transfer of assets (including insurance) out of personal names into non-estate ownership such as spouses.estate planning needs to adjust for changes In the personal. financial or business circumstances of the estate planner or the intended beneficiaries. retirement. 3. Adequate records. . Properties owned by the wife before marriage (parapheral property) g. Alternatively. eg a CGT register certified by a registered tax agent. In wealth accumulation.Ongoing REVIEW . Conduct an inventory of all valuable assets. need to be kept to ensure that capital gains tax liabilities can be ascertained and minimized. Use the same network of people and sources of information as you would use to obtain the names of other qualified professionals.the estate planning implications of changes to tax laws in particular can be easily overlooked. What are to be included in inventory? a. Select one or more planners. business and/or business succession plans. and To tax and other laws . Too often the estate planning services provided by lawyers and other advisors are only reactive to client initiative and clients are not kept up to date with developments affecting estate planning. Fruits of separate properties 2. eg to forestall challenges or achieve asset protection.Properties onerously owned during marriage h. Properties owned by the husband before marriage (capital property) f. Prepare a current financial statement identifying specially ownership of each asset and present market value. the following steps may be followed: 1.Wages and salaries i.Fruits of separate properties e. Properties owned by the husband or wife before marriage d.Absolute community property c. real or personal.
Planner must prepare a proposed estate plan to his client for review. State your goals with your planner on how to divide your property. 5. and expenses to be considered. 6. Evaluate the proposed estate plan prepared by the planner. Approve the estate plan 9. Execute the estate plan . 8. called compulsory heirs. 7.4. Discuss and evaluate your goals with your planners. Ask what are the tax implications. therefore. The table below explains the legitime of the compulsory heirs: Legitimate Legitimate Surviving Children/Descendants Parents/Ascendants Spouse A ½ Excluded Same as the legitimate child B None Surviving ½ None surviving C None surviving 1/2 ¼ D None surviving None surviving ½ E None surviving None surviving 1/3 Illegitimate Free Children/Descendants Portion ½ the legitime of a Varies legitimate child None surviving Non surviving None surviving 1/3 ½ ¼ ½ 1/3 Legitime – the part of a testators property which he cannot dispose because the law has reserved it for certain heirs who are.
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