Estate Planning 101 – How It Can Affect Your Wealth?

April 7, 2013 | By Garry De Castro | Filed in: Personal Finance.

What is ESTATE? Estate as defined by Investopedia goes like this – All of the valuable things an individual owns, such as real estate, art collections, collectibles, antiques, jewelry, investments and life insurance. In short, all your money in the bank, mutual funds, uitf, stocks + your real estate property like house and lot, farm lot, warehouse, factory etc.

estate-planning

And why would you care about that? Here’s the reason why – The value of a personal estate usually becomes very important upon the death of the person in question. Those in line for inheritance often have to pay an inheritance tax on the estate. This tax can be very large, forcing the beneficiary to sell some of the inherited assets in order to pay the tax bill.

[Estate Preservation or Estate Planning is actually on the 6th step in our Six Steps to Financial Security]

Here in the Philippines, the Estate tax or Inheritance tax usually ranges from 5-20% depending on the bracket of your estate. Below is the latest Estate Tax Rates from the Bureau of Internal Revenue (Philippines)

Estate Tax Rates

Estate Tax Rates

Imagine the scenario. You’ve worked all your life, built your assets (house and lot, properties, bank accounts, mutual funds, stocks shares, etc) to hand it down to your children. Only to find out in the end that you still have to pay TAXES for all of those.

Tricky isn’t it. That’s why they say that there’s only 3 things constant in this world. That is

  1. Change
  2. Death and
  3. Taxes.

From the moment we were born, till the day we die, we will be charged with TAXES. And we can do nothing about it.

How to compute Estate Tax?

To compute the Estate Tax, we’ll refer to the Estate Tax Rates. There are 5 columns namely Over, But not Over, The Tax Shall Be, Plus, Over the Excess.

Here’s how to compute. For example, the total Estate is equivalent to P10Million, the tax shall be P1.215 Million. That’s 12%.

If the Estate is P5Million, Tax shall be P465,000 – that’s 9%.

But what if the Estate is P20Million? We’ll have to compute using the Over column.

For the first P10Million, that’s P1.2Million. But for the other P10Million (the excess of the first P10Million), it will be computed with 20% which is P2Million.

We will then add, P1.2Million (for the first P10 Million) + P2Million (for the excess which is 20%). So for P20Million, total estate tax is P3.2Million.

Total Estate – P20Million
Tax Payable to the Government – P3.2Million

Another example – What is the Estate Tax for a P200Million worth of Estate? This applies to real estate properties (warehouse, several condominiums, house and lot etc).

Let’s compute. For the first P10Million, estate tax is P1.2Million. For the excess in P10Million, that’s P190Million multiplied by 20%. That’s P38Million. Add that to the first P10Million ( P1.2Million), that will give us a whopping P39.2 Million.

Total Estate – P200Million
Tax Payable to the Government – P39.2Million

What if you don’t have much cash or liquid assets (something you can instantly convert to cash)? Most likely, the heirs will have to borrow with the promise that upon settlement, they will sell some of the properties. Ika nga, pinaghirapan mo para ipamana, mapupunta din pala sa gobyerno.

How Can You Avoid Estate Tax?

Some of the commonly used methods/solutions in avoiding Estate Tax are as follows

  1. Transferring your properties to the names of your children – you may get away with estate tax, but there’s still other taxes to be paid. If it’s thru donation, there’s donor’s tax (ranging from 2%-15%). If it’s thru a sale, there’s capital gains tax (5%-10%). More than that, you loss control of the property. Another thing is that, what if your child passes dies first before you do. Then you’re still burdened with Estate Tax.
  2. Putting up a Family Corporation – usually this is done by incorporating the properties in exchange of shares of stocks of the corporation. Still, this will be covered by capital gains stocks upon selling of shares.
  3. Putting up a Trust – a little complicated to discuss.
  4. Getting Life Insurance – by far the easiest way. Idea is that if I have an estate worth P20Million, all I have to do is get an insurance coverage (be it Term, Whole Life or VUL Insurance) equivalent to P3.2Million and name my beneficiaries as IRREVOCABLE (estate tax free). Upon death, my beneficiaries can easily use the proceeds, which is P3.2Million to pay for the estate tax (around 3%-4% only).In the book of Atty. Angelo Cabrera “Thy Will Be Done“, he actually referred to Life Insurance as a Miracle Product as a preferred tool in Estate Planning. You can prepare early on to pay the taxes in a right and legal way. So simple yet so practical and beneficial.Aside from that, there are some deductions that you can legally declare to lessen the estate tax. Here’s the full context from BIR website – About Estate Tax, Penalties and Deductions

If you’re not yet on that stage, most likely you’ll say “Garry, I’m still on the building stage, I don’t have millions yet. I don’t need Estate Planning”.

My question will then be – “Would you like to leave your family millions when you die?”

Most likely you will answer a big, loud “Yes, definitely.” Then you might also want to consider getting a Life Insurance. That way, your family can have millions in case of death while you’re still building your asset. No wonder why Atty. Cabrera calls Life Insurance a “Miracle Product.”

Can you help me compute my Estate Tax and give a quote?

In case you’d like me help you compute the estate tax for your Total Estimated Estate and want to apply the Miracle Product (which is Life Insurance) as your Estate Planning tool or simply want to build your Estate, simply fill up the form below. Don’t worry, this is totally FREE. (Bonus na lang if you decided to get insurance from us).

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There’s an upcoming Estate Planning Seminar on April 18, 2013. You might want to attend for a detailed discussion on Estate Planning. http://www.financialplanningph.com/estate-planning-seminar-by-tritium/

 

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Garry Zaldy de Castro is an advocate, Financial Advisor, Certified Investment Solicitor (Mutual Fund Representative), blogger, IT practitioner, husband to Aileen and a dad to Jacob and JohnD. He started Financial Planning Philippines in 2008 just to share his financial learning to friends, relatives and anyone who wishes to be financially independent.

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