CHAPTER13 Using tl1e same example of a net estate worth
PlOO
million, assuming that this estate is comptlsed of real properties which all qualify as capital assets, tl1e tax impact shall be 6 percentcapital gains tax, 1 . 5 perce11t d<1cu1ne11tary sta1nps, transfer tax and registration tee for a total of about 8 percent. That adds up to Ps million of a P I 00,C)()O,DOO estate. To illustrate:
Capital Gains & Other
Taxes
8%
There
are,
however
, son1e legal effectsof
tl1e saleof the
property to one's heirs. f\s preYiousl)' discussed, one effect v,•ould be tJ1e loss of co11trol and j:>Ossibly possessio11 and enjoy111e11t of the propert)'·
I'vforvover,
a11y
atte1npt to retainpossession and enjoyn1e11t of a transferred property vvould have the effect of the property being included in the gross estate of the decedent-transferor for purposes of taxation, except when a usufrttct is legal!)' constituted.
There is also the
possibility
ofthe
sale bei11g cleclared as a simulated sale -an illegal transaction whereby no actualWILL
BE DONE
ANGELO /\.1. CABRERA
simply an agreement between tl1L' seller and the buyer, \vhere ; the seller transfers title of the property to the buyer without':,' consideration or pa;y1nent. A
deed
of sale would reflect the amount of consideratio11 but there is no actual pa3rment. This :, is ust1ally practiced betv.·een , nd arr1ong fiamily members toestate or do11or's tax. \\Then a sale is fOund to be simttlated, the transactiot1 can be i11validated �111d the property re\'erts to the original owr1er - whicl1 the11 subjects it to estate tax. Also, regardless whether a sale is real or i;imulated, capital' · gains tax has to be paid, based
on
the fair marl{et \'alue or the assessed '>'alue, whichever is higher.What if a11 exchange of money ac-tually takes place, but the sale price is below the fair marlzet value? Tl1is is wl1at t11e Tax .:. Code calls transfers for insufficient con!!lideration. provides that \Vhen tl1e selling price is below tl1e fair 1narket : valt1e, the clifference bet\vee1 t tl1e fair market value and the i'
selling price Rhall be included 11 tht.· determination of t11e gross estate of the decedent-seller. Thus, v.;J1ile the sale n"Iay be valid, the property shall still be
.suqject to
estate tax for tl1e clifference. Another in1porta21t thing to ren1ember about selling 1:1properties to your children is that, unlil�e a donation wl1ich is considered as an advance
of
inheritance, a sale is awhich does not affect tl1e eventual inheritance right or share ,
of the buyer-heir.
I am ren1inded of a story of a i11an who had four children.·· Mucl1 lil{e the story of the biblical prodigal son, this man·
SETTLEMENT OPTIONS
CHAPTER13
had a sor1 who asked h.is father f(,r his share of his ft1ture inheritance so he could start his o .. vn business. 'I'he fatl1er acceded and .. vith the helJJ of the .->on, caused the transfer of one fourth of his properties to tl1is son through a deed of sale. A1 ·d so the son ·ve11tured
into
his ow11 business, wl1ich unfortunately did not go very well. The father died a few years later.\Vould the so11 be entitled to a sl1a1·e in the i11l1eritance left by the fatl1er considering tl1at he alreatly "received" his portion? The answer is yes and tl1at's because tl1e n1ocle of transfer employed was a sale, which l1ad no effect on his inheritance rig·hts. Had the mode been a do11ation, the son would no longer have been entitled to anytl1i11g· because his inheritance had been advanced by way of donation. Tl1e three siblings didn't realize "vhat hit the111.
So if you plan to give to an)' of your childre11 a11cl use sale as the mode of transfer, ren1ember that a sale is not an adva11ce of inl1eritance.
Create a New Estate
One of tl1e reasons why a11 estate ow11er vvould consider transferring properties dtiring l1is lifetime is to a>'nid estate tax. But ""'hat
if
money can be n1ade available to pay tl1e estate tax liability when the time ccH11es? Wl1at if the estate plan includes an instrument which could generate the estate tax money? Wouldn't it allow the estate owner to hold on to his properties and pass then1 on to his heirs at a proper timeWILL B E DONE
ANGELO M . CAl>R�RA
- intact and undiminisl1ed? Would11 't it allow him to conti11ue to control his properties an<.:l pro"\'ide him with the flexibility to do witl1 tl1em as l1e pleases? V./ouldn't it allow l1im to enjoy his hard earned wea!tl1 vvithout tear of being con1pletely dispossessed with tl1e sudden change in circumstances, vvhen one reli11quishes ownership?
This option \Vill involve tl1e introcluction of life insurance as an estate jJlanning tool ineant to provide the liquidity to address cash I1eeds at tl1e ti1ne it is needeci.
l-Iere's 110\V it worl<s: By in ;uring the estate owner \.Vith a
coverage equivalent to tbe expected estate tax liability, cash can be n1ade im1nediatel)• a\'ailal)le at the precise titne vvhen the estate tax falls due � UJ 'or1 <lea th of the estate owner. Many people do not realize the i111portance and value of life insura11ce because of their preconceived notions. \Vl1at is oftenti1nes tal<en fOr granted is tl1at life insurance is the only product that con\'erts into cash at tl1e time it is neecied most - whetl1er to provide for the needs of a family wl10 just lost its breacf\\·inner or to provide cash for the timely settlement of estate tax. It is for reasons of liquidity, immediacy and :, availability that life inst1rance finds value as a necessary component in estate planning- to ensure that wealth is passed on to one's l1eirs intact and undiminished.
To illustrate: Using the same example of a
100
million estate, upon deatl1 of the estate o•vner \vho is covered with a 19 million life insurance, the beneficiary lies shall receiveSETTLEMENT OPTIONS
CHAPTER. 13 millio11 in death benefits and the estate ow11er shall have provid•_·d the exact amount of cash that his famtiy \vill need for the timel:y settlement of estatt· taxes.
Net Estate Worth PlOO Million