Reading 30: Estate Planning in a Global Context Flashcards
Deemed Disposition
Deemed disposition is a kind of exit tax and it is normally applied to any unrealised gain on the assets. Another exit tax could be on income earned for a period following the expatriation (renouncing citizenship) called shadow period.
Probate
Can be costly, time consuming, and invade privacy. Probate can be avoided or its impact limited by holding assets in joint ownership, living trusts, retirement plans, or life insurance strategies. The transfer through these structures do not need a will hence can avoid probate.
Forced Heirship
Children have the right to a fixed share of parents estate (can exist for estranged children), spouses tend to have similar guarantees along with marital property rights. In an attempt to reduce or avoid forced heirship, assets can be moved into offshore trust managed by seperate jurisdiction, gifted or donated during lifetime to reduce estate upon death, purchasing life insurance which can move assets outside realm of forced heirship provisions. Such strategies can have a clawback however if challenged by heirs in court.
Core Capital Needs
Not appropriate to use expected return of assets used to fund spending to calculate the capitalised value of core capital needs. As the risk of spending needs is unrelated to the risk of the investment portfolio used to fund those needs. Although the annual cashflows are not risk-less, a risk free rate should be used. Nominal or real will be used based on how the cashflows are reported in question.
Source Tax System
Jurisdiction that imposes tax on an individuals income that is sourced in that jurisdiction.
Residence Tax System
Jurisdiction that imposes a tax on individual’s income based on residency where all income (worldwide income) is subject to taxation.
Tax Conflicts
Residence-Residence: Being a resident of two countries and have to pay tax on worldwide income twice.
Source-Source: Two countries claiming source jurisdiction of the same investment properties for a property located in but managed from the other.
Source-Residence: Being taxed on worldwide income in one country then being double taxed on the source jurisdiction income.
Tax Treaties: Credit Method
Tax treaties reduce tax conflict. Credit method completely eliminates double taxation. Tax liability is the greater of the tax liability due in either the residence or source country.
Tax Treaties: Exemption Method
The residence country imposes no tax on foreign source income which eliminates the residence-source conflict. This completely eliminates the double taxation.
Tax Treaties: Deduction Method
Tax payer is still responsible for both taxes but the residence country allows for the reduction in taxable income by the amount of taxes paid to the foreign government. There is still a level of double taxation here.
Relative Value
This helps determine if the estate should be gifted now or transferred in estate at death. It is based on the RV ratio, which if it is bigger than one indicates value in gifting now vice versa. If the receiver can achieve a higher return and has low tax rate the ratio should be greater than one and the amount should be gifted now to maximise value.
Generation Skipping
It is optimal to skip generations when there are gifting taxes, you will avoid one level of gifting tax. However the second generation that is missed needs enough core capital, meaning some of the sum may need to go to the second generation and not straight to the third.
Valuation Discounts
Privately held interest can have both a liquidity and lack of control discount applied to their price. This will lower their value and reduce the amount of taxes that are paid when gifted or transferred. This makes them efficient.
Charitable Gifts
To find the RV the denominator is the same but the numerator is almost always higher because the charity can invest and the return is not taxed. The giver can take an immediate tax deduction for the gift and this will reduce the givers tax bill, which is then compounded by the formula.
Trusts
Revocable is when the settlor can revoke the trust and resume ownership of the assets. Settlor is considered the legal owner for tax purposes and creditors etc can make claims against the trust assets. Irrevocable trust is when the settlor relinquishes ownership and control, trustee is considered the owner of assets for tax purposes. Irrevocable trust protects assets from creditors.
