R12 Estate Planning in a Global Context

Question 1

R12

Basic Concepts

Answer 1

Civil Law

A legal system derived from Roman law, in which judges apply general, abstract rules or concepts to particular cases. In civil systems, law is developed primarily through legislative statutes or executive action.

Common Law

A legal system which draws abstract rules from specific cases. In common law systems, law is developed primarily through decisions of the courts.

Forced Heirship

Legal ownership principles whereby children have the right to a fixed share of a parent’s TOTAL estate.

Community property regimes

A marital property regime under which each spouse has an indivisible one-half interest in property received during marriage.

Seperate property regimes

A marital property regime under which each spouse is able to own and control property as an individual.

Question 2

R12

Core Capital and Excess Capital Definitions

Answer 2

• Human Capital :An implied asset; the net present value of an investor’s future expected labor income weighted by the probability of surviving to each future age. Also called net employment capital.
• Core Capital: The amount of capital required to fund spending to maintain a given lifestyle, fund goals, and provide adequate reserves for unexpected commitments.
• Excess Capital: An investor’s capital over and above that which is necessary to fund their lifestyle and reserves.

Question 3

R12

Core Capital and Excess Capital Calculations

Answer 3

Survival probability:

p(Survival) = p(Husband survives) + p(Wife survives) − p(Husband survives) × p(Wife survives)

Present value of the spending need:

PV (Spending need )= ∑ (Survival^j) × Spending^j / (1+r)^j

(Numerator is Expected Spending)

Core Capital Estimation with Monte Carlo Analysis

• Estimates the size of a portfolio needed to generate sufficient withdrawals to meet expenses, which are assumed to increase with inflation.
• More fully captures the risk
• Can incorporate recurring spending needs, irregular liquidity needs, taxes, inflation
• Expected returns are derived from the market expectations of the assets comprising the portfolio.

Question 4

R12

Tax Free Gift

Answer 4

The relative after-tax value of a tax-free gift made during one’s lifetime compared to a bequest that is transferred as part of a taxable estate is:

Question 5

R12

Taxable Gift

Answer 5

The value of making taxable gifts rather than leaving them in the estate to be taxed as a bequest, can be expressed as ratio of the after-tax future value of the gift and the bequest, or:

Question 6

R12

Donor pays gift tax and when the recipient’s estate will not be taxable

Answer 6

The relative after-tax value of the gift when the donor pays gift tax and when the recipient’s estate will not be taxable

Question 7

R12

Charitable Gratuitous Transfers

Answer 7

Question 8

R12

Trust Terminology

Answer 8

• Revocable trust - A trust arrangement wherein the settlor (who originally transfers assets to fund the trust) retains the right to rescind the trust relationship and regain title to the trust assets. Settlor is responsible for tax payments and reporting. Trust assets vulnerable to the reach of creditors having claims against the settlor.
• Irrevocable trust. - A trust arrangement wherein the settlor has no ability to revoke the trust relationship.Greater asset protection from claims against a settlor.
• Fixed trust - A trust structure in which distributions to beneficiaries are prescribed in the trust document to occur at certain times or in certain amounts.
• Discretionary trust - A trust structure in which the trustee determines whether and how much to distribute in the sole discretion of the trustee.

The legal concept of a trust is unique to the common law. Civil law countries may not recognize foreign trusts because it is a legal relationship, not a legal person

Question 9

R12

Double Taxation Terminology

Answer 9

• residence–residence conflict - When two countries claim residence of the same individual, subjecting the individual’s income to taxation by both countries.
• source–source conflict - When two countries claim source jurisdiction of the same asset; both countries may claim that the income is derived from their jurisdiction.
• residence–source conflict - When tax jurisdiction is claimed by an individual’s country of residence and the country where some of their assets are sourced; the most common source of double taxation
• Source tax system - A jurisdiction that imposes tax on an individual’s income that is sourced in the jurisdiction.
• Residence tax system - A jurisdiction that imposes a tax on an individual’s income based on residency whereby all income (domestic and foreign sourced) is subject to taxation.

Question 10

R12

Credit method

Answer 10

When the residence country reduces its taxpayers’ domestic tax liability by the amount of taxes paid to a foreign country that exercises source jurisdiction.

T_CreditMethod = Max[T_Residence,T_Source]

Question 11

R12

Exemption method

Answer 11

When the residence country imposes no tax on foreign-source income by providing taxpayers with an exemption, in effect having only one jurisdiction impose tax.

T_{ExemptionMethod} = T_Source

Question 12

R12

Deduction method

Answer 12

When the residence country allows taxpayers to reduce their taxable income by the amount of taxes paid to foreign governments in respect of foreign-source income.

T_{DeductionMethod}=T_Residence+T_Source−T_ResidenceT_Source

The residence country makes a partial concession recognizing the primacy of source jurisdiction.

Question 13

R12

Reduce / avoid forced heirship

Answer 13

• moving assets into an offshore trust governed by a different jurisdiction;
• gifting or donating assets to others during their lifetime to reduce the value of the final estate upon death; or
• purchasing life insurance, which can move assets outside of realm of forced heirship provisions.
• Such strategies, however, may be subject to “clawback” provisions that provide a basis for heirs to challenge these solutions in court.