The impact of estate and inheritance taxes on a deceased's estate is significant, and they can become a key consideration in terms of life and estate planning.
There are some key factors for the implementation of estate and inheritance taxes.
- The increased sophistication of certain economies.
- The perception of a "wealth divide" between rich and poor.
- And a government's intention to apply such taxes as an egalitarian means to re-allocate wealth acquired by individuals, and to provide for equal opportunity for all.
The impact of estate and inheritance taxes on a deceased's estate is significant. Once implemented, these taxes become a key consideration in terms of life and estate planning.
Currently, much depends on the jurisdiction and appetite of the government in question to tax through inheritance. We have much to learn from the position of high inheritance tax systems, for example, the Japanese and French, which are both jurisdictions that have determined to impose high estate and inheritance taxes. With respect to the Japanese tax system, estate and inheritance taxes, each respectively being up to 55% and levied on the beneficiary will apply. Having a partner to help take you through your options as well as one that speaks your language, is critical.
The Government requests payment of estate taxes assessed against the estate of the deceased. Inheritance taxes are levied on the legacies that a beneficiary receives from the estate of a deceased person, including money or real estate. This is normally a significant amount, applied against all of the deceased's assets accumulated over a lifetime and required to be paid within a specific time-frame. Quite aside from dealing with the bereavement of the deceased, the beneficiary may be compelled to consider an urgent sale of the assets of the estate in order to settle the estate and inheritance tax obligations.
Changes in estate and inheritance tax
Economic development and the increased sophistication of the tax systems of emerging economies in the Asia Pacific region are likely to see implementation of such taxes, either now – in some countries an implementation process is already underway – or in the near future. Underway are Thailand, Vietnam and China, whereas Japan increased their inheritance taxes in 2015 up to 55%, as a way of increasing tax revenues.
In 2017, Japan extended the scope of inheritance tax to include expatriates who have taken up long-term residency in the country. At a different part of the tax policy spectrum are other jurisdictions including Australia, Hong Kong, Macau and Singapore, which have now abolished inheritance taxes, in the conclusion that other forms of tax will better serve their social needs.
Safeguarding family assets through structuring using trusts
The effect of trusts will be for assets to be injected into a trust structure by an individual, who will serve as the settlor of the trust. Under the mechanism of a trust, the legal ownership of assets will pass to and be held by the trustee. The beneficial ownership will reside with the beneficiaries, which the individual-settlor will nominate.
The very act of assets passing into a trust structure and being held by a corporate trustee will have the effect of removing asset ownership away from an individual, who would be susceptible to estate and inheritance tax liabilities attached to their estate, and placing such assets into a structure which would be outside of the reach of such taxes.
The interest in trusts from High Net Worth individuals in places such as Hong Kong, was sparked in the 1970s as a direct response to the imposition of estate and inheritance taxes in the jurisdiction. In response, advisers developed elaborate structures in the name of estate-planning, such as a double-layered trust to insulate assets against such tax exposure.
Even though there is an absence of such taxes in most Asian jurisdictions, there is still scope for forward tax planning and use of structures to alleviate estate and inheritance taxes. Forward planning will be made all the more difficult once these taxes are legislated and formally implemented. High Net Worth individuals, in particular, should plan ahead to take advantage of structured solutions such as trusts and foundations, which may provide a legitimate basis to minimize exposure, or even eliminate altogether the obligation to pay such taxes.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.