How to: Optimize Your Estate Planning

Estate planning is a complex and, at times, contradictory concept. Many high-net-worth clients spend three-quarters of their lives building up their wealth and then, finally comfortable with their financial position and place in the world, spend the remaining quarter trying to give it away.

However, for this type of client, giving up control over their hard-earned wealth is not easy. On the one hand, they want to remove valuable assets from their taxable estate, but on the other hand, they want to retain control. The reasons for this are complex: sometimes it’s difficult to cede control after a lifetime of being in control; other times it is because the intended beneficiary is not considered trustworthy enough to deal with the wealth in an appropriate way. This is nearly always an issue when the beneficiaries are children or young adults; nevertheless, it can be an issue for older beneficiaries too. Often, the perceived threat comes not from the beneficiary but their spouse, with the concern here being that money intended for the bloodline could be dissipated upon divorce.

You then need to add to this mix the effect of succession law upon any estate planning exercise. In this globalized world, it is not uncommon for a client’s estate to straddle numerous jurisdictions. Consider, for example, a US citizen living in the UK with his Norwegian wife and their two children born in the UK. The client and his wife have properties in the UK, US, and Norway and they have bank accounts in all three countries plus Switzerland. Each of these countries will apply their own succession laws in the event that the client dies, and it could be the case that probate will need to be applied for in all four countries upon death. In some countries, such as the US, the probate process can be a real problem: it is slow, expensive, and subject to public scrutiny.

 

In this globalized world, it is not uncommon for a client’s estate to straddle numerous jurisdictions

 

As a consequence, private client lawyers use various methods to both simplify the succession process and reduce the tax burden for their clients on death.

One tried and tested method is to use a trust to hold the assets in question, often with the client acting as trustee during his or her lifetime. In this way, the desire to control is duly satisfied. On death, the beneficiaries will be able to benefit from the assets in the trust and probate is generally not required. Set up correctly, such trusts can substantially reduce — or even eliminate — death duties. However,  not all countries recognize trusts, meaning this is only really an option for Commonwealth countries and the US. For civil law countries, which is basically the rest of the world, alternative strategies have to be employed. For instance, clients can use companies or civil law foundations — a kind of company/trust hybrid — to avoid probate and assist succession.

Of course, one really straightforward method of reducing your estate and avoiding probate is to simply give your assets away to your children or grandchildren during your lifetime. However, some countries, such as Germany and Spain, impose taxes on lifetime gifts, so one would need to check this before making any gifts. Other countries, like the UK, do not impose gift taxes but will impose capital gains tax if the asset you are giving away is pregnant with capital gain. This is because under UK law a gift is treated as if it were a sale of the asset at market value. Of course, one really straightforward method of reducing your estate and avoiding probate is to simply give your assets away to your children or grandchildren during your lifetime. However, some countries, such as Germany and Spain, impose taxes on lifetime gifts, so one would need to check this before making any gifts. Other countries, like the UK, do not impose gift taxes but will impose capital gains tax if the asset you are giving away is pregnant with capital gain. This is because under UK law a gift is treated as if it were a sale of the asset at market value.

Estate planning can be a confusing maze, but it is one worth navigating through, as the reward for the people you leave behind after your death can be substantial.

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