“Don’t cling to fame. You’re just borrowing it. It’s like money. You’re going to die, and somebody else is going to get it.” – Sonny Bono

Last week we looked at the harsh reality that regardless of our current financial position, one day we will all pass on and leave our earthly possessions behind. Whether the transition of our assets is smooth or chaotic will depend on what plans we have put in place for them while we’re alive.

Although we may not like to think about it, estate planning is an important part of managing our finances. It involves making provisions to administer and transfer our money and property when we have died, so that our wealth is preserved and passed on according to our wishes.

Denise Henry James, noted legal expert, recently gave an insightful presentation on estate planning at a money management seminar hosted by First Global Bank. She first delivered the bad news about the costs that can be levied against our estates when we die, then looked at steps we can take to mitigate some of these expenses through proper estate planning.

As we outlined in last week’s column, estates are subject to four types of charges:

1. Transfer tax on the net market value of real estate, shares, and debentures;
2. Stamp duty on the net market value of all assets in the estate;
3. Attorney’s fees on the gross market value of the estate;
4. Executor’s commission on cash assets that pass through the executor’s hands.

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Henry James explained that it was possible to minimize your estate taxes by either eliminating your taxable assets, or increasing the debts left to the estate. She also advised that reducing the turnaround time in dealing with your estate can lower interest costs on transfer tax. Let’s look at some of her recommendations to cut estate charges:

Proper documentation

Henry James pointed out that it is crucial to have a valid will that has been produced in a written format, and signed by you and two witnesses who are not beneficiaries on the will. She noted that if a beneficiary has signed as a witness he will lose the gifts willed to him.

The legal expert also encouraged persons not to list out all their various assets in the will, as these would all be automatically subject to three per cent stamp duty. Henry James revealed that people have to re-write their wills once they become married, as previous wills would be invalid. She also noted that the preparation of wills should preferably be done by attorneys who practice in this area of the law.

Jointly-owned assets

Henry James pointed out that assets like bank accounts and shares that are jointly owned will be removed as taxable assets on the estate. This is because your joint assets are subject to the rule of survivorship which states that when one of the parties dies, the surviving joint owner is the new owner.
Real estate is a major asset that can be expensive to pass on to beneficiaries if it is not jointly owned. Henry James said that of the three ways to own property – sole proprietorship, joint tenancy, and tenants in common – joint ownership was the preferred method to reduce the estate tax liability. She explained that transfer tax still has to paid, because the property has to be transferred out of the dead person’s name into the name of the surviving owner. However, this is only charged on the portion that was owned by the dead party.

Henry James cautioned persons to be careful when instituting joint ownership of their assets, as this strategy was probably best utilized between couples or with persons who could be trusted.

Beneficiaries on life insurance

In the past, beneficiaries on insurance policies used to be limited to only spouses or children or else it had to left to the estate, Henry James revealed. These policies would be subject to the three per cent stamp duty. Fortunately, amendments were made to the law to remove these restrictions, and now persons can nominate anyone they choose to be a revocable or irrevocable beneficiary.

The attorney declared that she wanted to see fewer insurance policies with ‘estate’ as beneficiary, as a named beneficiary would remove the insurance proceeds from stamp duty, attorney’s fees and executor’s fees.

Fair distribution of assets

Henry James explained that people have testamentary freedom that allows them to leave their assets to any one they choose. They can even disinherit their spouses and children. However, their wishes may not necessarily hold up in court if it can be proved that their dependents are adversely affected. A recent legislation called the Inheritance Provision for Family and Dependents Act makes provisions for specific dependents to bring a claim on your estate whether or not you provided for them in a will.

Henry James noted that these claims can be costly as they extend the process of winding up an estate. Therefore, she encouraged persons to ensure that they make some provisions for dependents through life insurance or joint accounts, so that they have less chance of holding up the transferring of the estate by bringing a claim in the courts.