A practical guide to estate planning 

Does estate planning seem complex to you?

Here is a Q&A guide that will help demystify estate planning so you can secure your legacy and provide peace of mind for your loved ones.

Q: What are common mistakes when structuring an estate plan?

A: When planning your estate, it’s crucial to avoid certain pitfalls that can undermine your objectives. Here are some common mistakes to watch out for:

• Lack of Clear Goals: Not defining what you want your estate plan to achieve can lead to ineffective strategies. It’s important to be deliberate about identifying your priorities, such as minimizing taxes, protecting your assets, or ensuring family harmony, so that the solutions you pursue are on point.
• Insufficient Liquidity Planning: Oftentimes, the need for cash to cover estate taxes, fees, or other expenses is overlooked. This can lead to the forced sale of assets (meaning assets have to be sold quickly, perhaps at a lower price, to generate cash) or other unintended consequences.
• Inadequate Asset Protection: Failing to shield your assets from risks like creditors (people or companies you owe money to), lawsuits, or other financial threats can jeopardize your estate. Using tools like trusts (legal arrangements where assets are held by one party for the benefit of another) and insurance can help protect your assets.
• Disregarding Family Dynamics: Not considering how your estate plan might impact family relationships can lead to conflict, resentment, or even legal disputes.
• Inadequate Governance Structure: Failing to establish clear rules for how assets like trusts or family businesses are managed can lead to challenges and conflicts in decision-making.
• Lack of Professional Advice: Estate planning, especially for High Net Worth Individuals (HNWI) and Ultra High Net Worth Individuals (UHNWI), can be complex and nuanced. Not working with experienced professionals such as lawyers, tax advisors, or wealth managers can lead to costly mistakes.
• Failure to Update Estate Plans: Your estate plan should be reviewed and updated regularly to reflect changes in your life situation, such as marriage, divorce, or new children.

Q: How do estate and inheritance laws differ across jurisdictions?

A: Inheritance laws reflect local customs, cultural norms, and legal systems, leading to variations across different places. Here are some key differences:

• Forced Heirship: Some jurisdictions, like the Philippines, have forced heirship laws. This means certain family members are legally entitled to a portion of the estate regardless of the deceased person’s wishes.
• Spousal Rights: In some jurisdictions, spouses have automatic inheritance rights, while in others, they may need to be specifically named in a will or trust to inherit.
• Conjugal/Marital Property: Jurisdictions may have different rules regarding property acquired during marriage. Examples include:
  • Absolute Community of Property: All property owned by either spouse at the time of marriage or acquired during marriage becomes joint property.
  • Conjugal Partnership of Gains: Property acquired during marriage from the spouses’ efforts or from common funds is jointly owned.
  • Complete Separation of Property: Each spouse owns their property separately, whether acquired before or during marriage.
• Inheritance Tax and Exemptions: Some jurisdictions impose inheritance taxes on the beneficiaries, while others have estate taxes (taxes on the total value of the deceased person’s property before it’s distributed) or no taxes at all. Also, tax exemptions and thresholds vary, affecting the amount of taxes owed.

Q: What are the most effective tools to reduce estate taxes in the Philippines?

A: In the Philippines, you can consider the following strategies to minimize estate taxes:

• Maximize all allowable deductions:
  • You can automatically make a standard deduction of PHP 5 million from the total value of the estate.
  • Up to PHP 10 million of the family home’s value is exempt from estate tax.
  • You can deduct all medical expenses incurred within one year prior to death, up to a maximum of PHP 500,000.
  • You can deduct funeral expenses up to a maximum of PHP 200,000.
• Take advantage of tax amnesty programs. These are often government programs that allow taxpayers to pay a reduced amount of tax on past undeclared income or assets without penalties.
• Ensure accurate valuation of estate assets to minimize tax liability. Proper valuation means accurately assessing the worth of properties, investments, etc.
• Deduct claims against the estate, such as unpaid debts, to reduce the taxable amount.
• Deduct assets transferred for public use, such as donations to the government.

Q: What are the tools that can be utilized to remove assets from one’s estate?

A: Here are some ways to remove assets from your estate, which can help reduce its taxable value:

• Doing outright gifts: Giving assets directly to individuals while you are still alive.
• Making programmed gifts within the annual tax-exempt limit: This refers to giving specific amounts of money or assets each year that fall below a certain threshold set by tax laws, making them tax-free.
• Donations via irrevocable trusts: Transferring assets into a trust that cannot be changed or canceled once it’s set up. Once assets are in an irrevocable trust, they are typically no longer considered part of your personal estate.
• Purchasing life insurance where the designation of beneficiaries is irrevocable: If the beneficiaries of a life insurance policy cannot be changed by the policyholder, the death benefit may not be considered part of the estate for tax purposes.
• Transferring assets to a corporation: Moving personal assets into a business entity.
• Making charitable donations: Giving assets to qualified charitable organizations.

Q: What are the benefits of an offshore trust?

A: An offshore trust is a trust established and governed under the laws of a jurisdiction outside your country of residence (often called an “offshore” jurisdiction). Depending on the jurisdiction’s laws, they can offer several advantages:

• Assets held in offshore trusts can be shielded from creditors.
• Offshore trusts can provide a level of confidentiality, making it more difficult for creditors and other parties to identify the assets.
• Offshore trusts can provide a means to diversify assets and investments across multiple jurisdictions. This means spreading investments across different countries and markets.
• Offshore trusts can offer a level of privacy, as their existence and details may not be publicly disclosed.

Q: Does timing matter when making gifts?

A: Yes, timing can be crucial when making gifts, especially for estate planning and minimizing taxes. Here are some considerations you need to take into account:

• Annual exclusion limits allow you to make tax-free gifts up to a certain amount within a year. Gifting regularly within this limit can transfer wealth over time without incurring gift taxes.
• For assets that generally appreciate over time (increase in value), donating them much earlier when their value is lower can result in significant tax savings. This is because the gift tax (if applicable) or future estate tax would be based on the lower value at the time of the gift, not its higher future value.
• Donations that are executed too close to one’s death may be seen as “done in contemplation of death” and therefore may be assessed for estate taxes.
• Donations to an unmarried individual make the donated asset part of the absolute community of property once he/she gets married. This means it becomes shared property with their spouse.

Q: How often should one revisit his estate plan?

A: A regular review every 3-5 years is recommended to ensure that the estate plan is still aligned with your changing circumstances and current laws. Additionally, major life events should also trigger a review of your estate plan. These include:

• Marriage or separation
• Changes in health or disability
• Birth of children or grandchildren
• Migration to a new jurisdiction (moving to a different country or state)
• Significant changes in your financial situation (e.g., a large inheritance, starting a new business, selling a major asset).

Estate planning is a continuous process that evolves with your life. By understanding these key questions and considerations, you’re taking a vital step towards securing your financial future and ensuring your legacy is managed according to your wishes.

(Bookmark and visit Metrobank Wealth Insights at www.wealthinsights.ph daily for investment insights and ideas. If you are a Metrobank client, please get in touch with your relationship manager or investment specialist for assistance in accessing exclusive content. Not a client yet? Please visit any Metrobank branch so you can begin your wealth journey with us.)

WANDA BELTRAN is the Head of Account Management for Metrobank Trust with over 25 years of experience in providing estate planning solutions via Trust structures. She is also the Vice President and Director for Tax & Regulated Products of the Trust Officers Association of the Philippines or TOAP. A certified financial planner, Wanda is also a sought-after host and emcee.