The last stage of financial pyramid is wealth distribution or otherwise known as the leaving a legacy stage. This is the most crucial stage in the financial pyramid as this will determine how much of your wealth, the fruits of your hard work, will be transferred to your heirs efficiently. This is where estate planning plays an important role. Your heirs need to settle estate tax upon the death of owner as mandated by the government. This can be settled thru purchasing a life insurance that will not be part of your estate.
Estate planning is “the orderly process of arranging the disposal or distribution of one’s assets to beneficiaries or heirs.” (BussinessMirror)
The estate tax is the biggest concern in estate planning. The problem arises when not addressed properly. This is where the famous quote of Sun Life Financial enters: pamana na sana naging pabigat pa.
According to BIR, it is a tax imposed on the privilege of transmitting property upon the death of the owner. In other words, your assets will be frozen upon your death until the tax is paid. The tax must be paid within six months after death. If not, a surcharge of 25% will be imposed plus 20% interest per year afterward.
“The BIR said all real properties of deceased persons whose inheritance taxes have not yet been paid by their heirs can be foreclosed and sold through public auction and their cash in banks and jewelry can be garnished in favor of the government.” (MoneyTalkPH)
How much your beneficiaries will pay will depend on your gross estate. These include real properties, tangible personal properties, and intangible personal properties as part of your estate.
Let’s take a look at the table below.
Three Common Practices of Wealth Transfer That Maybe Illegal
Business connections. It is obviously illegal to go under the table by making a special arrangement with the authorities. But this is still done by some people. Keep this in mind, you may have connections but your family members do not. Kilala ka nga sa BIR pero ang pamilya mo kilala rin kaya? To iterate that this is an illegal practice and you do not want your family members to suffer when caught. Would you take the risk when there are legal ways to ease the pressure brought by estate tax?
Act of simulated selling. Some parents opt to transfer the properties under their child’s name thru simulated selling. Simulated selling is the act of selling a property wherein there is no cash transaction involved. Again, this is completely illegal. You may be charged with perjury when caught. In any case, when a parent dies just a few months after the donation, BIR may suspect that an illegal transfer was done in contemplation of death. This will bring your heirs within the bounds of the law.
Donation. This is an actually a legal way to transfer properties but can bring complication later in life. No one could ever get away from taxes. Even if you give your properties, you still have to pay the donor’s tax. Taxes are paid by the donor hence no more estate tax will be imposed. Some perceive that donating their properties to their heirs in contemplation to their death may be appealing. By doing so, you will lose all your right to the properties. Your heirs can now sell your house without your knowledge leaving you stressed and bewildered.
Early Transfer of Title
Believe it or not, this may happen. The following is an excerpt from an article about estate planning by the MoneyTalkPH,
According to Miss Ruzette Cadungog, she has married clients before who transferred their 6 houses to their children equally, probably via donation in order to avoid paying the estate tax. Years after, the father got sick and needed money for treatment. Unfortunately, none of the children would like to volunteer to sell one of their houses to help their father. They could be pointing fingers who should sell the properties. The daughters-in-law or sons-in-law already have interest in the properties and may have convinced their husbands or wives not to sell their properties. Of course, the married couple no longer have legal rights over the properties they donated to their children so they have nothing else to do besides convincing their children to give them money for treatment or sell their properties to make money for treatment. It appears like the parents are at the mercy of their children and their in-laws.
This is a clear proof that an early transfer may bring you in trouble later in life. Losing all your right to the properties you bought thru hard work is an option you need to avoid. This is where proper estate planning kicks in.
Bringing Estate Tax in Numbers
Federico Suan, Jr. has a gross estate of Php 20 Million. How much will the beneficiary need to pay the estate tax?
Using the table above.
Yung Php 20 Milyon na panama sana ay magiging Php 16.8 Milyon na lang dahil kailangang mabayaran ang estate tax.
And the problem does not stop there. What will your family do if most of their assets are illiquid like real-estate? Remember that your heirs/beneficiaries will only be given 6 months to settle the tax due. We all know how tedious the process of selling a property. 6 months may not be enough to liquefy the assets plus your family is still mourning. Without enough knowledge about the implication of not paying the tax on time, they might meet bigger problems later.
Protect Your Estate Thru Life Insurance
The idea of estate planning is a hassle-free wealth transfer of the deceased person to his heirs. One way to lessen the burden of the estate tax is by purchasing life insurance. Insurance proceeds are not subjected to tax in two cases.
- Life insurance proceeds are not taxable when expressly stipulated that the designated beneficiary is irrevocable. (BIR)
- A revocable beneficiary is deemed irrevocable when the insured never changed the designation of the beneficiary during his lifetime. (Insurance Commission—still under dispute)
Term Insurance for Estate Planning
A term life insurance only provides the stated benefit upon the death of the policy owner within a specific time. It does not give any returns beyond the death benefit, unlike permanent life insurance that has cash value and dividends payout.
Compared to other insurance policies, term insurance is the cheapest among the rest of it will only cover specific time period. This is best used in estate planning. You just need to pay a fair amount of money but in return, it will generate an instant wealth your family could use to pay the estate tax.
Sample Proposal: Term Insurance for Estate Planning
Federico Suan, Jr., 50 years old, has a gross estate of Php 20 Million. His beneficiary needs to pay the estate tax of Php 3.2 Million upon his death.
5 Year Renewable Term Insurance
- Life Coverage: Php 3.2 Million
- Accidental Death Benefit: Php 1.6 Million
Annual Premium (5 years): Php 32,464
A 5-year renewable term insurance premium increases every 5 years. Term insurance is a wonderful tool to create a fund that your irrevocable beneficiary can use to pay the estate tax. This can greatly help your family produce the money to pay the taxes while your assets remain intact.
The insurance money will not constitute to your gross estate and not taxable provided that the beneficiary is designated as irrevocable.
You may like other plans that combine income protection and investment in one product or VUL?
Request for a Term Life Insurance Proposal?
You too can preserve your wealth and let your family enjoy a hassle-free wealth transfer by getting a term life insurance today. Remember that your family will only have 6 months to pay the corresponding estate tax without surcharge and interest. The government can also foreclose your properties when taxes are not paid. Protect your wealth today to protect your family’s future.
Federico is an electronics engineer, financial blogger, insurance agent, and a certified investment solicitor. A multi-awarded Sun Life financial advisor with clients ranging from lawyers, doctors, engineers, accountants, business owners, company directors, and OFWs to minimum wage earners had sought advice from him in achieving lifetime financial freedom.