I have been getting a lot of inquiries lately about the much-rumoured inheritance tax. Frankly, I am not really sure who started this whole red herring, but I doubt whether the Revenue Department will go ahead with this out-of-date tax.
I would have thought that it should be blatantly obvious to the tax authorities by now that much of Asia has already abolished inheritance tax for obvious reasons. First of all, inheritance tax is unpopular because it’s a basic human instinct to provide for our children, and to try to give them a better start than we had. Taxes shouldn’t fly in the face of human nature.
Second, there might have been some justification for it in the past when so much wealth was simply inherited, but the “rich” of today are mostly ordinary people who have worked hard to build their own businesses and much of that wealth has trickled down to the masses, making everyone better off.
For most of its history, the inheritance tax yield has been negative. The losses to the economy, as people shuffle their finances around in order to avoid the tax, are greater than the revenue it brings in. People will hire even more expensive financial planners, create tax-avoiding trusts, shift their assets abroad or simply spend their fortunes. The details about inheritance tax are a bit vague right now but here are a few tips you may want to consider:
1. Make a gift. You may be able to beat inheritance tax by giving away some of your assets to your spouse and children while you are still alive. But inheritance and gift taxes usually go together. It remains to be seen how things will play out in Thailand. Mind you, it is advisable to keep the primary residence in your name until the day you die. You don’t want to be kicked out of your own home in case your children become ungrateful.
2. Corporatise your assets. If you own a company, it may make sense to sweep your fixed assets into the company’s name and divvy up shares to your spouse and children. In this way, when you die, the assets are “already” in the company. There’s no need to transfer anything to the beneficiaries since they are already shareholders. I suspect the Revenue Department will go after tangible assets like land and properties first for inheritance tax. Shares in private companies will probably be off the taxman’s radar screen for now.
3. Use an offshore trust. Setting up a trust to hold offshore investments and properties will mean that these assets are no longer part of your estate and will not be subject to inheritance tax. However, rules relating to trusts are complicated so you must take advice from a financial planning expert.
4. Buy life insurance. If you take out a life insurance policy, it won’t reduce the amount of inheritance tax. But the payout may make it easier for your surviving family to pay the tax bill. It could mean that they are able to prevent the family home from being sold. But if you do this, make sure the life insurance payout goes into a trust – if you don’t it will make your estate bigger and it will have to pay more tax.
Apart from the tax angle, an inheritance plan has several elements. They include: a will, assignment of power of attorney, and a living will or healthcare proxy (medical power of attorney). Taking inventory of your assets is a good place to start. Your assets include your investments, retirement savings, insurance policies, and real estate or business interests.
Ask yourself three questions: Whom do you want to inherit your assets? Whom do you want handling your financial affairs if you’re ever incapacitated? Whom do you want making medical decisions for you if you become unable to make them for yourself?
Everybody needs a will. A will tells the world exactly where you want your assets distributed when you die. It’s also the best place to name guardians for your children.
Dying without a will can be costly to your heirs and leaves you no say over who gets your assets. Even if you have a trust, you still need a will to take care of any holdings outside of that trust when you die.
Offshore trusts aren’t just for the wealthy. Trusts are legal mechanisms that let you put conditions on how and when your assets will be distributed upon your death. They also allow you to reduce your estate and gift taxes and to distribute assets to your heirs without the cost, delay and publicity of probate court, which administers wills. Some also offer greater protection of your assets from creditors and lawsuits.
Lastly, discussing your inheritance plans with your heirs may prevent disputes or confusion. Inheritance can be a loaded issue. By being clear about your intentions, you help dispel potential conflicts after you’re gone.
Teera Phutrakul is a certified financial planning professional and current chairman of the Thai Financial Planners Association.