Estate planning is equated with death and taxes — two certainties in this world according to Benjamin Franklin. It is about death, particularly, planning for death. And it is about taxes, particularly, minimizing tax burden on heirs. Perhaps, it is dealing with these two — death and taxes — that makes estate planning not very palatable to many people. But it is also the certainty of death, and even taxes, that makes estate planning essential.
Before the passage of Tax Reform for Acceleration and Inclusion or TRAIN Law, one commonly used tool in estate planning is the transfer or disposition of assets to intended beneficiaries or heirs during the lifetime of the person. Disposition of assets may generally be done through sale or donation. For real properties, for example, if the intended beneficiaries or heirs have the capacity to buy the property and will actually buy the property, transfer is made to them through sale. Otherwise, it may be done through donation wherein the property is gratuitously transferred to them as a gift. Under the old Tax Code (NIRC), estate tax is imposed at graduated rates of 5 percent to 20 percent, depending on the value of the net estate. Sale of real property considered as capital asset, however, is only subject to 6 percent capital gains tax while donation (net donations) to relatives is only subject to a graduated tax rate of 2 percent to 15 percent donor’s tax. While the modes of sale and donation are not tax-free, their rates are lower as compared to the estate tax rate. Thus, this simple tool of estate planning could effectively minimize the tax burden on the heirs.
Then comes the TRAIN Law. The advantage of using this simple tool to minimize estate tax exposure has been blurred by the TRAIN Law, in a good sense. This is because the TRAIN Law imposes a uniform flat rate of 6 percent for estate tax, capital gains tax and donor’s tax. The tax rate is the same — whether the real property is sold or donated during the lifetime of the person or transferred to heirs upon death of the decedent. The TRAIN Law simplified and reduced the estate tax to 6 percent based on the net value of the estate and even increased the standard deduction to P5 million and family home exemption to P10 million. It now appears that in so far as taxes are concerned, subjecting the assets to estate tax is more tax-efficient, than transferring them to heirs through sale or donation during the lifetime of the person.
With this legal development, one may ask: Does one still have to spend time and effort to plan for his death? And endure talking about death? Or simply do nothing — an approach many people are most comfortable with.
But estate planning is more than death and taxes. It is also about control. It is about control of the management and disposition of assets. It is about control during one’s lifetime and beyond death, for oneself, for one’s loved ones, for the next generation and the generations to come. With proper estate planning, a person is able to control the “who, what, when and how” in the disposition of the assets to the extent allowed by law, dictated by the “why” which is comprised of the goals, objectives and most of all, values of the person. It empowers the person to control who will get what assets, when and how they will get the assets. It guarantees that the intentions and wishes of the persons are fulfilled. It is like having an invisible hand giving, directing, loving and caring for loved ones even when one has passed on.
There are many tools that can be used to create a sound estate plan which lets a person control his assets even beyond death. Aside from disposition of assets during the lifetime of a person through sale or donation, some common tools in estate planning include execution of a last will and testament, getting a life insurance, incorporation of family assets and establishing a trust. Proper estate planning simply means proper use of one or a combination of these tools to implement the goals, objectives and values of the person. In this time of the year when we reflect on the certainty and meaning of death, let us also take time to plan for those we will leave behind when our time comes to kick the can.