“Leaving no worries behind” by Paulo T. Villareal (May 16, 2011)

SUITS THE C-SUITE By Paulo T. Villareal
Business World (05/16/2011)

For many people who are focused on building careers, businesses or families, planning for their eventual passing is probably one of the least desirable activities they would consider; they would prefer to work on their everyday dreams, such as upgrading their homes, scheduling their next holiday, or winning the next round of golf. Yet, as morbid and unappealing as it sounds, planning one’s eventual passing is both prudent and necessary. The time spent planning is worthwhile considering how the lack of planning can leave one’s descendants with a myriad of problems. At the very least, planning for one’s eventual passing can give new meaning to the term resting in peace.

As the old cliché goes, the only things constant in life are death and taxes, and so an important part of the planning process is the taxes that may become due upon a person’s death. Under Philippine law, upon a person’s death, the estate tax must be paid before any of his or her properties may be transferred to his or her heirs.

Clearly, a sound estate plan must ensure that one’s heirs or executors will have enough cash or liquidity to pay for the estate tax, as well as other administrative costs that may be incurred, without burdening the heirs with unnecessary taxes and costs. The estate should not be unnecessarily dissipated before it is distributed among the heirs.

For a start, a good plan should take into account the properties and assets/liabilities that would be left behind and the persons or entities among whom the estate will be divided, either as required by law or as designated by choice.

The law provides that the estate tax payable is based on the net estate of the decedent. However, in order to come up with the net estate, one has to collate all the decedent’s properties at the time of death making up the gross estate. This would include all the decedent’s real and personal, and tangible and intangible properties. It is therefore the better part of prudence to keep a list (and of course inform a trusted friend of the existence of such list) of all of the person’s assets, properties, insurance policies, liabilities, so that the family left behind need not spend a lot of time searching.

After the gross estate is determined, the next step is to consider the allowable deductions under the law, in order to determine the net estate subject to the estate tax. The estate tax is based on a graduated scale, where net estates of P200,000 and below would be exempt from tax while net estates above P10,000,000 would be subject to a basic tax of P1,215,000 plus 20% of the amount in excess of P10,000,000.

Apart from ensuring that one’s heirs will not be burdened with estate taxes to a point that they will not be able to enjoy their inheritance, a good plan should also aim to ensure harmony among the heirs. We have heard many stories about families being disrupted or siblings hurling lawsuits at each other over matters of real or perceived inequity in the distribution of the estate.

For someone who exerts every effort to provide for the security and future of one’s family after his passing, it would certainly be ironic if the heirs were to end up quarrelling with each other over inheritance. Prudence therefore requires that a person consult a legal adviser regarding any sharing or distribution plans among the heirs. Where one’s heirs are already of age and are participating in the operation of the business or administration of properties, it may also be wise to bring them into the planning process. However, whatever distribution plan is arrived at, it is important that the heirs or executor conform with the requirements of law, not only as to substance but also as to form.

Clearly, having a solid and viable estate plan and having it implemented flawlessly is crucial to ensuring the long-term peace and security of one’s heirs. In some ways, perhaps, there is no better legacy one can leave behind.

(Paulo T. Villareal is a Tax Senior Director of SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.