Giving your Wealth too soon? How will that hurt you too? Part 4 of Estate Planning 101

This is the part 4 of the series on Estate Planning 101:

Part 1:   What is Estate Tax and How it can hurt you even After Death?

Part 2: Estate Tax Settlement Options: What to do to Protect your Wealth?

Part 3: What to do to Protect and Conserve your Wealth?: Part 3 of Estate Planning 101

In trying to avoid estate tax, some estate owner gives away their inheritance to their heirs even while they are still alive. Thereby, decreasing their estate size, as well as the estate tax liability when the time comes that they are taken out of the picture.

There are two (2) ways in giving away your properties to your heirs while you are still alive:

1. By Donation
   • Yes, there is no estate tax, but there is still a Donor’s tax,
   • If the donation is less than or equal to 100,000, the donation is exempt from donor’s tax, 2% – 15% if more than 100,000. If a donation is made to a stranger, 30%.
   • This is considered as advance inheritance of the heir and should be “Collated”
   • Disadvantage: Losing control of your own property

2. Deed of Sale
   • Or selling your properties to your heirs
   • This also has a tax of capital gains tax of 6% + 1.5% other fees if the property being sold is a property not used in trade or business (Capital )
   • The tax is 32% + 12% VAT if the property is used in trade or business (Ordinary Asset)
   • Disadvantage: The buyer should have the financial capacity to buy the property; tax is even greater than estate tax if property is classified as ordinary asset and still there is the problem of losing control of your own estate.

Before we move forward, you need to know first how marriage can affect everything that we will talk about.

Effect of Marriage to Properties

We are now in the regime of Absolute Community of Property, meaning to say if you are married 1988 and after, all the properties you have as an engaged couple, will carry over until Marriage and thereafter as conjugal properties. If your marriage took effect before 1988, the properties you have as engaged remains exclusive to you and those properties you have gained inside marriage will be the only one that will be conjugal unless the couple instituted a prenuptial agreement.

Let me illustrate it in a story:

A story about a couple who had only one child (Simon). They love their son very much and would not want him to have problems in estate tax when they are gone. The couple decided to transfer their business, and their home under the name of the son where they live together through a deed of sale.

Simon got married to Sandra and gave birth to their first grandson named Carlo. Whom became their little bundle of joy since they live in the same house, when tragedy struck, Simon their only child, died in a car accident.

Since there is no pre-nuptial agreement and there is a presence of a grandson Carlo, all their business and even the house are all transferred to their daughter-in-law and her child. The relationship between the in-laws became strained when Sandra has begun seeing another man. But the sad ending, the daughter-in-law got remarried, and the old couple is forced out of the house since she decided to sell the house and also with no business to support them, they didn’t know what to do.

What could have been done:

1. The best thing that should have been done is, to keep the property unto them and give the property at the right time, which is upon death. If they want to avoid the estate tax of 20%, they should have gotten a life insurance equivalent to the estate tax due. The couple should have not lost control, they still have a business to keep them alive and even support their grandson.

2. If in the event the couple has no life insurance, or became uninsurable (usually due to health problems when old), if they really want to give away their properties, they should have DONATED IT instead of selling it through a deed of sale. Donor’s tax is around 15%, but since donation could be “Collated” meaning they can get it back if they want to, they could have gotten it back when Simon died.

Losing Control

This is a story of Lola Mapagbigay. Lola Mapagbigay made her wealth by successfully running a restaurant business with her husband. But then her husband died and left everything to her. She loved her financial independence, which enabled her to take care of herself as a widow and help her children and grandchildren. Since she had difficulty in settling estate tax when her husband died, she asks her lawyer friend what to do. She was advised that to avoid estate tax she needs to distribute her properties while she is alive. That included her food business to her 5 children through (Deed of Sale).
Unfortunately, slowly, her children and in-laws ease her the management of her business. There was nothing she could do. Since, she is not the owner anymore. Now, she said: “Before I transferred my properties to them, they would come to me for help, now, I go to them begging for support.”

In the above story, Lola Mapagbigay obviously lost control of the business. Giving your properties and business prematurely can usually do this, without consulting properly with Estate planning experts. She loves her business and it keeps her alive, even if she still wants to control it, there is nothing she can do about it.

Another problem in giving your properties too soon, there might be change of character of the person you are giving your property to.

“An Inheritance quickly gained will not be blessed in the end.” – Proverbs 20:21

According to Atty. Angelo M. Cabrera, in his book – Thy Will Be Done, — “By its very character, an inheritance is designed to be a post-mortem transfer – an after death event. But people change the original intention of inheritance to suit their objectives, their tax-avoidance objectives.

As the verse says, the inheritance is not going to be a blessing. Not to the giver because he loses control. And neither would it be a blessing to the child or recipient, because wealth that is untimely and prematurely given can even destroy the child’s character instead of relying in his God-given abilities.”

Summary of The disadvantages of giving your wealth too soon are:

1. The problem of losing control of the property

2. Loss of possession and enjoyment of your own property

3. Articles 88 up to 104 of the Family code of the Philippines impose the “Absolute Community of Property.” The problem of losing the property to your in-laws if your heir dies ahead of you. Your wealth goes to your in-laws if there is no proper estate planning that was imposed during transfer and if there is no pre-nuptial agreement made before marriage.

4. The problem of making your sons or daughters prematurely rich. They may not rely on their own capabilities anymore. What would it do with their character?”

Certainly, there are ways how to avoid these complications, but a common Filipino may not have the resources to seek for proper estate planning advice and the ugly truth is, they may even get a wrong advice. Even some perceived experts give the wrong advice, (even some lawyers and accountants give the wrong advice). If these are not done the proper way, it could go all wrong.

If you are considering on giving your wealth while you are alive, seek proper guidance on how to do it right. There are numerous ways on how to transfer your wealth now without losing control of the property you are giving. Seek advice of Estate Planners of the country.

“Listen to advice and accept instruction, and in the end you will be wise.” – Proverbs 19:20

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Read more here:

• Part 1: What is Estate Tax and How it can hurt you even After Death?
• Part 2: Estate Tax Settlement Options: What to do to Protect your Wealth?
• Part 3: What to do to Protect and Conserve your Wealth?: Part 3 of Estate Planning 101
• Part 4: Giving your Wealth too Soon? How will that hurt you too?
• Part 5: The Real Benefits of Estate Planning

You want an Estate Planner? Contact me here.

Source/s:

“Taken from THY WILL BE DONE – Understanding the What, Why & When of Estate Planning by Atty. Angelo M. Cabrera, ELYON Publishing House,” Tax code of the Philippines and BIR website

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Pinky De Leon-Intal, MD, RFC

Doc Pinky is a licensed Medical Physician, Internationally Registered Financial Consultant, Certified Investment Solicitor and Associate Wealth Planner and Estate Planner of the Philippines. She loves to educate and spread financial literacy. She is a Lactation Consultant. She loves to travel. She is a devoted wife and mother.

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