The many advantages of early estate planning

Press, 26 April 1988, Page 40

The many advantages of early estate planning

By-

GARY BOURNE

Estate planning (could, beldescribed as "Thp utilisation of a variety of financial tools to minimise the effects of death duties and to ensure the smooth' ; transition of asset? | from ope generation tij .the next." ' There are essenijuliy three main steps (tn be carried out in estate planning: (Stabilisation of the estate so that the liability for death duties will not grow. ; Protection of the existing estate. I Reduction of the estate so that death duty liability will eventually fall. Let us consider each step in turn: Stabilisation. Death duties of (l 0 rents ip the dollar are (paid on all assets accrued above 5(450,000. This charge car, obviously be very considerable so there are a variety of techniques available to ensure that:

Future asset growth is not reflected in future duty growth; assets are held in the most efficient manner; and distribution of existing assets does not contribute to a (future duties problem. i Future growth. To ensure future growth in an asset occurs outside your l estate, a number of options* apply The most] well-known of these is the( utilisation of trusts set up! for the benefit of someone! ' else. Many people dislike trusts as they take the asset away from their ownership, and therefore — they imagine theii; control. Before dismissing trusts, it would be advisable to investigate some very interesting option!* available using: trusts in conjunction with other structures Holding of Assets. It i£s often forgotten thl t everyone has- a 5450.000 exemption from ■ death duties. For exam lie in a

marriage situation it is often advisable to split the assets down the middle using a Matrimonial Property Agreement. This involves ho cost in either gift or,l stamp duties providing certain criteria are met and, can save as much as SIOO.OOO in unnecessary tax. ■ There are other ways (which could be!explored) (in which assets can be . shifted to ; ensure that duties are minimised in the future. Distribution of Assets. The'(structure of a will is very important. In many matrimonial! situations the ! use of "life interest” wills has proved very desirable. In these types of wills, capital can (lie left for]' the benefit of = the children without disadvantaging the surviving spouse. If the capital was passed straight' to the spouse, hundreds of thousands of dollars in, extra duty would be payable.

Protection, i i: Death dut es .are a prior charge on an estate, lyhich means! that they must be paid prior to the estate being distributed. This will ( often cause problems if j the duties have not been; allowed for before death.; Generally. |.he most economically efficient (i.e. i cheapest) method is by way of permanent life assurance. I For example, on death, an estate of 51,000.000 is (left. The duty payable on (this is 5220L000. Assuming [the individual concerned was 40 when (estate planning was done five years ago, the maximum outlay in premiums; would have been just over 523,000. i If we regard the premiums as payment on a standby overdraft, the interest rate has : been 2.1 (per cent. .Vo: further payjments are! now required. -Compare this with the (other choices if insurance was not in place, to meet

the duties if death occurred now: Borrowing: To borrow $220,000 and repay it over five years requires pretax earnings of $574,000 (assuming $44,000 capital repayments annually and an interest rate of 20 per cetn). Selling: To sell (say) a building worth $220,000 would result in an annual

loss of $22,000 income and $22,000 capital gain (assuming 10 per cent rental and 10 per cent appreciation annually. Life' assurance, is. therefore. the logical method to use to provide the necessary protection. It is possible to make this more attractive by adjusting the premiums to suit the situation.

Reduction of the estate. I By usiing gifts an individual's estate can be reduced by $27,000 annually without (' incurring tax. While it is not an end in itself, used in conjunction with other tools makes gifting a very useful idea.

Estate planning is an integral part of the total

financial planning. Obvi-i ously, this is but a brief, sketch. To become more; involved in this area, you| will need to prepare a full; estate plan in conjunction; with your professional advisors.

Gary Bourne is an investment consultant and financial planner with the Securities Corporation in Christchurch.