In simple English, most of us believe that we should be able to leave our assets to anyone we like BUT if we hold assets in certain countries, this choice is removed as we are forced to bequeath to our children and/or parents.
Most of Europe; UK excluded, Latin America; most of Asia; Hong Kong, Malaysia and Singapore excluded, most of Africa; South Africa excluded are all Civil Law jurisdictions which impose Forced Heir-ship Rules.
This means that you must include your children in the distribution of your assets, including homes and houses.
This may not be practical for most people, especially if your children are minors. You may wish your children to receive a part of your estate eventually but not generally when money is needed to be spent on their upbringing.
Also, many countries in Asia do not allow a foreign spouse to inherit so if you have used your hard earned money to buy a property in Thailand or Indonesia or Philippines and placed the ownership in your spouse’s name, to circumnavigate the local rules, then he/she dies, your assets could straight to their/your children and not you!
In Thailand, if you do not have a Will, the spouse is number 7 on the list of heirs.
- Brothers and sisters of full blood
- Brothers and sisters of half blood
- Uncles and aunts
- The surviving spouse is a statutory heir, subject to the special provisions of Section 1635 Civil and Commercial Code.
In Philippines your share as a spouse is the equivalent of your child. If there are no children then the estate is split between you, and the parents or siblings of your spouse.
In Indonesia, the rules are similar to Philippines but if you have more than 2 children, the spouse would not receive more than a third of the estate.
Basically, whilst Common Law countries allow freedom of instruction, the Civil Law countries have different requirements and it is important to know what rules affect your assets.
We all know of people who have bought a house with their own money but it is in the spouse’s name. Most people do this without any protection in place for example, via Trust. If you have to buy the asset in the national’s name, it does not give you any protection from Divorce or Death. The national can utilise the laws associated with the ownership and this could leave you with nothing.
I have a friend who has bought numerous houses in the Philippines. Due to the current rules in place, these had to be under his wife’s name. He has no children and she has 3. If she dies, the houses are split between him and her children but as she has more than 2 children, he would not get more than a third of each property. This is all of his savings.
To “protect” the estate from a disastrous outcome i.e. he gets left with less than a third, we set up companies for his wife. Each company owns a property. Each company releases shares to the value of the property and the shares are placed in a Discretionary Trust. Should the wife pass away, the Trust owns the shares, which are basically the assets of the companies. This prevents forced heirship rules as the spouses are primary beneficiaries and the children are contingent beneficiaries.
In this case, my friend does not have to ask his step-children for his own money back. Also, two of the properties are rental so being in a Trust does not interrupt the flow of business i.e. should anyone pass away, they are simply crossed off the list of beneficiaries. No legal costs or time are imposed and the assets do not have to be sold.
Many people have gained wealth and want to create a legacy for their children and heirs. You cannot do this by Will alone. You cannot gift an asset when you pass away and instruct the heir what to do with it. If you want to keep something in the family for future use and/or benefit, you have to place it in a Trust.
Most people buy assets and do not consider what happens to the asset if they pass away. Who will inherit under the law? Will this incur taxes? Many countries do not have a death or inheritance tax as such but do have transfer or capital gains taxes on distribution. For example, the UK has Inheritance Tax which is 40% over GBP325,000 in assets holdings. This is a global tax i.e. taxed on everything you own when you die. The US has similar but their allowance is US$5,430,000. Canada has a capital gains tax i.e. a tax on the increase in value of the asset. Australia has a transfer tax.
You have little defence on your estate if you have already passed away and your loved ones cannot fight this battle for you.
I also have a client with over 20 properties throughout the world – he earns a lot of money and did not know what to do with it all so invested in the easiest option to him. Being overseas at the moment allows him not to worry too much about taxes other than income tax BUT he will return home to UK which will create huge tax liabilities for him. Not only would this be an administration nightmare to sort out the distribution – the assets are in 5 countries – and cost a royal fortune, changing his resident status will incur huge levies such as capital gains and inheritance taxes.
We are creating structures that will allow him to maintain ownership of assets, dead or alive, and mitigating most of the taxes that would affect his estate. He can have capital access at any time, create a tax-free income and have peace of mind that if anything happened to him, his loved ones can continue with the same assets.
Having 30 years’ experience in the field, one thing I have noticed is that people investing in whatever mechanism are not paying attention to the changes in the laws, which could affect the outcome of the asset. For example, Hong Kong used to be beneficial to have a company own the property that you own for tax and estate planning reasons. It is not anymore as stamp duty for an ordinary person is 4.25% BUT if you buy a property now via a company it is 23.50% - makes it an expensive exercise.
The UK allowed company ownership of assets i.e. properties and exempted many taxes as a result. Most of these structures will be “looked through” from April 5th 2017 so the taxes that the structure protected, would no longer be viable in certain circumstances. The UK also introduced new Capital Gains Tax rules in 2015 that many people are not aware of - if you have property in UK that is not your primary residence and sell it in the future, you will pay CGT on the increased value from 5th April 2015.
There are many more changes around the globe so if you have had your assets for a while and/or looking at changing your estate, please pay attention to rules that may affect the outcome.
Over 70% of the working population do not have a Will alone never mind if it is suitable for the country that you hold assets in. Even if you wanted to leave assets to certain people, without instruction and permission, the intestacy laws of the relevant jurisdiction would prevail.
Trusts used to be complex and expensive and many people have not paid attention to the fact that they are inexpensive, compared to the cost of probate, and quite easy to put in place, at least to protect your legacy.
If you have a family Trust, your remaining assets (not in the Trust, to be distributed via Will) can be sent into the Trust. Therefore when you pass away, everything you own would go into the Trust. You, being alive at the time (of setting up the Trust) can impose the various rules and conditions under which assets are to be distributed. This gives peace of mind and provides complete control over your estate.
If you want the Villa in Phuket or Samui or Bali to remain in the family, you can do this via Trust. If you want provide a lifetime income to your loved ones, you can do this via Trust. For many parts of the world, Trusts can mitigate or remove taxes associated with you passing away such as inheritance or death taxes.
Please feel free to contact me with regards to your own situation.
You may be shocked at who would actually inherit your assets and at the net result.