Proper estate planning can minimise the amount of tax paid on your assets when you die and minimise unwanted complications in dealing with the estate, say experts.

Estate planning specialist, attorney-at-law Denise Henry-James on Wednesday outlined some of the benefits that can be derived from proper estate planning and the negative implications of not doing proper planning during a Mayberry Investor Forum held at the Knutsford Court Hotel.

Henry-James said estate planning can “shelter the estate against the large cash burden of transfer tax and stamp duty” as well as “eliminate the complication of clients affairs”. She said persons should think about paying taxes and fees amounting to 15-20 per cent of the value of their estates upon death. “That is what your estates have to pay just for dying,” she said. That 15-20 per cent can be a lot given the nature of the assets and their value. For example, a person who has more real estate assets may pay more in taxes than someone who has a greater percentage of their assets in cash.

Estate planning is the process of anticipating and arranging for the disposal of an estate upon death. Estate planning attempts to eliminate uncertainties over the administration of a probate and maximise the value of the estate by reducing taxes and other expenses. Proper estate planning begins with making out a will, appointing executors and administrators, naming beneficiaries, guardians for minor children and trustees of their welfare, and clearly making arrangements for liabilities to be handled upon death.

However, estate planning can also ensure that the amount of taxes levied against one’s assets upon death is minimised and that the estate is divided as one would like it and within a reasonable time frame. Without proper estate planning, the net assets of the deceased can attract as much as 20 per cent of the net value of the estate in taxes and fees.

Though the amount of transfer tax payable on an estate has been reduced over the years from 15 per cent to four per cent in 2009, the amount paid is calculated on the net value of the estate and this includes the market value of real estate, shares or ownership in companies and debentures, which Henry James pointed out are usually large value items.

In the case of real estate, transfer tax is paid on property owned both locally and overseas and is applied from the date of death. This means that for persons born before June 2005, at which time the transfer tax was 15 per cent, that is the amount that would be due on the estate. Those who die after August 2009, would pay the applicable transfer tax, which is four per cent, at the time of death. However there is one caveat, the tax must be paid within year of the person’s death otherwise an interest payment of six per cent is charged.

“The interest is now higher than the tax itself, but we welcome the reduction,” said Henry James who is a partner at Myers, Fletcher and Gordon. This interest charged is also where estate planning becomes critical because the affairs of persons who die intestate, that is, without making a will, take a longer time to be wound up than those who have planned for it.

The net market value of the estate to which the transfer tax is applied is arrived at by deducting the liabilities from the assets of the decedent. Minimising the net asset value of the estate is one way of reducing the amount of taxes paid. However, not all liabilities are recognised by the Tax Department when making a claim for deductions.

‘Reasonable’ funeral and medical expenses are deductible, advised Henry James, but “it is only what I can prove,” she said. So if the funeral costs amount to $500,000 but the family only has receipts for $200,000 of expenses that is what is deducted. The same principle applies for medical expenses, but in cases of long illnesses, the amount that is allowed to be deducted is limited.

“Having tested the system at the tax office they are only allowing 30 days before you die,” said Henry James. Therefore for persons with illnesses that continue on for years, the amount that can be recouped from the estate is only what was incurred in the last month before death. Also deductible are loans and mortgages, however, mortgages can only be deducted where there was not a life insurance policy protecting the mortgage payment, Henry James outlined.

Other fees due on the estate are stamp duty, which is now three per cent of everything you own, including real estate, stocks or shares, debentures, household items, bank accounts, jewellery, motor vehicles and so on; attorney’s fees, which is between five and seven per cent of the gross value of your assets when you die; and the executor or administrator’s fee, which is six per cent of all monies that pass through their hands during the execution of the estate. These include the value of bank accounts, any dividends, rental income and the like.

The most simple way to minimise the amount of taxes and fees associated with these items is by having joint ownership on all property and bank accounts and by naming a beneficiary for your insurance policy, advised Henry James. With joint ownership, there is no need for a formal ‘transfer’ of assets, thus eliminating the transfer tax and stamp duty. Additionally, where executors or administrators are to be named, it is advisable to choose persons who will not need to claim the six per cent that is due to them as this fee is not mandatory. Georgette Wiltshire, attorney at law, Dunn Cox, also advised naming more than one executor so that there is continuity if one executor is no longer able to carry out their functions. She said this can minimise complications and eliminate the time it would take to wind up the estate.

“We advise that you appoint more than one executor because sometimes an executor can refuse to act. An executor might be dealing with personal problems at the time and decide that they don’t want to deal with this, you might appoint someone and they decide that ‘I’m too ill at the moment’, or the person could die,” she said. The number of executors appointed does not increase the amount of fees paid to them.

“The estate through the attorney will pay the executor’s commission of six per cent of the monies passing through the hands of the executors. The executors do not have to charge this commission. If there are two executors then they get three per cent each, if there are three executors they get two per cent each. So this sum is shared between the executors no matter how many there are,” she said.

Problems with the will can also complicate the winding up of the estate and add to the time taken to do so. “Make sure you date the will. Otherwise it adds to a further delay, especially in cases where two Wills are found. The date on the Will will identify the last or valid will,” said Wiltshire.

“The administrator if you do not leave a will, will have to wait a lot of times until they get a grant of administration. Banks these days I find are a bit reluctant to give out information to the administrator of an estate if that person is applying for a grant of administration. Because they are saying in many instances they are not sure if this is the person who is going to get the grant while the Will states clearly who is the executor and they know that they are authorised to deal with this person,” Wiltshire explained. She said, on the other hand, where a Will is drafted and an executor named, the process can go more smoothly. “The executor will have the power to act in your estate from the date of your death. For example if you have assets to sell the executor can enter into a sales agreement. They are not going to be able to transfer the asset until they get a grant. However there are certain things that your executor can do. There is certain information that your executor can seek from the bank from the date of your death,” Wiltshire said.

“An executor is someone who is appointed by the will and who subsequently obtains a grant and has authority dating from from the date of the will of the testator.”

If the will is not in a pristine condition this can take time in the probate of the will as every disparity will have to be explained.