What is Estate Planning?
ESTATE PLANNING SERIES
As part of our efforts to make legal knowledge more accessible, we are launching a special series on the topic of estate planning. In the coming weeks, we will be posting articles on what estate planning is, how to prepare for it, and the best ways to manage an estate's assets, among other things. If you have any questions regarding the topic, please send us an e-mail at batocabeandpartners@gmail.com and we’ll try our best to answer.
PART I - WHAT IS ESTATE PLANNING?
Estate planning is the preparation of tasks that serve to manage an individual's asset base in the event of their incapacitation or death. The planning includes the bequest of assets to heirs and the settlement of estate taxes. It involves the creation of a last will and testament or taking out life insurance policies or investing in some lucrative venture.
For most of us, the term “estate planning” is mostly associated with the management of the belongings left behind by an extremely rich person. However, it’s time for us to remove that stigma and realize that estate planning is not exclusively for the extremely wealthy as such activity benefits anyone who expects to leave properties behind, no matter what their values are.
While you are alive, you accumulate property. Cars, homes, other forms of real property, checking and savings accounts, investments, life insurance, furniture, and personal possessions – are all part of your future estate. Eventually, everyone passes on their estate to their loved ones or, as the law refers to them, heirs.
In preparation for one’s untimely demise, one would want to control how his or her estate will be given and distributed to one’s beloved heirs (or entities). Without a plan in place, leaving one’s affairs unsettled and unmanaged can result in a long-lasting — not to mention costly — impact on loved ones, even if one doesn’t have a pricey home or valuable piece of art to pass on.
Consider the following reasons why you should have one and avoid potentially devastating consequences for your heirs:
Estate Planning makes sure that your heirs – your surviving spouse and your children – will enjoy what you’ve left them.
Properly planning out your estate involves organizing and preparing your assets (and the underlying paperwork) to ensure that your heirs will actually enjoy what you have left them. A poorly managed estate often results in heirs not being able to use, enjoy, or sell the properties – sometimes even leading to lengthy court litigation. To make sure that your loved ones do not suffer even more because of your passing, you must ensure that all documents pertaining to your assets are in order.
2. It protects young children.
If you are a parent of small children, you need to prepare for the unthinkable. To ensure that your children are cared for in a manner of which you approve, you’ll want to name their guardians in the event that both parents die before the kids turn 18 in your last will and testament. Without a will that names these guardians, the courts will step in to decide who will raise your children.
3.It minimizes the taxes for the beneficiaries.
The transfer of a deceased’s estate to its beneficiaries is not without the taxes to be paid. Upon transfer, the beneficiaries need to pay 6% estate tax on the net estate of the estate to be transferred. Estate Tax is a tax on the right of the deceased person to transmit his/her estate to his/her lawful heirs and beneficiaries at the time of death and on certain transfers, which are made by law as equivalent to testamentary disposition. It is not a tax on property. It is a tax imposed on the privilege of transmitting property upon the death of the owner. The Estate Tax is based on the laws in force at the time of death notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary.
Section 85 of the National Internal Revenue Code (NIRC) defines Gross Estate as the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated: Provided, however, that in the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate. Gross estate is not necessarily all the assets of the deceased. For instance, it excludes accruals from the SSS and irrevocable life insurance policies. Section 86 of the NIRC lists the possible deductions for the Gross Estate to lessen the value of the Gross Estate. That value minus the estate obligations is the net estate. Estate Obligations are claims against the estate such as loans, mortgages, etc.
Reducing the gross estate by deducting all there is that can be deducted or taking out a life insurance policy, for example, ensures your loved ones have enough money to cover the estate tax upon your demise so the transfer of titles is smoother, and leaves them with some extra money to help get them by. You could also transfer your properties to your beneficiaries while you are still alive so that your beneficiaries won’t be burdened by the estate tax.
4. It minimizes family disputes.
This is where the other half of your will comes in. In the creation of a last will and testament, the testator (which is you) designates the beneficiaries and specifies their inheritance. By doing this, it can minimize disagreements between family and relatives.
The next topic in this series will be a discussion on the process on how to go about estate planning.
