What is the significance of this scenario? Our government needs more revenue!
Many governments around the world, and NZ too, have huge debt, and if you look closely, you will see they are subtly (sneakily) finding ways to increase your taxes (tax creep) and hoping you will not notice.
So what if our government decides to reintroduce death duties or introduce some sort of wealth taxes? Such taxes will usually hit “the mugs in the middle who pay all the taxes” (MITM’s) now, and such a tax could be applied when we pass on.
Let us assume the government introduces a wealth tax of 40% on any assets you own above $500,000.
If you die worth $1.2 million, that is $700,000 taxed at 40% – they would get off with $280,000.
We don’t want to own too much in our own names
Obviously then, we do not want to be that well off when we die, so we may not want to inherit our spouse’s 50% share of our assets. However we do not want to give those assets away either, so we need to look for estate planning tools so we do not own the assets, but can use them or spend them if we want to.
None of this is a reason to spend up or give it all way
None of this is a reason to spend up, or give it all way, not at all. It is just looking for a way to protect our money so we can leave it to our family, or chosen charity.
Joint ownership of assets is a problem because on first death they pass to the survivor regardless of your will. Step one would be to change the ownership of your assets to tenants in common instead of jointly. You are now worth $600,000 each.
Change your will to leave your assets to an estate or trust of which your spouse is the primary beneficiary (a testamentary trust is formed on death).
And vice versa – your spouse does the same.
When one of you dies and are worth $600,000, the govt. would only get off with $40,000.
And the same for your spouse – another $40,000.
That is a whole lot less than $280,000.
So on first death ( husband or wife) leaves his/ her $600,000 to an estate, which the survivor is fully entitled to use.
However it will not be combined with the survivor’s estate when he/she dies.
A simple little estate planning tool
This is a simple little estate planning tool which could just stop greedy governments from taking a big slice of your assets when you pass on – especially on second death.
If you set up a family trust and transfer your assets into it, the growth in the value of those assets will belong to the trust and not you. This is desirable because it means the trust, which does not die, can get richer and be at least partially protected from any death duties or wealth taxes.
If you maintain the assets 50/50 owned as tenants in common, and they keep growing in value, impoverished governments may get off with some of it. However they are not likely to get anywhere near as much as they might from jointly owned assets.
Executors or Trustees
Any estate must have an executor or trustee, and preferably it would be the husband for his wife’s estate and vice versa.
For a trust, you might need 2 trustees – ask your lawyer for guidance.
Is it worth the trouble ?
First of all try the “3 good reasons test” for a trust – see last week’s article, or our blog.
If you can’t find 3 good reasons for a trust, but want to take some steps to protect your money when you go, it is probably worth it.
We cannot predict future taxes, and some lawyers might agree with us, and others might not.
It will not benefit you, but it might mean your family will inherit more, which may or may not be important to you.
At the end of the day, you must decide. Remember those who plan ahead (but without too much complexity) usually win.