LEGALLY SPEAKING: Minimise stamp duty with proper estate planning
People are very careful about managing their money during their lifetime; how it is spent, what deductions are made, how it can be invested, and how it can be saved.
But it’s also important to think about how your assets will be managed after death — and that’s where having an estate planning strategy can prove beneficial.
That is because, before anyone can receive anything under your Will, your estate will be subject to stamp duty in respect of Bermuda property.
An astute estate planning strategy, however, can minimise, or even avoid, the payment of stamp duty, allowing more of your estate to pass to your loved ones.
If your estate is probated, estate stamp duty will be payable on the value of the net estate and is calculated as follows:
· On the first $100,000, nil
· On the next $100,000, five percent
· On the next $800,000, ten percent
· On the next $1,000,000, 15 percent
· Thereafter, 20 percent.
Estate stamp duty must be paid within 90 days of the Grant of Probate or Letters of Administration unless an extension is given by the court.
However, before your death it is possible to reduce the value of assets that go to probate by Will or under intestacy — or potentially avoid the probate procedure altogether.
One way to reduce the value of assets that go to probate, or the risk of probate altogether, is by holding assets jointly.
On death, there will be an automatic transfer of your estate to the surviving joint owner. Probate will not be necessary if all assets are held as joint tenants, rather than as tenants in common, and there will be no estate stamp duty.
Holding some assets in joint names can still be advantageous if holding all assets in joint names is not an option for you. Although those assets that are in your sole name may trigger the need to make an application for grant of probate, holding some assets in joint names will reduce your estate’s stamp duty on probate as only the deceased’s share of the asset as at the date of death is taxable.
Owners of property (real or otherwise) can also consider making lifetime gifts as opposed to transferring property on death.
A lifetime transfer will still be subject to stamp duty — however, the thresholds are lower than that of estate stamp duty as outlined above. The stamp duty rates applying to a conveyance or transfer of property during one’s lifetime are:
· On the first $100,000, two percent
· On the next $400,000, three percent
· On the next $500,000, four percent
· On the next $500,000, six percent
· Thereafter, seven percent.
If you do not want to completely give up your rights to property by transferring it during your lifetime, you can make a gift of property subject to a life interest.
This allows you to benefit from the use of the property during your lifetime.
Your estate planning gift from government came with the introduction of the primary family homestead designation pursuant to the Stamp Duties Amendment Act 2005. The designation allows owners of real property to register a property as their primary family homestead.
Following their death, the designated property passes to the beneficiaries without incurring estate stamp duty.
Although this removes the incentive to make a lifetime transfer in relation to real property as noted above, the designation is only applicable to one property.
In cases where an individual owns multiple properties, lifetime transfers will still be a useful estate planning strategy.
You can also reduce the value of assets that pass through probate by establishing a Trust during your lifetime.
The property in Trust is immediately available to the beneficiaries. Transferring assets into a Trust means that stamp duty may be payable during one’s lifetime. However, once this is done the Trust will not be affected by any future changes in stamp duty rates.
As part of your estate planning strategy, you should be aware that there are certain exemptions from stamp duty including gifts to spouses, gifts to Bermuda charities and gifts of foreign real property.
Further savings in estate stamp duty can be made by converting assets into foreign currency assets — for example, using foreign currency accounts.
These assets will not form part of your estate and will not be subject to stamp duty.
Shares in local companies having no more than five shareholders where at least 75 percent of the assets are foreign and 85 percent of the net income is foreign are also protected from estate stamp duty.
It can be very beneficial to consider your options when it comes to anticipating and organising the disposal of your estate as you can minimise any uncertainties that may arise in its administration and maximise the value of your estate that will be passed on to your loved ones.
It is best to consult an attorney experienced in estate planning to assist you in this respect.
Janine Carey is a Trainee Associate with Appleby (Bermuda) Limited and spent the past six months with the Private Client and Trusts Practice Group mentored by Vanessa Schrum.
This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.
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