Presented by: Robert L. WolffP.O. Box 381

Dumaguete City, Negros OrientalPhilippines 6200

wolff2000@earthlink.netNY (518) 325-6015PH 09266485273

Disclaimer

I am not an attorney admitted to practice law in the Philippines. I am an attorney admitted to practice law in New York. That and 35 pesos gets me a cup of coffee at McDonalds. fortunately I have a friend who is a Philippine lawyer that can give advice.∗The following is not legal advice, but rather comments and observations.∗For answers to legal issues raised by this presentation, you need to consult an attorney admitted to practice law in the Philippines.

Issues of Estate Planning

∗ Succession Issue – Who gets What, When and How∗ Potential Probate Issues In The US and The Philippines∗ Potential Estate Taxes In The US and The Philippines

Further complicated by:∗ Complex family scenarios, potential challenges∗ Asset protection planning for spouse, children, and grandchildren,

and maybe yourself∗ Plus, our plans, objectives and needs change over time

Two Estates

∗Probate

∗Taxable Estate

Probate and Taxable Estate

Difference between probate estate and taxable estate.

∗ The probate estate is limited to assets in the decedent’s name that title can only be changed by executor or administrator.

∗ The taxable estate includes probate and non-probate assets, such as IRAs, Annuities and life Insurance.

∗ Note- your taxable estate passes out side of your probate estate

Not understanding how your assetswill be distributed at death can result in an

estate catastrophe.

The Three Main Ways Your Estate is Distributed:

ProbateRight of SurvivorshipContract

Disposition of Your Estate With or Without a Will

∗ A person who dies without a will dies “intestate.” Statutory law will determines how your assets are distributed, not you. Draw back is that the estate may not be distributed in accordance with the decedent’s wishes.

∗ With a will, you die testate, you control how your estate will be distributed and who will administer your estate.

∗ It gives you control over how your estate will be disposed of after your death. For example, you can create a so-called Inheritance Asset Protection Trust for a spouse, children or other beneficiaries in the will.

Wills Disadvantage

∗ Does not avoid probate. But having a will dose not cause probate.

∗ Typically your will needs to be updated as your life situation changes.

Probate

∗ Probate is a court proceeding to supervise the orderly distribution of a decedent’s property to his or her creditors, heirs and beneficiaries.

∗ Advantages∗ Court supervision

∗ Disadvantages∗ Delay and inconvenience∗ Cost, and if you have assets in both the U.S. and the

Philippines probate can be very costly and time consuming to settle your estate

Testamentary Substitutes

Testamentary Substitutes Dispositions Are Not Controlled By Your Will, But Typically Are Part Of Your Taxable Estate.

Testamentary substitutes are not subject to probate. The more common testamentary substitutes;

∗ Trusts – which can also act as a will substitute∗ Life Insurance∗ Retirement plans and IRAs∗ Joint accounts and survivorship estates∗ Pay on death accounts (TOD)∗ Totten Trusts ( in trust for accounts)∗ Some buy-sell agreements

General Rule, Under U.S. Law You Can Leave Your Estate to Whomever You Want Subject to The Rights

of a Surviving Spouse.

∗ Under New York you can leave your estate to whomever you want, except that you must provide an elective share to your spouse which is the greater of $50,000 or one-third of your estate. Not so, under Philippine law.

∗ Net estate includes most Testamentary substitutes. Irrevocable disposition of assets before marriage are not Testamentary substitutes – not subject to a spousal right of election.

∗ Waiver of right of election or Pre-Nuptial Agreements.

Inheritance Law in The Philippines

∗ The Philippine Inheritance Law has three types of heirs - Voluntary Heirs, Compulsory or Force Heirs, and Legal or Intestate Heirs.∗ Under Philippine Law, Filipino citizens cannot freely dispose of their

property. One half of the estate is reserved for primary and secondary compulsory heirs. Put another way, compulsory heirs have to inherit part of the estate unless properly disinherited.

∗ A problem area, if the title to your house is in your Filipino spouse's name and she dies first, compulsory may inherit part ownership in the house with you.compulsory heirs that have to inherit part of the estate.

∗ A trust can be used to avoid this result.

The Good News, Foreign Wills and Trusts are Allowed in the Philippines

As a general rule, property owned by foreigners in the Philippines will be governed by the national or domiciliary laws of the their country – if they do a will or trust governed by the laws of their country.

The will of a foreigner that is proven and allowed in a foreign country, in accordance with the laws of that country, may be allowed, filed and recorded by the Philippine courts.

∗A copy of the will and the decree of allowance issued by the proper authorities in the foreign country, must be duly authenticated, and filed with a petition for allowance before the Philippine courts.∗The due execution of the will and the testamentary capacity of the decedent need to be proven again. After hearing, the Philippine court decides whether the will may be allowed in the Philippines.

Foreigners Can Make A Philippine Will

If a foreigner decides to make a notarial will in the Philippines, his/her presence in the Philippines is required.Need to follow the formalities under Philippine law to have a valid will.Better choice, create a Philippine trust to avoid probate wherever your assets are located in the world. The trust can hold assets located any place in the world - for example in the Philippines, U.S. England, etc.

Real PropertyPrivate land in Philippines cannot be owned by a non-Private land in Philippines cannot be owned by a non-

citizen.citizen.

∗Non-Filipino citizens, can inherit land by hereditary or Non-Filipino citizens, can inherit land by hereditary or intestate succession (without a will) but not by testamentary intestate succession (without a will) but not by testamentary succession (with a will)succession (with a will). The problem, heirs of the . The problem, heirs of the deceased spouse may inherit part of the property deceased spouse may inherit part of the property too.too.

∗Condominiums may be inherited by non-citizens through Condominiums may be inherited by non-citizens through testamentary or intestate successiontestamentary or intestate succession

Conjugal / Community Property

∗ Absent marriage settlements (pre-nups ) executed before marriage, property of both spouses from before and after the marriage becomes joint community property, except:-Property acquired before marriage by either spouse who had legitimate descendants from a prior marriage-Property acquired during marriage by gratuitous title-Property for personal and exclusive use of either spouse, except jewelry

∗ Spousal consent generally required to transfer or sell property.

Trusts are Effective Will Substitutes, Trusts are Effective Will Substitutes, Asset Management, and Asset Asset Management, and Asset

Protection ToolsProtection Tools

∗ A Trust is an arrangement whereby assets transferred to the trust are held, administered and distributed by the Trustee for the sole benefit of the person named as beneficiary of the Trust, which can be YOU.

∗ The three parties to a trust are the Grantor or Settlor, Trustee and Beneficiary. Under New York law and Philippine you can be all three. If you don't want to, you don't have to give up control over your assets. The only big change, the assets are held in the name of the trust, not yours.

Trusts

Why do most people do a trust?

∗ Avoid probate.∗ Asset management.∗ Asset protection from the three Ds – death,

divorce and disaster-for themselves or heirs.∗ Control after death.

Trusts

∗ Trusts can be divided into three categories.

∗ Self-settled trust, which is created by you and are either revocable or irrevocable

∗ Third-party trusts are generally irrevocable trusts

∗ A testamentary trust is a trust created by the last will and testament of a deceased person.

Trusts

∗ An Irrevocable Trust is typically created for estate planning and asset protection planning.

∗ For oneself or a third party.

∗ Irrevocable Trusts for oneself can be used to protect assets from the creditors, lawsuits, etc.

∗ An Irrevocable Trust for a child or grandchild can be designed to be an inheritance asset protection trust to protect them from the Three D’s.

Trusts

∗ Not all trusts are created equal.

∗ It is the drafting of the trust which distinguishes between a trust that works and a trust that doesn’t.

Important Trust Powers and ClausesImportant Trust Powers and Clauses

∗ In an irrevocable self-settled trust, important trust powers for the grantor to keep are the power to change trustees and power to change beneficiaries.

∗ Two important clauses in both self-settled irrevocable trusts and third-party trusts for asset protection are the spendthrift clause, and the discretionary distribution clause. Both clauses used together offer the greatest asset protection.

Asset Protection TrustAsset Protection Trust

*Asset Protection Trusts – can be used to protect:

∗ Your assets;

∗ An Inheritance Asset Protection Trust can protect heirs inheritances from creditors, ex-spouses, or other types of lawsuits.

∗ Protect heirs from themselves.

Trusts

∗ What can trust assets be invested in?

∗ Given the Trust Powers to do so, almost anything you can invest in.

IRAs – The Forgotten Asset.

∗ IRAs and Retirement plans are often overlooked as an estate planning asset.

∗ Annuities are an another common overlooked asset.

IRA After Death Distribution Rules Are Important To Understand

∗ How much must be distributed after death and when the distributions begin depend on whether the owner dies before or after the RBD

∗ Three possible options:

No designated beneficiary A non-spouse designated beneficiary A spouse designated beneficiary

Estate Planning For IRAs

∗ Before RBD∗ 5 Year Rule ∗ 1 Year Rule – Non - spouse designated Beneficiary∗ Spouse

∗ Can wait until decedent would have been 70 ½∗ Over the life of spouse – 1 Year Rule∗ Spouse can rollover IRA

∗ After RBD∗ At least as rapidly as under the method in effect before death∗ Over life expectancy of non – spouse designated beneficiary∗ Spouse can rollover IRA

It Is Important to Keep Your Designation of Beneficiary Form Up to

Date

As we age, often the beneficiaries of our estate change. It is important that as the beneficiaries of our estate change, we update our designated beneficiary selection

The problem of having named an ex-spouse, a deceased spouse or an ill spouse as a beneficiary.

You Need to Understand Who Can be a Designated Beneficiary

Only an individual or an individual who is a beneficiary of a Only an individual or an individual who is a beneficiary of a Qualified IRA Trust can be a designated beneficiary. Qualified IRA Trust can be a designated beneficiary.

Your estate or an entity can be a beneficiary, but it is not a Your estate or an entity can be a beneficiary, but it is not a designated beneficiary. General rule, it is bad planning to designated beneficiary. General rule, it is bad planning to name your estate as the beneficiary of your IRA, etc.name your estate as the beneficiary of your IRA, etc.

Your designated beneficiary is important if you want to Your designated beneficiary is important if you want to create a Stretched-Out-IRA, the gift that keeps on giving.create a Stretched-Out-IRA, the gift that keeps on giving.

The Stretched-Out IRA

Give a Tax Shelter Piggy Bank to Your HeirsGive a Tax Shelter Piggy Bank to Your Heirs

Minimum DistributionMinimum Distribution

The Power of the Stretched-Out IRA

Age IRA Factor Total Distributions

1 81.6 $8.8 million

7 75.8 $6.0 million

18 65 $3.0 million

22 61.1 $2.4 million

40 43.6 $857,071.00

54 30.5 $415,949.00

80 10.2 $157,958.00

Assume $100,000.00 was invested at 8%Assume $100,000.00 was invested at 8%

Why Use Separate Accounts for IRAs Why Use Separate Accounts for IRAs for Multiple IRA Beneficiariesfor Multiple IRA Beneficiaries

Oldest beneficiary rule.

The problem of naming an entity, such as your estate, as one of the beneficiaries of an IRA.

Using separate accounts avoids the oldest beneficiary rule.

Assume a $300,000 IRA is left equally ($100,000 each) to a child age 54 and two grand children age 18 and 22, invested at eight percent.

No separate accounts.

IR A Account's

$415,949 $415,949 $415,949

C hild G rand child 1 G rand child 2

The Stretched-Out IRAThe Stretched-Out IRA

Same assumptions, except the separate account method is used.

IR A Account's

$2,400,000$3,000,000

$415,949

C hild G rand child 1 G rand child 2

The The Stretched-Out IRA IRA

Why Name a Trust as a Beneficiary of an IRA?

Control and Asset Protection Control and Asset Protection Planning for the Trust Planning for the Trust

BeneficiaryBeneficiary

Benefits of Naming a Trust as Benefits of Naming a Trust as IRA BeneficiaryIRA Beneficiary

Spendthrift protection Creditor (asset) protection Divorce protection Funding special needs of a disabled child Estate planning “Dead-hand” control

Estate Taxes In United StatesEstate Taxes In United States

U.S. Unified Estate and Gift TaxesU.S. Unified Estate and Gift TaxesThe U.S. estate and generation-skipping transfer taxes for

2013 exemption amount (technically, the applicable exclusion amount) is $5.34 million (as indexed after 2011) and the top tax rate to 40%. The $5.34 million exemption is per person.

∗ Thus, there is a $10.68 million exemption for a married couple.

∗ There is also a portability feature that allows the unused portion of the deceased spouse exemption to be used by the surviving spouse.

∗ The gift tax is unified with the estate tax, with an applicable exclusion amount of $5.34 million and a top estate and gift tax rate 0f 40%

Generation-Skipping Transfer Tax Generation-Skipping Transfer Tax

The Generation-Skipping Transfer Tax (GST) exemption for decedents dying or gifts made is equal to the applicable exclusion amount for estate tax purposes (i.e., $5.34 million as indexed)

∗ Up to $5.34 million in GST tax exemption may be allocated to a trust created or funded during 2014.

∗ The GST tax rate for transfer made in 2014 is 40%.

∗ The GST exemption is not portable.

Marital Deductions Under U.S. Tax LawMarital Deductions Under U.S. Tax Law

∗ Transfers to U.S. citizen spouses during your lifetime or at death are fully gift or estate deductible (caution-need to think about the second estate)

∗ A non-U.S. citizen spouse’s martial deduction is limited to $145,000 in 2014 – Note this is only a problem if the decedent's estate exceeds $5.34 million in 2014

∗ For larger estates a QDOT is often used to defer U.S. estate taxes

U.S. Gift TaxesU.S. Gift Taxes

∗ Annual Gifting

∗ $14,000 per year to each beneficiary. Husband and wife may gift up to $28,000 per year to a single beneficiary. No limit for qualifying tuition and medical gifts.

∗ Gifts may be assets other than cash, such as stocks or real property.

∗ Basis carries over.

Estate Taxes In Philippines

Philippine Estate TaxPhilippine Estate Tax

∗ If Subject to Philippine estate taxes, what is Philippine estate tax payable on?

∗ Bank accounts, securities, IRAs and any other asset owned at death.

∗ Located anywhere in the world

Philippine Estate TaxesPhilippine Estate Taxes

The gross estate of a citizen or resident of the Philippines includes the value of all property, real or personal, tangible or intangible, wherever situated.

In the case of a nonresident decedent who at the time of his or her 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 or her Philippine taxable estate.

If you spend a few months during the winter in the Philippines, and go back to the U.S.-- your U.S. property is not subject to Philippines estate taxes. If you move here, that is a different story.

Philippines Estate TaxPhilippines Estate Tax

∗ The Philippine Estate Tax graduated rates range from 5-20%.

∗ Philippine net estates over PHP10 million are taxed at a flat 20% rate on assets located any place in the world, including the U.S.

∗ Yes, your U.S. estate may be subject to Philippine Estate Taxes if you are a resident of the Philippines.

∗ For example, assume your net U.S. and Philippine taxable estate is 1.25 million. You would pay no U.S. estate taxes due to the 5.34 million exemption, but your Philippine estate tax would be $230,375.

Rates of Philippine Estate Tax

OverOverBut NotBut Not

OverOverThe TaxThe TaxShall BeShall Be PlusPlus

Of theOf theExcessExcessOverOver

₧₧200,000 ExemptExempt

₧₧200,000200,000 550,000550,000 00 5%5% ₧₧200,000200,000500,000500,000 2,000,0002,000,000 ₧₧15,00015,000 8%8% 550,000550,000

2,000,0002,000,000 5,000,0005,000,000 135,000135,000 11%11% 2,000,0002,000,000

5,000,0005,000,000 10,000,00010,000,000 465,000465,000 15%15% 5,000,0005,000,000

10,000,00010,000,000 And OverAnd Over 1,215,0001,215,000 20%20% 10,000,00010,000,000

The Philippines standard deduction is one million pesos ($1,000,000.00)

The tax is based on the value of a net estate, as computed in accordance with the following schedule:

Donor’s(Gift) TaxDonor’s(Gift) Tax

∗ Graduated rates from 2-15% on amounts over PHP15 million

∗ If transfer is to a stranger (not within 4 degrees, in law are always strangers) transfer / donor’s tax is 30%

U.S. Citizens Living In The Philippines Need to Do U.S. Citizens Living In The Philippines Need to Do Estate PlanningEstate Planning

∗ Overlapping estate tax laws-Note there is no U.S. – Philippine Estate Tax Treaty

∗ Consider using a trust

∗ Possibly avoid succession issues inheritance/intestacy in the U.S. and the Philippines.

∗ Asset protection planning for heirs.∗ Make sure assets pass properly to the heirs you want them to pass to.∗ Need to plan to reduce or eliminate taxes.

First Step for Estate Planning with U.S. and First Step for Estate Planning with U.S. and Philippine Assets Philippine Assets

∗ If you are moving to the Philippines, you need to do estate planning to reduce potential Philippine estate taxes on your U.S. assets before you become a resident.

∗ If you want to marry a Filipina, you may want to do estate planning to avoid The Philippine Community Property Rules and The Force Heirship Rules.

∗ Most likely, a trust will be part of your estate plan.

Estate Tax Planning Estate Tax Planning

The U.S. Estate Tax Credit (often referred to as an exemption) for 2014 is 5.34 million per person, 10.68 million for a couple. The Philippine Standard Deduction is 1 million pesos.

∗One way is to look at it, The U.S. is a Tax Haven, when compared to the Philippines. Therefore one would want their estate subject to U.S estate taxes, not Philippines.∗If you don’t want to divest yourself of assets, you may want to create a trust, whose assets will be subject U.S. estate taxes, but not Philippine estate taxes.∗It appears that where a beneficiary’s interest in a trust is limited to income only interest, the trust assets would not be included in the income beneficiary’s taxable estate under Philippine Law. The trust assets would be included under U.S. estate tax law.∗An other possibility is a Income Defective Trust.

Summary of Tax IssuesSummary of Tax Issues

The United States and the Philippines subject their citizens to estate taxes on a world wide basis.

There is a U.S./Philippines Income Tax Treaty which eliminates many income tax issues, but there is no U.S./Philippines Estate Tax Treaty.

If you are a U.S. or Philippine citizen, property, wherever located in the world, is subject estate taxes.

The U.S. is becoming more aggressive in identifying foreign assets and taxing them. Who is to say the Philippines will not become more aggressive in collecting estate taxes on property outside the Philippines owned by citizens or residents of the Philippines.

WE CAN HELP

∗ IF you need help with your tax, estate, or retirement planning in the Philippines or elsewhere in the world, we can help.

∗ If are living in the Philippines or planning on retiring in the Philippines, let Dumaguete Retirement Consultans be you guide to a happy retirement.

∗ Email us at wolff2000@earthlink.net.

IRS Circular 230IRS Circular 230

Pursuant to Internal Revenue Service Circular 230, we Pursuant to Internal Revenue Service Circular 230, we hereby inform you that the advice set forth herein with hereby inform you that the advice set forth herein with respect to U.S. federal tax issues was not intended or written respect to U.S. federal tax issues was not intended or written by the law firm of Robert L. Wolff to be used, and cannot be by the law firm of Robert L. Wolff to be used, and cannot be used, by you or any taxpayer, for the purpose of (i) avoiding used, by you or any taxpayer, for the purpose of (i) avoiding any penalties that may be imposed on you or any other any penalties that may be imposed on you or any other person under the Internal Revenue Code or (ii) promoting, person under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek advice or matter addressed herein. Taxpayers should seek advice based on the taxpayer’s particular circumstances from an based on the taxpayer’s particular circumstances from an independent tax advisor.independent tax advisor.