An advisor to private wealth clients is familiar with “anticipated inheritance.” Every ten years, the usual allowances for spouses and children – via chain gifts also from grandparents to grandchildren can be used. What is less well known is that this inheritance tax ten-year rule can also be applied after death. This also multiplies the allowances and subsequent lower tax rates.
TEXT: JOHANNES FIALA
The trend towards assets abroad is still unbroken, not only because of discretion and banking and insurance secrecy. Better protection of privacy, but also the avoidance of cross-border reporting under the 2003/48/EC Savings Directive, favours investing in Austria, Luxembourg and Belgium.
INSURANCE WRAPPER:
Life insurance shells from Liechtenstein can be a good alternative, because assets held in custody there and the resulting income are not reported. If the investor transfers money or securities into an insurance shell, this is initially an individual asset management according to the customer’s wishes. The income from the capital is tax-free as long as the values remain “wrapped up” in the insurance. The investment is not subject to the strict conditions that apply to domestic life insurance policies.
ASSET-PROTECTION:
When advising wealthy private clients, there are four main reasons for holding a protected “iron reserve” abroad. Litigation, creditors and separation or divorce. The typical basic strategies for asset protection are derived from this. These include, in particular, the separation of personal and business risks, trusts and foundations, and special insurance policies.
SPECIAL FEATURES OF LIECHTENSTEIN LIFE INSURANCE:
Calling it a life insurance wrapper might suggest that something is just being “wrapped” here. However, ownership is transferred to the insurance company when the premiums are paid (in cash or securities) – an insurance benefit is then paid out later. A typical motive is, for example, in inheritance planning, when the aim is to protect the children from themselves.
The concern of parents is that a fortune will end up in the hands of their offspring too soon and too quickly – added to this is the fear that the children are not yet settled and will be in the wrong circles. Here, too, there may be an irresistible need for anonymity – alongside the possibility of more flexible legal arrangements.
TRANSPARENCY AND INCREASED EARNINGS:
A higher net performance compared to normal unit-linked life insurance policies results from the transparent cost structures – the customer usually knows how high the costs for conclusion (usually: zero to four percent) and set-up (usually: one percent) as well as ongoing administration (usually: 0.5 to 0.95 percent p.a.) are. Since there is no current income taxation, the tax return is simplified. There is no taxation at source and in many cases additional risk protection components can be built in. The free design of the investment strategy can be just as advantageous as the insurance secrecy as a safeguard for informal self-determination.
PRACTICE OF ASSET MANAGEMENT:
First, existing deposit assets are transferred to the insurance company. The customer can have a say in the selection of the asset manager and the bank: However, in order not to jeopardise recognition as a life insurance policy, the insurer should always determine the bank and the asset manager. Asset management can then be carried out in accordance with the client’s investment guidelines. The customer thus has “his” cover pool constructed himself, with securities of all kinds. The insurance company is the holder of the custody account and the cash account. The customer is entitled to the contractually agreed benefits from the insurance company.
TAX EXEMPTION OF THE CURRENT INCREASE IN VALUE:
As in the case of a German life insurance policy, the current capital gains in the insurance wrapper are not taxed – provided that no withdrawal is made – because the legal and economic owner is the insurance company, which is exempt from the current taxation of the capital gains. There is therefore no interest discount. Only when withdrawals are made after partial terminations is the value of the fund compared to the contributions paid in order to calculate the taxable quota. Only half of the proportional increase in value in relation to the actual withdrawal from the cover pool is then taxed at the personal tax rate.
age of consent act:
Income from capital-forming life insurance policies and unit-linked life insurance policies is generally subject to tax. However, in the case of contracts with a term of twelve years or more and a payout from the age of 60, “only” half of the income is subject to taxation. This shall apply mutatis mutandis to withdrawals from the insurance policy.
ESTATE-PLANNING:
Of much more interest to estate planning are the options of tax-free policy sales and income tax-free exits at death. When policies are sold, the speculation period comes into play, so that after a holding period of one year, a profit from the sale remains legally tax-free. Typical is the contractual arrangement with several policyholders, and a maturity only at the death of the last policyholder (last-death basis), so that the insurance contract is given a particularly long term from the outset. Partial terminations can be used to make the exit more flexible in terms of time.
ACCESS AND LIQUIDABILITY OF A WRAPPED CUSTODY ACCOUNT:
The terminability of the insurance cover depends on the agreements, which are often flexible. Problems due to lapse discounts, zillmerisation, low surrender values, market price adjustments or periods of notice of several years are excluded here. If losses are incurred, they can be included in personal income taxation. A policy sale can often be structured to be tax-free.
POSTMORTEM ALLOWANCE IN ESTATE PLANNING:
The maturity of the policy can be delayed by appointing several policyholders, which results in a foundation character and additional allowances can be used. In the case of inheritance, the heirs can only use their personal allowance once, §14 ErbStG.
The available liquid assets are then taxable. As is well known, the tax-free allowances are available again and in full every ten years through repeated gifts among living persons. This can be done repeatedly every ten years after the death of the testator. The prerequisite is that the claim is not or will not become due at the time of death.
The lawyer is talking about an aged claim here. The decisive point in the design is that the deceased is not appointed as the insured person – because then the death would lead to maturity. It is therefore usual for the future heir or legatee to be appointed as the insured person from the outset and, in addition, for it to be contractually agreed that, in the event of death, the insured person will continue the contract as the new policyholder.
For tax purposes, §9 I No. 1a ErbStG then applies, according to which “claims subject to a condition precedent or aged” are not considered to be immediately taxable. If the design is such that there is no maturity or still (partially) cancellable policy until ten years after death, the allowances are available in full to the beneficiaries. The longest possible term and the use of several policyholders are the design approach.
In this way, the inheritance tax burden can be reduced to “zero” in individual cases. The crucial detail is that inheritance tax and income tax are generally mutually exclusive. The (partial) maturity every ten years can be regulated from the outset. In the case of partial terminations, in each case not before the expiry of ten years, the tax-free allowances and often more favourable tax rates are available again. In the case of subsequent taxation, it should be noted that increases in value are also subject to inheritance tax.
Johannes Fiala, Attorney at Law Mediator De-la-Paz-Strasse 37, 80639 Munich Phone 089/17 90 90-0, Fax 089/17 90 90-70 E-mail: info@fiala.de
(finest.finance! 2/2007, 86)
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Courtesy of www.finestfinance.com.
Link: https://www.yumpu.com/de/document/view/8348822/postmortaler-freibetrag-dr-johannes-fiala
