Five common pitfalls in estate planning
Learning from the mistakes of others can help us do a better job at leaving a legacy for the people we care about.
Who doesn’t want to leave their loved ones happy when the grim reaper calls?
Our legacy is the only thing that will comfort those we leave behind. And part of that legacy is our estate, which, if we plan well, will benefit our loved ones according to our wishes.
Wanda Beltran, Metrobank’s Head of Account Management, who’s been taking care of the financial affairs of many shrewd and hard-to-please high-net-worth individuals, lists some common pitfalls.
1. Focus on the beneficiary and tax.
There’s just no way to escape taxes even when we pass on. And because we don’t want to pay more than we must, some of us may seek to avoid taxes, especially since we want our beneficiaries to get more from our estate.
Beltran said that some people do fall into this trap by transferring ownership of their assets to their beneficiaries too soon. One manifestation of this is when business owners decide to convey most of their shares to the next generation, thinking that their children will continue to honor them as the heads of their companies.
“That may not always be the case. There is nothing that will stop the children–who are now majority owners of the company–from booting out their parents if they want to,” said Beltran.
Another example is when parents buy properties and put them under the names of their children.
“But what if the children marry and the marriages don’t work out?” said Beltran. “It would have been better if the property was given after the children got married, because the property would be theirs even if their marriages failed.”
2. Focus on death.
Others focus on death, such that they only want their assets to be transferred when they die. Perhaps they subscribe to this improvident idea that what happens after they are gone is of no consequence to them.
After all, they won’t be around to witness the repercussions of their action or inaction.
There are certainly those who find it hard to let go. And with the TRAIN (Tax Reform for Acceleration and Inclusion) law now setting both the estate and donor’s tax at 6 percent, it may seem that there is no benefit to transferring assets within one’s lifetime.
What people fail to realize is that paying 6 percent for donor’s tax today is better than paying a 6-percent estate tax for property that would likely have gone up in value, such as real estate.
“Now for those who don’t care, they only need to read about the horror stories involving the dissipation of estates due to litigious family disputes,” she said.
3. Failure to consider present needs.
Sometimes we opt for what is convenient rather than what is appropriate. Beltran cited as an example the practice of using the “or” for certain joint bank accounts.
What if the person who put in most of the money gets sick or suffers from a stroke? The other joint account holder will be able to get all the money easily. When the patient wakes up, he is left with an empty bank account.
“It’s sad that people don’t think of their present needs without considering the risks,” said Beltran.
4. No further accumulation of wealth.
“If you plan to leave something behind to your heirs, shouldn’t you be concerned about the proper management of these assets?” asked Beltran.
Take the case of the husband who left a huge sum of money to his wife when he passed away, owing to a generous insurance policy. But then the wife had zero knowledge of investment. Soon the money was all gone, and nothing was left even for the education of the children.
If the family has no expectation of accumulating wealth or having a reliable income stream, there has got to be some plan to manage the assets.
5. Resort to tax evasion schemes.
There is a need to stamp out this mindset of tax evasion among some people. Perhaps it was because estate taxes were once as high as 15 percent. If you had a PHP 50-million estate, that would have been PHP 7.5 million in estate tax.
“Recently, however, people have become more compliant and law-abiding because of the TRAIN law,” said Beltran.
Knowing these pitfalls when planning for your estate is one thing; doing something about them is another.
If you want to do estate planning right, talk to your financial services provider, and start that conversation.
ANTHONY O. ALCANTARA is the editor-in-chief of Wealth Insights. He has over 20 years of experience in corporate communications and has a master’s degree in technology management from the University of the Philippines. When not at work, he goes out on epic adventures with his family, practices Aikido, and sings in a church choir.
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Things to ponder on before your retirement
How financially prepared are you for retirement? Here is a list of things you may want to consider to ensure a smooth transition into retirement.
There are people who retire, only to come out of retirement in a few months or years. When asked for the reason, some will say they got bored or they miss the challenge. Unfortunately, a good number will say the reason is financial in nature. Yet, not all will have the luxury of having access to a job anytime he or she wants — that is why we really need to prepare for our retirement.
Preparing for retirement is no easy task, and I would say it is more of an art rather than a science. What will work for one person might not necessarily be true for another.
I have observed that individuals normally procrastinate on this matter, saying “I’m too young to be planning for retirement” and preferring to enjoy life as it goes on. There’s nothing wrong with enjoying our careers, but we must bear in mind that retirement is not always our choice, especially under the situation we are currently in. I myself will be retiring in eight years, and I have been spending a good amount of my free time asking myself if I will be ready by then.
How prepared are you?
Being prepared for retirement largely involves financial preparedness. A big part of financial preparedness will be a function of your chosen lifestyle, the timing of your retirement, and your health condition when you retire. Your chosen lifestyle and time of retirement are both within your control, while health conditions can potentially alter your preparedness. For instance, there are cases where the retirement money was completely wiped out because of medical expenses.
How, then, will you assess your preparedness for retirement? Asking yourself the following questions can help you gauge if you are almost ready: Will I have an outstanding mortgage that I will need to amortize after my retirement? Will my kids be done with their education by then, or will they take up further studies? What is the minimum amount I will need to cover my day-to-day expenses? (You have to factor in inflation for that).
Moreover, ask yourself how much retirement money you will get and what will be the interest rate at that time. Gone are the days when we can live on interest. You should also figure out if you have enough insurance coverage, and whether you have passive income other than your SSS pension.
In addition, check on your health and determine whether you have medical coverage after retirement. Determine as well your estimated life expectancy.
To further assess your financial preparedness, imagine how your life will be if you retire. If your concern will be what to do with your idle time rather than how you will deal with the basic necessities (e.g., paying bills), then you are likely prepared. The ‘idle time’ concern can be easily addressed as long as you have financial security, while the latter concern will be a bigger problem because it will cause you anxiety.
While financial preparedness will be a more pressing concern for those nearing their retirement, those who are still far from retirement should also consider this. Regardless of how long you’ve been in your career, you should realize that you would retire at some point. You will not be working forever. The sooner you realize this, the earlier you can prepare for your eventual retirement.
Preparation for starters
Retirement can be either a personal or a mandatory choice. Ideally, we prepare for it as early as we can. But, in reality, there are a good number of us who are very close to retirement age who have not given it much thought.
If this is your situation, you have to start somewhere. For starters, you should have a clear idea of your estimated years of work before retirement. Then, you have to determine if you will be eligible for retirement pay.
If you have been switching jobs, there is a high chance that you will not be getting substantial retirement pay. So, you’ll just have to rely on whatever savings you have through the years.
Once you have determined your remaining work years and eligibility for retirement pay, you have to consult financial experts. Set up a meeting with your trusted banker or financial advisor, and have an honest-to-goodness conversation on how they can help you manage and grow your existing savings and retirement pay.
In addition, you can consider setting up your own business, as this is another alternative source of passive income; but you need to ensure you have a solid business model. It is also advisable not to put your entire retirement money at risk.
Financial tools will always be there to help you plan your retirement, but it will all boil down to how much you can set aside on a monthly basis. Depending on the amount you have saved and your risk appetite, you can choose to invest in time deposit/unit investment trust fund, equities, property, and insurance with medical coverage, to name a few.
Of course, to begin with, you should make sure you have funds to invest. Then, you have to ensure you have a good understanding of the financial products out there.
In case you are not yet fully aware of these tools, it is never too late to reach out to your banker or financial advisor who will be more than willing to share their knowledge with you. Financial advisors can help tailor-fit solutions to cater to your specific requirement. Make sure you give time for open conversation with them on where you are in your retirement plan.
Metrobank can help you with these specific needs. We have highly trained investment specialists who can recommend products based on your need. You can also be referred to our Trust Banking services or our partner AXA Insurance for insurance-related solutions.
ROMMEL ENRICO C. DIONISIO The author has more than 20 years of banking experience particularly in Corporate Banking and Treasury/Markets. He is a B.S. Management Graduate from Ateneo De Manila University and earned his Post Graduate Degree from Asian Institute of Management.
This opinion article is part of Metrobank’s Financial Education campaign series.
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The Pursuit of HappyNEST
Preparing the next generation for the family’s wealth can be a difficult balancing act. Find out what you can do to make it easier.
Wealth management and preservation for the ultra-high-net-worth (UNHW) is a daunting task which goes beyond financial management. More importantly, it involves the perpetuation of the family legacy. This is why it is equally important to ensure the general well-being of family members across generations.
UHNW families have various business interests and own substantial assets locally and offshore. With multiple sources of income, they have complex needs and face numerous concerns that need to be managed well. First among these is BUSINESS — the setting up of strategic vision & direction as well as day-to-day business demands. Second is management of financial and & real ASSETS, owned individually and by the family. Third is FAMILY MANAGEMENT.
The first generation is usually focused on business and asset management because wrong decisions could result to huge financial losses. For this reason, they engage the best consultants in the industry to deploy or reallocate assets to the next most promising venture, talk to their bankers about loans and investments to maximize business profits and optimize portfolio returns.
What about Family Management? How important is this for the UHNW?
Many among us are familiar with numerous celebrated “Family Feuds” that have turned mean and ugly that has led to costly legal tussles over control of business and assets which sadly ends up in the tragic breakdown of family relationships. Surely, this goes against the long-term vision of the wealth creator for the clan.
This leads us to the main thesis of this piece:
“That breakdown of the family system is the single biggest destroyer of wealth and the one true source of unhappiness among the affluent. Wealth is not meant to destroy family relationships, it is meant to forge it.”
Pinoys are generally known to be ultra family-centric. Parents look to accumulate wealth over and beyond what they need because it is critical to leave something substantial to the children. However, only a few believe that their children are prepared to handle a huge inheritance and even fewer have revealed their actual wealth to their heirs. Most Filipino families have weak successor training and very restricted information sharing.
Why is this so? Why are Filipino families not actively addressing this area of concern?
Parents are rightfully concerned that knowledge of wealth may affect their child’s values, work ethic and security. And while they truly believe that the family would benefit from developing a formal set of principles to guide the purpose and meaning of their wealth, only a selected few have actually done so. Why? Perhaps because crafting a family vision is a long and tedious process that involves commitment from all family members.
Filipinos are innately family-centric. I often see this in parents who look to accumulate wealth over and beyond what they need because it is critical for them to leave something substantial to the children. Only a few of them, however, believe that their children are prepared to handle a huge inheritance, and even fewer have revealed their actual wealth to their heirs.
This is where trusted advisors come in. Usually, there is a need for an objective third party to fully unearth and understand interpersonal relationships, historical conflicts and other family needs. There are multiple providers & products available that help address specific areas of Family Management. Metrobank is well-placed to partner with independent counsellors who are experts in Family Education & Governance.
For us, the state of “health” of our families is as important as the weather-proof portfolios that we build for them. In order to ensure the family’s well-being over time, these are some things that the first generation can reflect on:
- How are the children being prepared to handle bigger responsibilities?
- Are succession lines clear and defined?
- How will the perpetuation of the family legacy be ensured?
- Is there a STEWARDSHIP mindset in the family, or just consumption?
- Is there an effective conflict resolution process in place?
At Metrobank, we encourage clients to think about both Family Management & Portfolio Management because each family is unique and there is no one-size-fits-all solution for a successful wealth transfer strategy in the pursuit of a happy nest.
LIZETTE PEREZ is Head of the Private Wealth Division of Metrobank and has over 20 years experience in Private Banking. She is a B.S. Business Economics graduate of the University of the Philippines and earned her master’s degree in Economics at the University of Southern California.
This opinion article is part of Metrobank’s Financial Education campaign series.