Why Estate Planning
By Cathy Manahan
“Life is like a box of chocolates. You’ll
never know what you gonna get!” So goes a
line from the movie, “FORREST GUMP.”
However, this does not certainly hold true for those
who plan their estate ahead of time and figure out
early in life its distribution, i.e., ( i ) what
properties, ( ii ) how much, ( iii) what cost and
( iv ) who shall receive those properties.
Estate Planning is the process of building, conserving
and transferring a person’s assets or wealth
so as to limit or avoid legal and financial complications,
excessive professional fees and expenses, but most
of all, taxes, after a person’s death. It’s
core objective is to conserve a person’s estate
from diminution on account of taxes.
When we speak of wealth, this does not necessarily
refer to millions in cash, but, possibly to properties
or assets which a person owns or to any amount of
money which is in excess of his basic needs and
is therefore not required for his personal or family
expenditure.
Statistics in the 1990’s show that the richest
20% of the Filipino population hold 56% of the national
income. This is one segment of our society that
will definitely find this topic quite relevant.
One may ask, “Why is estate planning necessary?”
First and foremost, it is critical in order to ensure
that your spouse and children will have sufficient
income after your death to sustain their lifestyle.
Throughout your lifetime, you tend to accumulate
so much wealth that when it hits more than P 200,000.00
to more than P 10 million, you could now be liable
to an estate tax with rates of 5% to 20% of your
net estate upon death.
Secondly, you will need to limit the estate tax
liability upon your death; thirdly, you have to
ensure that there is enough cash available to settle
such liability and fourthly, you need to protect
your assets from creditors.
Estate tax is virtually an unknown subject to
a grieving Filipino folk whose uppermost concern
during a period of bereavement is to provide a decent
burial to a departed loved one and to complete the
nine to 40 days novena for the dead.
This issue surfaces several years later and suddenly
becomes relevant when the surviving spouse and children
or other legal heirs decide to dispose of some real
properties left by the deceased and, lo and behold,
the same being still titled in the name of the deceased,
can not be transferred or sold until an estate tax
clearance is secured from the Bureau of Internal
Revenue (BIR).
In addition, a legal instrument of partition becomes
also necessary to allocate these properties among
the surviving heirs. At this point, fines, surcharge
and interest penalties for late filing of estate
tax return and payment of estate tax can turn pretty
horrific!
Thus, previous programs of the BIR for administrative
compromise settlement by delinquent taxpayers such
as the Voluntary Assessment Program (VAP), Voluntary
Assessment and Abatement Program (VAAP), have included
estate tax among the list of internal revenue taxes
qualified to avail of these programs.
What does estate planning entail? It can generally
cover four aspects: drafting your will; setting
up a trust; restructuring your assets; and review
of insurance policy beneficiary nomination.
Preparatory to the foregoing, some preliminary
spring cleaning can be done in order to prepare
the database required for this exercise.
First, keep good records by breaking down your
assets into the following categories: real estate;
retirement plans; savings/checking/other bank accounts;
interests in business and partnerships; insurance
policies; personal properties; and debts.
Second, create an index tab for each category
for easier information retrieval.
Third, create five tabs labeled as follows: personal
information; people to call; where to find it; funeral
instructions and miscellaneous.
Once you have set up this database, then, you
can proceed with the execution of any of the four
strategies earlier mentioned. Take note that your
estate inventory taking is an ongoing task as you
continue to accumulate wealth in life. Thus, your
record keeping must continually be updated.
The first two strategies, i.e. will and trust,
are basically transferring tools which define what
properties and to whom will such properties be assigned.
The last two ones are conserving mechanisms with
the aim of minimizing the tax bite that may be due
on the transfer of said properties.
We shall examine the general features of four
estate planning strategies.
A will (either holographic or notarial), is a
written instruction by a person (“testator”)
concerning the disposition of his properties after
his death. A holographic will is entirely written,
signed and dated by the testator himself subject
to no particular legal form, may be made in or outside
the Philippines and need not be witnessed. A notarial
will, on the other hand, subscribes to a legal form
which requires it to be personally subscribed and
attested to by at least three or more credible witnesses,
in addition to the testator himself, in the presence
of each other, and to be acknowledged before a notary
public.
A will is also known as a testamentary trust.
Since the disposition and distribution of the testator’s
properties take effect after death, the will does
not operate to exclude these properties from the
coverage of estate tax. Neither is there any income
or transfer tax consequence upon its execution except
for a minimum documentary stamp tax (DST) on its
acknowledgment portion.
A trust is a legal entity that is used to hold
legal title to property for the benefit of one or
more persons. The person creating the trust is the
Grantor or Trust Creator; the person or institution
holding the legal title to property is the Trustee;
and the persons to benefit from the trust are the
Beneficiaries. This tool is very effective in managing
and controlling assets of minor as well as problematic
children, preserving the indivisibility of assets,
pegging the future growth in the value of the estate
and thereby minimizing estate tax exposure, and
protecting the assets from sequestration. This is
a living trust as contrasted to the testamentary
trust or will. Under this strategy, a donor’s
tax is applicable upon the execution of the trust
instrument that will transfer properties of the
grantor to the trustee in favor of the beneficiaries.
There are several types of living trusts which will
have various tax consequences depending on their
features and objectives.
Restructuring assets can cover the conversion
of real properties into shares of stock via the
tax-free exchange of assets with shares of stock
under Sec. 40(c)(2) of the National Internal Revenue
Code as amended. This can take place either by increasing
the authorized capital stock of an existing family
firm or incorporating a new one (i.e. Newco) via
a deed of exchange of properties for shares. These
properties are either invested in the Newco as initial
capital or additionally subscribed as capital to
the old firm in exchange for a controlling shareholder’s
interest of at least 51% of the total voting stock.
The transferability of shares of stock for estate
planning purposes could be more tax efficient than
fixed assets, e.g. land, with a lower tax rate of
5% if net capital gain does not exceed P 100,000.00
or 10% if in excess of P 100,000.00, versus a 6%
capital gains tax based on gross value of real property
which is a capital asset. These shares of stock
may also be donated or given as a gift directly
or indirectly on a staggered basis, utilizing the
tax exemption ceiling of one P 100,000.00 thus,
not having to pay donor’s tax nor DST on this
transfer.
Finally, a review of the beneficiary nomination
in the insurance policy is material to exclude the
proceeds of such policy from the gross estate of
the deceased that will be subject to estate tax.
If the beneficiary is the estate of the insured,
his executor or administrator, for example, or the
insurance proceeds are available for payment of
taxes, debts or charges on the insured’s estate,
then such proceeds are includible in the gross estate
of the insured.
Any exercise of incidents of ownership such as
the power to change beneficiary, to cancel, surrender,
pledge or borrow against the insurance policy by
the insured will not take its proceeds out of the
ambit of estate taxation. Thus, for estate tax savings,
the beneficiaries of the insurance policies and
even that of the living trust must be designated
irrevocably, among others. There are many packaged
insurance products, like annuity insurance package,
life insurance trust, etc., that are quite useful
in estate conservation.
Other complimentary tools of estate planning are
powers of attorney, prenuptial agreements, donation
propter nuptias, inter vivos transfers, and foundations.
Ultimately, cost and tax efficiency underlie all
these measures, leading towards the building, conservation
and disposition of the estate. Thus, the most important
question to ask is, “When is the right time
to start?” The big, resounding answer is “Now!”
______________________________
Reprinted from Business World, Taxwise or
Otherwise Column, January 15, 2004.
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PERA: A step towards pension
reform
By Romeo L. Bernardo
Opposition to the Personal Equity Retirement Account
(PERA) bills in the Finance department and among
some members of Congress appears to stem from fears
that the favorable tax treatment accorded these
accounts would reduce government revenues at a time
when government is working overtime to legislate
new taxes. First of all, the argument goes, tax
deductibility of contributions will reduce the personal
income tax base. Secondly, in all likelihood, there
will be no “new” savings. Rather, funds
will merely migrate from taxable accounts where
they are currently held, to PERA products where
they will be tax-exempt (or deferred).
These arguments are not unreasonable. The tax
exemptions are after all, key features of the bills.
The PERA is also entirely voluntary and chances
are, prospective contributors have already formed
the habit of saving and are simply seeking higher
net returns on their savings. Nonetheless, judging
PERA by the amount of taxes it deprives government
today is myopic.
To appreciate the significance of the PERA bills,
one should focus instead on the potential contribution
of PERA to long-term fiscal sustainability and capital
market development. The way I see it, PERA is a
first step to harmonized financial regulation and
pension reform, both necessary conditions for capital
market development. Pension reform, particularly
containment of unfunded pension liabilities, is
likewise critical for long-term fiscal stability.
How can PERA lead to harmonization of tax and
regulatory regime? As envisioned, funds contributed
into PERA may be invested in a host of savings instruments,
including stocks, bonds, mutual funds, bank deposit
products, etc., which ideally should receive similar
tax treatments so that investment decisions are
not made on the basis of differential taxation.
It is also expected that different financial institutions
(e.g., banks, insurance companies, investment houses,
mutual funds), supervised by different regulatory
institutions (i.e., the Bangko Sentral, Insurance
Commission, SEC), will be offering PERA products;
thus the need to define a single product jointly
and uniformly regulated by the three. Only with
a sound regulatory framework, including equal application
of tax and accounting standards, can another pre-need
fiasco be avoided ( in this case, it will take even
longer – over 40 years from work-age to retirement
versus 16 years for educational plans – to
discover any anomalies) and confidence in PERA be
engendered.
The PERA also serves as a pilot test for the mandatory
defined contribution pillar of a multi-pillar pension
architecture.
Under the proposed architecture, the defined benefit
second pillar, currently consisting mainly of the
pension programs of the Social Security System (SSS)
and the Government Service Insurance System (GSIS)
will be downsized while a mandatory defined contribution
third pillar will be established to supplement retirement
income provided under the second pillar. The third
pillar will essentially be an enlarged PERA system.
Mandating it puts the burden of prudent regulation
on government, which will have the opportunity to
learn the “tricks of the trade” during
this test period and work on strengthening oversight.
Successful reform of the pension system is important
from both capital market development and fiscal
sustainability perspectives.
As it is, the pension institutions, particularly
SSS (not to mention RSBS!), are financially sapped
and are at risk of becoming net takers instead of
providers of funds to the capital market.
In fact, based on actuarial studies made in 1999,
the SSS is projected to start drawing down its reserves
as early as 2008, with its reserve fund running
out by 2015. If nothing is done to stop the bleeding,
the National Government would eventually have to
step in to fulfill its guarantee of the pension
obligations.
In 1999, the implicit public debt (the cost of
accumulated pension obligations) associated with
the SSS (based on a status quo on current policies,
especially the level of contribution rate and benefit
entitlements) was estimated at P 1.5 trillion (about
50% of GDP) and must be significantly higher by
now. This very real fiscal risk should override
any concern over short-term tax losses.
At the end of the day, the truly binding constraint
to Philippine capital market development has been
and will be the paucity of available long-term savings
and savers.
A fully functioning third pillar will help build
up domestic savings needed to broaden and deepen
the local capital market, providing savers with
more investment choices and firms with access to
long-term peso-denominated financing. That is the
long-term vision. PERA takes us one step closer.
The proposed multi-pillar pension architecture
considered by the World Bank’s “Averting
the Old Age Crisis” as international best
practice consists of: a redistributive social assistance
first pillar, a mandatory defined benefit second
pillar, a mandatory defined contribution third pillar,
and a voluntary private pension fourth pillar.
______________________________
Reprinted from Business World, The Financial
Executive Column, April 15-16, 2005.
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Financial Planning Prepares
You For Life
By Larissa Josephine C. Vila
Risk and uncertainties are part of life’s
great adventure. They are built into the workings
of the universe, waiting to happen. So the question
is: Are you ready for life?
There is probably no area in life that we spend
more time thinking, worrying, planning, working
for, counting, allocating, budgeting, paying bills,
investing, borrowing and spending than in our individual,
family and business finances. Yet while most Filipinos
dream of financial independence, only a few actually
achieve it. What have they done differently? In
most cases, they saved faithfully, lived within
their means, invested wisely, and in the majority
of cases worked 20 to 40 years developing their
career and accumulating financial resources. Overnight
success is popularized in the daily press, although
the reality for most achievers is that it took many,
many years to develop, with several challenges and
disappointments along the way. They key seems to
be persistence, consistency, conservative spending
and a targeted realistic growth plan that is built
upon and nurtured, one day at a time.
Yes, a plan. While life is full of surprises and
uncertainties, a plan will minimize the shocks,
double the blessings, and prepare you for more of
them. No matter what one’s net worth is, a
financial plan, when implemented, will give you
and your loved ones financial security and protection.
Financial planning is the process of meeting one’s
life goals through the proper management of finances.
Life goals, which usually involve necessities of
life, can include buying a home, saving for a child’s
education, planning for retirement or estate planning.
Undoubtedly, financial planning provides direction
and meaning to one’s financial decisions.
It allows anyone to understand how each financial
decision affects other areas of his finances.
A financial plan summarizes one’s earnings,
expenses and what will be done with the excess,
or the savings. But even before the plan, it is
necessary to first identify one’s needs. By
doing a “needs analysis”, not only is
one able to budget his finances, but also prioritize
his needs and see where his earnings can take him.
As most people go through broadly predictable
stages of development in their adult lives –
from young adulthood to building a family, reaching
the peak of a career, and retirement – their
financial goals and needs also change.
It is easy to identify what one needs in each
stage of his life. Education, health, protection
and retirement are the primary considerations. What
makes it tough is the struggle to have these needs
while dodging the blows of life – thus, the
need for a plan that will provide for these necessities
and even allow one to have more in the future.
Unfortunately, many Filipinos have yet to discover
the benefits of financial planning. Filipinos have
to learn more about finance management, overseas
Filipino workers especially. It has been found out
that many OFWs come back and use all their savings
for consumption. That is why they are being encouraged
to save more of their funds for the rainy days.
It is true that the journey to financial security
is not a smooth one. But the right preparation should
take you from where you are now to where you want
to be in the future.
Setting goals and objectives is the first step
of any financial planning process. If you do not
know where you are going, how can you know when
you get there, or even decide which route to take?
Setting goals and objectives should lead to a sound
financial plan. Keep in mind also that heading in
a general direction will not guarantee success in
reaching your final destination.
Then, you have to re-evaluate your financial situation
periodically, since financial goals may change over
the years due to changes in lifestyle or circumstances,
such as an inheritance, marriage, or change of job
status. Financial planners advise that you revisit
and revise your financial plan as time goes by to
reflect these changes so that you stay on track
with your short and long term goals.
Third, be realistic in your expectations. Financial
planning is a common sense approach to managing
your finances to reach your life goals. It cannot
change your situation overnight; it is a lifelong
process. Remember that events beyond your control,
such as inflation or changes in the stock market
or interest rates, will affect your financial planning
results.
Another step to make financial planning work is
to realize that you are in charge. If you are working
with a financial planner, be sure you understand
the financial planning process and what the planner
should be doing. Provide the planner with all the
relevant information on your financial situation.
And finally, it is always better to start planning
as soon as you can. Do not delay financial planning.
People who save or invest small amounts of money
early often tend to do better than those who wait
until later in life. In the same way, by developing
good financial planning habits such as saving, budgeting,
investing and regularly reviewing your finances
early in life, you will be better prepared to meet
life changes and handle emergencies.
With the help of some personal finance software
packages or self-help books, one can actually do
his own financial planning. However, in many instances,
a professional financial planner is needed. If you
need expertise you don’t possess in certain
areas of your finances, or if you have an immediate
need or unexpected life event – a professional
financial planner is simply the answer. And in choosing
your financial planner, one sound advice tops everything
else: get somebody to trust.
______________________________
Reprinted from BusinessWorld 58th Year Anniversary
Supplement of Philam Life.
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Lessons Bro. Andrew Taught
Us
By Ma. Lourdes S. Bautista
Professor Emeritus
De La Salle University-Manila
Now that Br. Andrew Gonzalez has left us, and we
indeed grieve the loss of him, we also find consolation
in remembering the lessons we all learned from him,
educational manager par excellence.
Br. Andrew served as President of De La Salle
University for a total of 16 years. During that
period of time, he trained countless administrators
on educational management principles and practice.
As University President, he was in a unique position
to institutionalize research in DLSU by putting
in place the infrastructure and sources of funding
for the implementation of research projects. The
establishment of the University Research Coordination
Office and the various research centers in the different
colleges, and the strengthening of the University
journals and the publication of the different college
journals were done at his initiative. His view was
that it is difficult enough for a full-time teacher
to do research without having to worry about looking
for the funds and the administrative support for
it and the journals in which to publish, and therefore
administration must help that researcher as much
as possible. His fundraising skills were at their
most formidable when he tried to get funding for
endowments and professorial chairs in support of
research.
In addition to promoting research, Br. Andrew
promoted efficient management. At workshops he gave
administrators, he reminded them of St. La Salles’s
dictum that a La Salle school should be well managed.
Of great importance to him, therefore, was choosing
the right middlelevel administrators. To him, two
necessary but not sufficient requirements for such
administrators were common sense and a sense of
self-assurance. Regarding the first, he would cite
lawsuits that the University faced and sometimes
lost because a department chair had not exercised
sound judgment or had not sought wise counsel. Regarding
the second, he would say, “Never choose a
department chair who will be threatened by excellence.”
If a chair is insecure or lacks self-confidence,
he or she will not recruit the best people for the
department and will stand in the way of people who
are brighter or who have more initiative.
One measure of competent administrators, to Br.
Andrew, was their ability to recruit quality persons
to join the school. Except when times were hard
and the University faced a financial crisis, he
insisted on over-recruitment. “Recruit, recruit,
recruit” was his mantra, understandably so,
since people retire or migrate or get better offers
and therefore a university cannot afford to have
a shallow bench. He was happiest when a Ph.D., preferably
above 35, preferably married, joined the staff because
he believed that that faculty member would be stable
and would focus on research and would likely be
happy at De La Salle. And this was also one reason
why he encouraged administrators and faculty to
attend national and international conferences: to
scout for talent. If the conference was worth their
time because of the quality of the discussion, so
much the better. The important thing was for administrators
and faculty to meet people in the discipline and
get a feel of trends in the field and encounter
the promising talent that could be recruited or
developed
Yet another item on his scorecard was whether
administrators were able to solve a problem at their
level so that the problem did not have to go up
to higher management. Some problems, of necessity,
would have to percolate to the top, but as a matter
of course, most problems should be solved within
the concerned.
One of Br. Andrew’s greatest strengths was
that he knew his people. Talk about an opening for
a position and he could identify the person to do
the job. Talk about a project and he could slot
in the right people right away. As a general rule,
he knew the discipline and the university where
faculty members obtained their advanced degrees;
he might even know the topic they did their thesis
or dissertation on.
Br. Andrew constantly mentioned a rule that he
believed in but sometimes could not observe: An
administrator should stay in a position for at least
three years to provide continuity for priorities
and projects and be able to have some impact on
the office. Thus, to him, if a person would be moving
on to something else after just a year or so, that
person would not be a good candidate for an administrative
position. However, the three-year rule to him was
not inviolable: If in the course of time it should
turn out the appointment was a mistake, as perceived
on either or both sides, Br. Andrew was the first
to cut and cut cleanly.
Many faculty members become administrators in
universities by happenstance. Trained as academics,
they are then tapped to head an office or department
or college. Faculty members are drafted into administration
and have to learn the ropes while on the job. Knowing
this, Br. Andrew, starting in the midnineties, asked
his top and middle-level administrators to identify
their understudies. The goal is for mentoring to
take place, up close and personal. And thus the
stage is set for succession.
Br. Andrew the educational manager was an exemplary
mentor. As practiced by Br. Andrew, Educational
Management 101 consisted of a handful of simple
but important principles:
1) push research; 2) provide the infrastructure
and the incentives for research; 3) help young academics
finish advanced degrees; 4) get senior researchers
to work with junior researchers for transfer of
knowledge and training; 5) make sure a school is
well managed; 6)choose administrators with common
sense and good judgment; 7) never choose administrators
who are threatened by excellence; 8) recruit, recruit,
recruit; 9) know your people; and 10) prepare for
succession.
Br. Andrew has faded from the scene, but he has
trained a generation of educational managers who
will talk his talk and walk his walk. If they have
learned their lessons well, they will manage the
way Br. Andrew managed DLSU in his time, efficiently
and wisely. It is a tremendous legacy indeed.
______________________________
Reprinted from Manila Bulletin: Views/Comments/Features
dated February 4, 2006.
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What You Should Know About
Mutual Funds
A mutual fund is an investment company that pools
the funds of many individual and institutional investors
to form a massive asset base. The assets are then
entrusted to a full-time professional manager who
develops and maintains a diversified portfolio of
security investments.
People who buy shares of a mutual fund are, technically,
its owners or shareholders. Their purchases provide
the money for a mutual fund to buy securities such
as stocks and bonds. A mutual fund can make money
from its securities investments in two ways: a security
can pay dividends and interest to the fund, or a
security can rise in value. The fund passes any
dividends, interests or profits on the sale of its
portfolio securities, less fund expenses, to shareholders
in the form of distributions.
In the Philippines, there are currently five types
of mutual funds – stock (also called equity),
balanced, bond, money market and index-tracker funds.
Bond funds invest primarily in bonds such as treasury
notes issued by the Philippine government and commercial
papers issued by reputable companies in the Philippines.
Having a full basket of only fixed-income securities,
bond funds provide capital preservation while maintaining
a conservative stance in terms of asset allocation.
Like bond funds, money market funds also have
a conservative stance since they have a full basket
of fixed income funds. The main difference lies
in the term of investments of money market fund
investments, which is one year or less.
Equity funds, on the other hand, invest primarily
in shares of stock issued by Philippine corporations.
The dominance of stock issues within the portfolio
positions the fund to attain a more aggressive rate
of growth.
Meanwhile, balance funds invest in both shares
of stocks and bonds, thereby accessing the growth
potential of stocks tempered with the presence of
secure fixed-income instruments.
The index-tracker fund, an emerging type of fund
in the country, mimics the weightings of the securities
in an index, for example, as may be contained in
the PHISIX. With this, an investor is automatically
given the chance to invest not only in selected
issues, but in a diversified portfolio of 33 stocks
that comprise the PHISIX.
Investing in mutual funds, as compared with investing
in other outlets, poses a number of advantages.
Mutual funds offer affordable investments. For
as low as P 5,000, an investor is given access to
high caliber investment outlets such as government
bonds and securities which are usually reserved
to high net worth investors.
Investing in mutual funds also entails professional
portfolio management. Professional fund managers
create value for shareholders by providing superior
yields within controlled risk exposures. Moreover,
since there is someone to look after the investments,
an investor need not go through the hassle of checking
the daily interest rates or in the case of equities,
the fluctuations of the stock market within a day.
Since the investments are handled by full-time
managers, the investments are diversified. This
means that the investor’s money is not only
put in one outlet. For instance, the typical portfolio
mix for a fixed income fund is invested not only
in government securities but also in commercial
papers, cash agreements and others.
Mutual funds also offer liquidity. In the event
that the investor needs his money, mutual fund companies
allow the investor to pull out his investments and
redeem his shares at the prevailing net asset value
per share.
_____________________________
Reprinted from Business World Special Feature
dated March 9, 2005
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