The price of death

PUBLISHED : Sunday, 10 October, 1999, 12:00am
UPDATED : Sunday, 10 October, 1999, 12:00am

Earthquakes in Taiwan and Turkey, a train crash in London, accidents in a Hong Kong typhoon, the plane crash that killed John F Kennedy and his wife - great or small, tragic events such as these hammer home the chilling fact that death may not be as remote as you imagine.

Focus on that for a moment and consider that a significant portion of the wealth you worked so hard to build during your life could be taken by the government in the form of estate duty, leaving your loved ones un-provided for. What a nightmare.

While natural disasters and accidents are difficult to predict and prevent, there are ways to avoid the financial costs associated with one's death.

Mrs Wong never thought she would be facing such a devastating situation by herself. Happily married for 25 years, she and her husband enjoyed their life until a month ago, when Mr Wong was in a fatal accident.

The Wongs had done fairly well over the years. Mr Wong had climbed the corporate ladder to be a senior executive for a Hong Kong conglomerate. Thanks to a booming property market in the two decades before the financial crisis, they bought a house in Tai Tam Road, and two rental properties that produced steady income.

A few days ago, Mrs Wong was advised by her lawyer that she may be subject to an estate duty of $5.85 million. She also was told that she would not be allowed to dispose of assets without passing probate. Her lawyer said the process could take more than a year, which is not unusual for probate.

To make things worse, she found she could not access their most liquid assets: a portfolio of shares worth $5 million listed in Hong Kong, because it was under Mr Wong's sole name.

As in many Chinese families, it is usually the husband that takes care of the family finances. Neither of them thought it made much difference whose name the investments were under.

They had talked about drafting a will, but kept putting it off because they were always too busy.

The size of the bill aside, perhaps the more pressing issue is: how can Mrs Wong pay, given that most of the assets are held up in the probate process? It is this kind of scenario that illustrates the importance of timely and proper estate planning.

It is estimated two out of three Hong Kong residents die without making a will. The Estate Duty office has about 11,000 cases of unresolved estates - where probate cannot be granted - that have arisen mainly from people dying without a will or adequate estate planning.

Estate planning usually conjures up an image of complex financial schemes designed for the very wealthy. This is not necessarily true, according to Jonathan Hubbard, managing director of HSBC International Trustee.

'Estate Planning is a very much misunderstood concept. You do not need to be a millionaire to benefit from it,' he said.

Simple schemes such as drafting a proper will can save time and money lost in the probate process, and most importantly, ensure your wealth is distributed according to your wishes.

Professionals encourage you to apply the reliefs and exemptions provided by the law before you adventure into fancy schemes such as trusts. Many estates can easily be brought below the minimum payable level of $7.5 million if simple planning is in place.

The most important exemption is on the matrimonial home - which for many people in Hong Kong is their most significant asset.

To get this benefit, the home must pass on death to the deceased's spouse. The best way to ensure this happens is to prepare a will that specifically bequests this. The other way is to put the home in joint names. If the home is left to children or other family members, the exemption will be lost. Similarly, lengthy waiting for probate can be avoided if the property is jointly owned.

Gifting is another effective way to bring down the taxable amount. You can make gifts up to $200,000 per person, and these will be exempt. By giving gifts to family and friends, a sizeable portion of an estate can be made exempt.

Gifts made to a Hong Kong charity also are exempt from estate duty.

A note of caution: any gift made beyond the $200,000 threshold within three years before death will be subject to estate duty.

Simon Ng, tax consultant at Horwath Tax, said a sophisticated estate planning structure was not needed in most cases. The first step was to look at your asset base and try to apply the exemptions and reliefs mentioned above.

If the asset value still was large enough to draw significant estate duty, there were strategies that could reduce the burden.

Among the most commonly used and effective are trusts, or overseas trusts.

The complex structure of trusts is baffling for most laymen, but the idea behind them is simple: assets under the trust are separated from the owner and so are not subject to probate or estate duty. The caveat is that trusts must be set up and administered properly, otherwise they may fail a legal challenge.

Tax professionals caution that one reason for a trust to fail is if the sole purpose for setting it up was to avoid taxes.

Mr Hubbard said there were many motivations for setting up trusts - and financial concerns may not even come into the decision.

'The real challenge here is the long-term continuity of business. One does get the tax benefit by constructing a trust. However, if saving tax is the only reason why you are seeing us, I think you are wasting your time,' he said.

'Among all groups of people, entrepreneurs are those who face the biggest challenges. I guess the question they are facing is: how are you going to continue the control of this successful family business after death? 'It is my belief that it is the long-term financial planning that the trust is based upon, rather than the tax avoidance.' Mr Chan, a Hong Kong resident in his mid-60s, was starting to feel time was running out to make arrangements for his business after his death.

He had worked extremely hard to build his manufacturing business up from scratch. In the early days, he was supported by dedicated and loyal staff whose experience, accumulated through the years, had become invaluable to the business.

His children gradually were brought into the company to take on managerial roles but Mr Chan remained in charge.

Sitting in the trustee's office, he explained his concerns and goals he wanted to achieve through a trust. These included: his continued participation in the management of his business during his lifetime; undisrupted and effective management after his death; continuity of control of business after death; the preservation of wealth after his death for future generations; and the protection of the interests of his wife and children.

An overseas trust was established to hold all of the shares of the group, with Mr Chan acting as a director, together with his children and trusted senior staff.

After his death, the business will continue to be managed by his children and those senior staff.

By setting up the trust, Mr Chan ensured that the capital of the business would not be distributed until the end of the trust period - in this case 80 years.

During this time, his wife would receive a steady income from the trust and the shares would be distributed only to Mr Chan's descendants.

The other main motive for estate planning is in the interests of children.

'If you have got children, and you are worried about how they will be looked after after your death, you will need to consider estate planning,' says Christian Stewart, senior manager of tax services of PricewaterhouseCoopers.

Privacy is another important factor. Probate is a public process that enables everyone to see what assets you owned and what you did with them. Trusts offer a shield of privacy.

As beneficial as it seems, there is a cost to go with a trust. It is difficult to say how much, because each is tailored to individual cases and the price depends on the complexity.

Mr Hubbard said setting-up fees normally ranged from $60,000-$70,000 for simple structures, to $400,000-$500,000 for a reasonably complicated one. If there is significant restructuring, or an initial public offering is involved, the bill could run into millions.

Maintenance was crucial as benefits could be lost or denied due to poor management. He said fees ranged from $30,000-$40,000 for a restricted structure to $1 million for a complex one.

Expensive, you might think. But you got what you paid for, Mr Hubbard said - and paying for good advice could save a lot of money in the long term.