IMPACT OF INHERITANCE TAX ON ESTATES
The impact of inheritance tax or estate duty on a deceased’s estate can be considerable. The tax and associated costs will reduce the actual value of the estate that the beneficiaries inherit.
The inheritance tax rate varies from country to country. Some have a threshold that is deductible from the value of the estate. The rare is applicable to the excess. The applicable rate can be as high as 40%. There is no deductible in some countries, but the rate can vary from 10% to 25% of the value of the estate. Besides, there are associated costs like legal fees payable to
probate lawyers and filing fees for processing the grant of representation.
The tax and associated costs can also put financial stress on the personal representatives and the beneficiaries when there is a time limit for payment. In some countries, the time limit is as short as six months or one year. The main cause of financial stress stems from the nature of the estate’s assets. Sourcing the fund for paying becomes difficult when assets are illiquid. Even when liquid, like cash in the bank or stocks, the personal representatives must produce a grant before they can access the bank account or dispose of the stock. If real estate forms part of the estate, prospective buyers may take advantage of the absence of personal representatives’ title to underprice the property.
Personal financial planning by the estate owner using life insurance while alive presents an effective solution.
INHERITANCE TAX/ESTATE DUTY PLANNING WITH LIFE INSURANCE
Life insurance enables the Rich to maintain the value of their estate for the next family generation. They buy a life policy on their own lives with the sole purpose of protecting their estates. It helps them provide the fund for paying inheritance tax or estate duty, legal and filing fees while they are alive.
Such a life policy must meet estate protection need. The policy must pay a benefit only on their death, and provide sufficient funds to cover the tax, legal and filing fees. The death proceeds must not form part of the estate to avoid being subject to tax. A Whole Life Assurance Policy provides effective protection if properly arranged.
A whole life assurance policy is a contract between a life insurer and the Rich. The policy will pay an agreed benefit (sum assured) on the death of the Rich who took the policy on his/her life. The contract can be a with-profits or participating policy. The policy will share in the profit that the life insurer will pay in form of a bonus or dividend to participating policies from the surplus that arises from its operation. The life insurer adds such a bonus to the sum assured. It is payable together with the sum assured. Thus, it increases what is payable as a death benefit on the death of the Rich. The profit addition can take care of the increase in the estate value and the corresponding tax.
The next topic addresses the arrangement of the policy to avoid being taxable with the estate.
Profile of Amos Adeoye Falade
Mr Falade is a 1980 graduate of the University of Ibadan. He holds a Bachelor of Science, Second Class Honours (Upper Division) Degree in Economics (1980) and Master of Communication Arts Degree (2002) from Ibadan. He is an Associate, Chartered Insurance Institute, London (ACII) 1985 and Associate, Chartered Institute of Stockbrokers (ACS) 2010. He also holds the Authorized Dealing Clerk’s Certificate of The Nigerian Stock Exchange (2011). He is a Member, Equipment Leasing Association of Nigeria (ELAN); Member, Institute of Financial Planners. He is also a Fellow of the West African Insurance Institute.
He specialized in Life Insurance and Pension in his insurance career that commenced in 1975. He attended several courses on life insurance including Actuarial Aspects of Life Insurance by Swiss Re/West African Insurance Institute, Monrovia, Liberia (1984) and India’s National Insurance Academy (1997).
He taught several generations of student life insurance and pension preparatory for the professional examinations of the Chartered Insurance Institute, London from 1987, and Chartered Insurance Institute of Nigeria from 1989. Since 2002, he has taught Pension
Planning & Administration and Life Insurance at the West African Insurance Institute, Banjul, The Gambia where he is a Visiting Lecturer. He is also a resource person for the Association of Investment and Portfolio Managers.
He held top management positions in the financial services industry. He was Head of Pension in Niger Insurance (1982 to 1988); General Manager (Life and Pensions), Nigerian French Insurance Company Limited (1988 – 2003); General Manager/Chief Executive Officer, Guardian Express Assurance Limited (2003 – 2008) where he retired. He was Managing Director/Authorised Dealing Clerk, Golden Capital Plc (2011 – 2014). He is currently a Stockbroker/Dealer on The Nigerian Stock Exchange.
He held several positions in the insurance industry before retiring in 2008. He was Chairman, Life Offices Committee (2003 – 2006) and a Member of the Governing Council of the Nigerian Insurers Association (2007 – 2008). He represented the Association in many national assignments including the Securities and Exchange Commission’s Committee on Pension (2001/2002), and Central Bank of Nigeria’s Financial Systems Strategy (FSS 2020).
Mr Falade is a writer. He has written many articles on life insurance and pensions published in local and international professional journals. His four books on
Life Insurance and Life Annuity are in the process of publication.