An Inheritance or Estate Tax is a tax imposed on a beneficiary who has inherited money or property or a levy on the estate (money and property) of a person who has passed away.

 

An Inheritance or Estate Tax is a tax imposed on a beneficiary who has inherited money or property or a levy on the estate (money and property) of a person who has passed away.

 

Estate Tax and an Inheritance Tax may be compared as follows:

Estate duty or state tax

Estate Duty or Estate Tax is a Government Tax which arises on the demise of an individual, also known as "death tax". An Estate Duty is a tax imposed on the deceased’s estate in its entirety. The executor is responsible for paying this Estate Tax to the government. It is different from Inheritance Tax.

Inheritance tax ("IHT")

Similar to Estate Duty, Inheritance Tax is a Government Tax which arises on the demise of an individual. Unlike Estate Duty, an Inheritance Tax is a tax imposed on the beneficiaries who receive assets from the deceased. Each beneficiary is responsible for paying their own Inheritance Tax. 

However, this distinction is not always observed; for example, the UK's "Inheritance Tax" is a tax imposed on the assets of the deceased. Strictly speaking, it is therefore an Estate Tax. For historical reasons, the term “death duty” is still used colloquially (though not legally) in the UK and some Commonwealth countries.

Life insurance for state duty / inheritance tax

Using life insurance to pay estate duty / inheritance tax

Purchase of a Life Insurance policy to pay some or all of the Estate Duty / Inheritance Tax , can make things easier on the deceased’s family when the need for liquidity arises. One would not be forced to sell assets in distress for the purpose of paying such taxes.

 

In short, it can give the insured peace of mind that he/she would not be burdening their family and friends with a hefty tax bill when the eventuality has taken place.

 

The process would involve an individual buying a life policy on his/her life for a face value covering the expected tax liability.

 

In a jurisdiction where ownership of the policy by the insured would result in proceeds of death benefit falling into his/her estate, there would be a need to consider an alternative ownership structure. Whereas, in some jurisdictions where proceeds of death benefit for a life policy are not captured by Inheritance Tax / Estate Duty, individual ownership is the most appropriate.

 

As estate and tax planning can be complicated, so the client is best advised to obtain independent legal and tax advice.

Case studies

Case study 1: Failure to plan – Elvis Presley (“The King of Rock”)

  • When the King of Rock passed away, his estate was valued at USD 55 million in 1977 (valued today at USD 300 million).
  • Unfortunately, he did not have proper planning in place for the transfer of his estate to his heirs.
  • Taxes and fees consumed most of the estate, leaving less than USD 3 million for his heirs.
  • In such situation, if there was proper estate planning including an insurance policy (to cover the liability of Estate Duty), the heirs could have received most of the estate left to them.

Source: http://wealthmanagement.com/estate-planning/richest-rich-ten-celebrity-estate-planning-mistakes#slide-6-field_images-581421

 

Case study 2: Failure to plan – Loss of family Heirlooms to save Family Castle

  • In 1926, Highclere castle (“subject of the International TV show – Downton Abbey”) raised a liability of GBP 500,000 (valued today at GBP 30 million) as Inheritance tax upon the demise of the Earl of Carnarvon.
  • The family barely managed to save the castle but had to conduct a fire sale of valuable assets that belonged to the family for generations.
  • Through an auction at Christie’s in London, they sold their exquisite artwork including those by Leonardo da Vinci and Gainsborough.
  • The family was able to then pay the taxes due, but only by selling other family heirlooms.
  • For a case like this, through proper estate planning and implementation of a Life Insurance policy, the family could have not only held on to their heirlooms but also paid the imposed tax with peace of mind.

Source: http://www.telegraph.co.uk/culture/tvandradio/downton-abbey/10350044/Downton-Abbey-Highclere-Castle-where-series-set-was-almost-lost-after-tax-bill.html 

 

Case study 3: Appropriate planning– Inheritance tax for U.K. property

  • Mr Client has a net worth of USD 350 million and does not have a U.K. status.
  • He has two properties in the U.K. worth over USD 35 million owned through a BVI company.
  • Upon his demise, an Inheritance Tax exposure of approximately USD 14 million would result even though the properties are owned through a BVI company.
  • The client purchased a Universal Life Insurance policy with a sum assured amount of USD 20 million to cover the future liability.

Summary of benefits

  • A pool of funds is created at a time of need for the beneficiaries through the pay-out of the Death Benefit from the life insurance policy. These liquidity can then be used towards paying off any Estate Duties or Inheritance Tax which may arise from the transfer of assets to the loved ones, without draining other resources or causing a “fire sale” of assets.
  • Assets which may have sentimental value or have belonged to the family for generations can be safe guarded and protected through the pay-out from a life insurance policy.
  • The liquidity created also eases the pressure on the loved ones left behind, at an emotionally draining time.