Estate Duty and Inheritance Tax
Speculation has been rife, over the past two months, that estate duty or inheritance tax would be reintroduced. This rumour isn’t new. In fact, such talk has recurred over the years.
This, in turn, spurred my high net-worth clients to research and attend talks by private banks with wealth preservation departments, as well as promoters of offshore financial centres. This, as opposed to it’s nebulous relation, the tax haven. These places range from nearby Labuan to exotic jurisdictions like the BVI & Cayman. Out of curiosity, and to better understand my client’s needs, I too attended such presentations.
Wealth Preservation Talks
These talks usually consist of sales representatives from private banks or fund managers extolling the virtues of setting up generic, or boiler plate, on shore or off shore trusts or foundations. Legal terms and representations are made repeatedly. These include terms such as “firewall”, “control retained by the settlor through ‘protectors'” or “letters of wishes”, along with the use of seemingly simple charts. The representatives offer trusts or foundations as an all encompassing solution to estate planning and wealth preservation needs of those attending.
The Malaysian Budget
They announced the Malaysian Budget last Friday, 27th October 2017. Therefore, it’s a busy time for tax accountants and us lawyers. We have to juggle our work and digest the parts of the law which concern our areas of practice. I’m happy, however, to report there has not been any imposition of estate duty.
See my previous blog title “What is Inheritance Tax? Will Malaysia Introduce Inheritance Tax?” for more information.
So, with the long list of ‘help’ at hand, who should the prudent high net-worth person go with to estate plan?
Rather than suggest the structures mentioned above as an all encompassing panacea for the ‘ails’ of my clients, I prefer a different approach.
On the surface, the template structures often talked about at seminars, namely trusts or a foundation, are relatively simple concepts. A settlor, in the case of a trust, is the person who sets it up. In the case of a foundation, they are called a founder. Similarly, a trustee or council member respectively are who manage the structure. Finally, in both structures, the beneficiaries are the people provided for.
In practice, however, there are numerous types of such structures. Whichever structure you choose, and the way the aforementioned people are placed, may differ depending on the needs of the client.
The Laws for Inheritance Tax
Laws where these structures are set up may differ from the laws where the creator, subject matter assets, or parties being provided for, are. The pros & cons of which are well covered by the promoters/private banks/lawyers setting up such structures. All the speakers seemed unaware or ignored this basic, but fundamental, piece of the puzzle.
Both the person setting up the structure, and the person being provided for, may be in different jurisdictions. It is not uncommon, at least in my experience, for us to appoint a team of specialist advisers across jurisdictions and areas of law to advise on one estate.
What To Do?
I would therefore start by ascertaining the needs of the clients. Namely are they looking for protection against forced heirship, creditor claims, inheritance tax and/or looking after a family member needing guidance. Then, I would study the laws relating to the subject matter of interest to the client. Namely, I would study the laws of the possible jurisdiction where the structures are to be set up, calling in “outside” experts where necessary. Size does matter after all, and in this case being small and unrestricted by affiliations has its advantages. We then advise on the appropriate structure, in the appropriate jurisdiction, for the client.
Estate Duty/Inheritance Tax in Malaysia
As for estate duty or inheritance tax in Malaysia, this is a bit tricky. The laws have not yet been drawn up, if indeed they ever will be. Therefore, to create a structure and move assets in, and incurring stamp duty should be considered in order to avoid it being wasted.
Worse still, if the structure doesn’t work, further stamp duty and possible gains tax may be incurred. Assets will have to be transferred into a further structure. Take, for example, the UK and the Inheritance Tax Act, 1984 which is being updated by Finance Bill (No.2) 2017. This Act has resulted in those setting up offshore company structures having to undo or “de-envelope” such structures.
So, how does one estate plan for a law that has yet to be drawn up? I would take into account the points mentioned above and consider how the latest inheritance tax laws are drafted in the leading financial centres around the world, as the Malaysian drafters are likely to take their cue from there.
Author: Sam Choong
Sam Choong is a lawyer practising in Malaysia. His areas of practice include estate planning, wills and UK inheritance tax for expats residing or seeking to retire in Malaysia.