Paying Death Taxes is “..almost entirely voluntary”

In 1983 I sat in my first law lecture at Kings College and listened to the legend that was Professor Mellows, describing Death Taxes:

“Death Taxes are almost entirely voluntary - only those who fail to take advice pay them”

It was quite an astonishing statement; and it was the precursor to spending 12 months learning the relatively simple ways in which the wealthy avoided paying them.

Of course, ‘Death Taxes’ are typically targeting the wealthy, even without using the various planning techniques, only 2% of the population may be affected; but to the 2% there is little doubt that Death Taxes lie at the heart of the maxim coined by Andrew Carnegie that it takes Three Generations to go from shirtsleeves to shirtsleeves.

(A universal truth that from the wealth creator ‘rolling up their shirtsleeves, it takes three generations before the wealth is gone and the third generation are back to ‘rolling up their short sleeves’ and having to start again)

The simple solution to avoiding the payment of Death Taxes was always to gift away the wealth holders assets significantly before death; surviving 7 years was enough for any UK domiciled individual to avoid the payment of Inheritance Tax.

That of course led to the problem of deciding when the right time was to start the process of gifting - the earlier the better of course. But when is that? 40? 50? 80?

And then dealing with the challenge of the impact of the next gens getting their hands on the money before they are ready to manage it wisely … a huge boon for the trust industry of course:

If you don’t trust your kids…put it into a Trust

But it is fair to say that in most jurisdictions around the world, anti avoidance legislation and the introduction of gift taxes and wealth taxes have made the ‘pre death transition of wealth’ almost pointless when it comes to the transferring of wealth from one generation to the next without losing a significant proportion of wealth to taxes.

So how should the wealthy plan for the preservation of wealth through inter generational transfer?

For many wealthy families, an entire industry has emerged to create programmes based around the foundations of a life insurance policy (which pays out an amount to cover the taxes due on death) wrapped around an investment programme which is often written into trust so that the accumulated wealth is passed directly to the next generation without ever appearing in the wealth holders estate.

The technicalities vary from jurisdiction to jurisdiction of course; for UK domiciled individuals around the world and Canadians for example, well established programmes are available for families that would otherwise have their wealth decimated by taxes.

An illustration of how these schemes typically work:

A 50 year old takes out a Programme Policy with ￡5m (possibly paying in 5 annual instalments)

At ANY point when the individual dies, a payout is made of between ￡18m and ￡30m - this is used to settle the tax liability on a ￡50m estate.

And here’s the kicker:

After 10 years (at 60) they can take out an annual income from the policy of ￡250k per annum … for life.

And at ANY TIME, the Policy can be cashed in for a value that increases (typically in line with a major index like the S&P 500) - with the base line set so there is never a loss of capital.

This collar is often mirrored with a ‘cap’ that limits the annual gain to 10%+

The use of these policies is something that requires specialist advice and there are only a handful of advisors worldwide who represent the global insurance groups that have developed the programmes; but for wealthy families and their advisors, this is an incredibly useful tool in the armoury of any wealth preservation strategy.

If you would like to learn more, please don’t hesitate to contact me

[email protected]