How do inheritance taxes impact the transfer of wealth?

Inheritance taxes, also known as estate taxes, are taxes imposed on the wealth transfer after a person's death. These taxes can vary greatly depending on the jurisdiction in which they are imposed.

According to a recent study by the OECD, on average, only a small percentage of total tax revenue is generated from gift, estate, and inheritance taxes across the organization's member countries. However, the ratio is slightly higher among countries that impose these taxes.

It's worth noting that not all OECD countries have estate and inheritance taxes. Some countries such as Austria, Czech Republic, Norway, Slovak Republic, Sweden, Israel, New Zealand, Australia, Canada, Estonia, and Latvia don't levy these taxes.

In the United States, inheritance taxes are imposed at the federal and state level. The federal estate tax has a threshold of more than USD 11 million per individual. In contrast, some European countries have much higher inheritance tax rates and lower thresholds. For example, the inheritance tax rate in France can be as high as 60% for non-related parties.

Given that inheritance taxes may play an essential role in preserving family wealth, it's vital to consider inheritance tax planning opportunities. This can include strategies such as gifting assets during one's lifetime, taking advantage of tax exemptions and deductions, and structuring investments tax-efficiently.

Real estate is a common asset subject to inheritance and gift taxes. In many countries, the value of a primary residence is often exempt or subject to lower tax rates. However, transferring other properties, such as vacation homes or rental properties, may be subject to higher taxes. Investment portfolios and alternative investments, such as private equity or hedge funds, can also be subject to inheritance and gift taxes.

Lifetime giving, or the transfer of assets during a person's lifetime, may trigger gift taxes that often depend on the relation between persons.

In particular, in international scenarios, it's essential to plan early for the transfer of wealth. This includes assessing the applicable laws and determining the states that will have jurisdiction over the estate. Furthermore, the residence of the indented beneficiaries plays an important role. With such groundwork performed, one can then engage in tax planning.

If you're planning on passing on assets to your spouse and children, there's a good chance you can do so in a way that minimizes the taxes they would have to pay. For example, you can gift assets to your spouse and children during your lifetime, take advantage of tax exemptions and deductions, and structure investments accordingly. Sometimes tax laws foresee annual allowances for lifetime gifts to specific beneficiaries; thus, regular donations can reduce the taxable value of an estate. You can also do good and save taxes by donating to charitable organizations that are not subject to the gift tax.

One way to transfer wealth efficiently is to use trusts. A trust is a legal arrangement where a trustee holds and manages assets for the benefit of one or more beneficiaries. Trusts can be used to minimize inheritance and gift taxes, protect assets from creditors, and manage assets for beneficiaries who cannot control them themselves. It's essential to focus on estate planning rather than taxes since you may risk that your wishes cannot be executed as intended if the arrangement is merely tax driven.

Another effective tool is a life insurance policy. Next to enabling a smooth transfer of wealth, life insurance policies often benefit from preferential tax treatment. They can also be combined with trusts to hold investment portfolios and other assets tax-efficiently. Life insurance can also be used for liquidity planning to settle inheritance taxes if the transfer of wealth may cause tight liquidity situations for beneficiaries. Just consider an estate that comprises mainly real estate. In such a scenario, beneficiaries may have to sell assets to cover inheritance taxes. Family wealth can be preserved with specific life insurance policies with a high death premium.

You may even want to relocate to another jurisdiction that offers more tax planning opportunities. However, relocating your residence solely to avoid inheritance taxes can trigger the application of anti-avoidance rules. Many jurisdictions have specific rules to prevent tax avoidance by imposing inheritance taxes on expatriates for several years after they leave the country.

In conclusion, inheritance and gift taxes can significantly impact the transfer of wealth. Wealth owners need to be aware of the tax laws and plan early for the most efficient ways to transfer their assets. This can include using trusts and life insurance policies and taking advantage of exemptions and deductions.