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Stephen Tierney MBMG International Ltd.


IHT planning using protection products

For a start, let me explain that this particular piece is mainly aimed at Brits; however, it will also be of use to those of you whose law is based on the premise of the English legal system.

There are many UK non-residents who are still UK domiciled. These people either live or work overseas at the moment but are still considering a return to the homeland sometime in the future.

There is a good chance that they still have assets in the UK, especially a property, and despite the fact they live overseas still maintain close links with the UK whilst they are away.

This means that, irrelevant of all else, Her Majesty’s Revenue & Customs (HRMC) will still regard these people to be UK domiciles. In turn, this ‘qualifies’ them to be subject to UK Inheritance Tax (IHT) on their worldwide (the emphasis is intentional) assets.

There are several ways to counter this. However, in this article we will look at how to combine Life Assurance with a simple Trust which is NOT expensive.

I am the first to admit, that for those people who have worked hard all their lives the last thing they probably want to talk about is insuring their estate for someone else’s benefit. However, the fact is that it is very wise to do so. If all the right plans have been put in place then your heirs will avoid a lot of potential financial hardship and the emotional side of things will be easier to endure as well.

In the UK, the IHT threshold is presently at GBP325,000. It is not expected to increase at any time in the near future. Thus, whilst the value of your personal assets may well increase in the next few years, the ability of offset any rise in the price of your property will not. The result of this, unless proper protection is in place, is that your beneficiaries will not get what you wanted them to receive. Therefore, unless other measures have been taken, an easy and efficient way to get round this is to ensure protection via Life Assurance is in play.

Let’s look at how this can work. Take Fred who is fifty and lives and works in Thailand. For some strange reason when he retires at 65 he has decided that they UK is the place to be. His total portfolio, including his home, is worth GBP525,000. This obviously means that he is GBP200,000 over the threshold value and so forty percent of this will be liable to IHT or, to put it another way, the government will get GBP80,000 of Fred’s money for doing nothing.

This is bad enough, but even if we only assume a five percent growth per annum on Fred’s worth until he retires then the value of his taxable estate could have become as much as GBP1.1 million. Suddenly, the GBP80,000 has grown into a liability of over GBP300,000.

After taking advice, Fred decides to take out cover to the tune of GBP350,000 which should be enough to cover any IHT liability should he die before he retires (there are two ways of doing this, either via Level Term or Whole of Life. The former is usually the cheaper option).

On top of this, Fred has realized that the Life cover will be construed by HMRC as an asset of his estate which will thus increase his IHT liabilities even more. Having understood the implications of this Fred also took out a trust.

The reason for this is that IHT law in the UK can be quite a pain. Potential beneficiaries have to obtain probate before they can legally deal with the Life company which has supplied the cover. This may not look like a real problem but it should be remembered that the beneficiaries need to put in an IHT account to HMRC and tax must be paid. This is a Catch 22 situation. Those that are meant to receive what you want them to cannot then get hold of it as they have not been able to provide any documentation which shows they are legally allowed to access to what is rightfully theirs.

This means that, potentially, some of Fred’s assets could have to be sold to provide HMRC with the money to cover the IHT liability.

Fortunately, as indicated above, Fred had the foresight to realize this. By placing the policy in a trust the value of the Life Assurance could not be included in the total value of his assets. Moreover, the trustees of the policy are the legal owners and so would have all the right paperwork to hand so could obtain an immediate payout. This would then result in Fred’s beneficiaries getting what was rightfully theirs quickly, efficiently and with no stress.

Doing the above does not take long, it makes things a whole lot easier for those who survive you and you know that those you wanted to benefit actually do so.

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Stephen Tierney on [email protected]


Banana Republics, part 1

The biggest single structural defect facing the US economy night now is the widening gap between rich and poor. This is forcing the alleged reformer - Barack Obama - to reshape the U.S. economy thus leaving it more vulnerable to recurring financial crises and less likely to generate enduring expansions.

My business partner, Paul Gambles, recently debated this point on CNBC with Eric Rosenkranz -

Issues like record levels of debt, spiraling federal deficits, and chronic lack of velocity in money circulation are all symptoms of the same disease.

“Income inequality in this country is just getting worse and worse and worse,” James Chanos, told Bloomberg Radio recently. “And that is not a recipe for stable economic growth when the rich are getting richer and everybody else is being left behind.”

We have been beating this drum a while and we would thank GMO’s Jeremy Grantham for waking us up to this.

Since 1980, about 5% of US annual national income has shifted from the middle class to the nation’s richest households. That means the wealthiest 5,934 households last year enjoyed an additional $650 billion - about $109 million each - beyond what they would have had if the economic pie had been divided as it was in 1980 (U.S. Census Bureau).

Between 1993 and 2008, the top 1 percent of families captured 52 percent of total income gains, according to a 2010 analysis of Internal Revenue Service tax data by economist Emmanuel Saez of the University of California, Berkeley.

Disputes over what constitutes economic fairness are moving to center stage amid a near-stagnant U.S. economy saddled with 8.6 percent unemployment yet boasting record corporate profits. President Obama last month targeted, “the wealthiest tax payers and biggest corporations” for higher taxes, saying they should pay “their fair share” - Bloomberg.

Of course Republicans, led by John Boehner, elected on a pledge to oppose all tax hikes, whether they are good or bad, sensible or stupid, see any suggestions of increases as being unacceptable. They are probably hoping that the wealthiest 5,934 households exert an influence disproportionate to the actual quantum of votes that they themselves wield when it comes to the polls.

A lot of the anger over this banana republic income dispersion fuels the likes of ‘Occupy Wall Street’ and statements like, “We are the 99 percent that will no longer tolerate the greed and corruption of the 1 percent,” -

Tax reforms

Howard Buffett, the Berkshire Hathaway Inc. director sympathizes with this anger. Buffett Junior recently told Bloomberg News: “There has never been such a large gap between earnings in this country… There has never been a time in my lifetime when the government is going to cut an incredible amount of programs that support poor people and feed them.”

Almost half Americans now see their country divided between “haves” and “have-nots,” according to a Pew Research Center poll last month.

Growing Gap

“The large and growing gap between the haves and have-nots will tend to undermine growth, both directly and indirectly - including by reducing the marginal propensity to consume and by amplifying the political polarization that has already contributed to poor economic policymaking,” - PIMCO, CEO: Mohamed El - Erian.

To us this is the central issue right now. It is not a specifically American problem, although much of the data and available commentary focuses on the Banana States of America. It is also very easy to see the evolution of the gap in America. Following WW II, the country unified around a program of building post-war prosperity in the 1950s. This was so successful that the 1960’s saw radical social change and moves to greater equality encapsulated by the promise of a “grand society”.

When times became tougher in the 1970’s, the focus on distribution of the spoils once again moved to the fore, setting the stage for what we have long highlighted as Art Laffer’s role.

Since 1968, according to the standard statistical measure of inequality know as the Gini coefficient, incomes in the U.S. have become steadily distributed less equally. The U.S. Gini score rose from .39 in 1968 to .47 in 2010, meaning that incomes were becoming increasingly unequal.

Bloomberg points out that in the 30-nation Organization for Economic Cooperation and Development, only Turkey and Mexico have more unequal societies than the United States. In the U.S., the rich-poor gap has widened by 20 percent since the mid-1980s - more than in most developed countries. “Nowhere has this trend been so stark as in the United States,” the OECD concluded in a 2008 study.

To be continued…

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Stephen Tierney on [email protected]