x Abu Dhabi, UAEFriday 21 July 2017

Planning your inheritance leaves a house in order

Navigating through the inheritance process is often exacerbated when people refuse to create a plan of attack.

Navigating the inheritance process is often exacerbated when people refuse to create a plan of attack. Virginia La Torre Jeker, a tax specialist, knows from experience that inheritances can often cause unexpected complications for an estate plan.
Navigating the inheritance process is often exacerbated when people refuse to create a plan of attack. Virginia La Torre Jeker, a tax specialist, knows from experience that inheritances can often cause unexpected complications for an estate plan.

It's never easy to see a parent suddenly diagnosed with a severe illness. But shortly before her mother passed away last year, Sophie Snow had the added challenge of having to discuss one of the most sensitive topics that some families never talk openly about: inheritance.

"When she found out she was going to pass away, it was one of those moments where she had made a will, but hadn't done anything else like paperwork and explaining things," says Ms Snow, an account manager at a public relations firm in Dubai.

"At that point, she took the time to sit down with us [me, my brother and sister] and say, 'This is what you're going to inherit from me'. The process will always be quite emotional because it means someone is leaving you ... with that comes a moment where you have to be quite practical."

In this case, Ms Snow and her siblings were collectively inheriting a property in London that was worth about £360,000 (Dh2.14 million), but still carried a mortgage. Because of the conversation she had with her mother, Ms Snow and her husband were able to budget for the extra cost ahead of time. Once her mother passed away, Ms Snow had the mortgage transferred over before she sat with her siblings "in the house for a month and decided it's better to sell it", she says.

Navigating through the inheritance process - even when someone knows they'll be receiving money, investments or a home - is by no means easy. But some say the problem is often exacerbated because many people refuse to create a plan of attack in these situations.

"I find that even if clients know that it's coming they tend to prefer not to plan for it," says Sarah Lord, the wealth planning director at Killik & Co, a financial management firm in Dubai.

"There are those who don't want to talk about it because they're almost wishing that person's life away."

It can be even more challenging when individuals become beneficiaries unexpectedly. "Where it is a surprise, and it's a decent amount of money, that can totally change someone's overriding financial planning goals," warns Ms Lord.

Some studies have found that many beneficiaries of inheritances are largely left on their own to figure out how to manage their new financial reality.

For instance, only 43 per cent of high-net-worth Americans with US$3m (Dh11m) or more in investable assets say their estate plan reflects their expectations of how their children would be able to handle an inheritance. Just 33 per cent think their beneficiaries understand their wishes for how they want their property divided, according to a survey released this year by US Trust, a wealth management-focused subsidiary under the Bank of America umbrella.

So what's the first step in learning how to manage an inheritance if it comes in the form of money?

Vince Truong, a certified financial planner based in Dubai, recommends asking a number of key questions that can get beneficiaries thinking about what the money represents to them, what their goals are and the time frame of each goal.

Along with these considerations, individuals need to prioritise their goals and address how much risk they're willing to take with their investments to achieve each one. "Receiving an inheritance is a good opportunity to stop and take inventory of the things that matter most," Mr Truong says.

Some expatriates might want to put down a deposit for a new home in a couple of years as they continue to save for a child's university tuition in 15 years' time. Money for the home should be put in a conservative and liquid investment that is not exposed to volatile swings in the market, Mr Truong says. "The education goal is further off, however, and a higher level of risk should be taken in order to achieve a higher return."

Other expatriates may want to consider paying off debts or at least keeping money socked away where it won't be a temptation. "If you are worried that disposable cash might cause you to spend a little more than usual, perhaps it's wise to invest in locked-in, long-term investments rather than having liquid assets that can quickly dwindle in the glitz and glamour of the Dubai Mall," says Andrew Landin, the managing director of Expat US Tax, a Dubai-based firm that specialises in helping American taxpayers.

If an inheritance arrives in the form of an investment portfolio full of stocks and bonds, or a home for that matter, it may be tough determining whether to continue holding onto it.

"Often, homes and stocks may have stayed in the family due to sentimental reasons," Mr Landin says. "They may not be the wisest investments and it may be beneficial, from a financial perspective, to sell the assets and re-invest the proceeds elsewhere."

That said, Mr Landin acknowledges that the initial period of mourning "can cause a tremendous amount of distress and immediately selling off assets may not go down well in the wider family".

Deciding what to do certainly wasn't an easy decision for Ms Snow or her siblings. But once they agreed to sell their mother's two-bedroom home in north London, they "kicked into gear" and renovated it so it could be put on the market.

Ms Snow is now looking for a financial adviser who can help to determine what types of investments might be the best fit for her risk tolerance and long-term goals. "It's something I have to take the plunge and do," Ms Snow says.

For Virginia La Torre Jeker, the issue of inheritance has recently been an important topic of discussion with her father. But perhaps not for the reason many might think.

Ms La Torre Jeker, who works as a US tax specialist in Dubai, notes that older people often inherit money from other relatives and friends. Yet this can wreak havoc on someone's estate plan.

Her 91-year-old aunt, for instance, had requested in her will to divide up all of her assets among her siblings - including Ms La Torre Jeker's father. "My father's 85!" says Ms La Torre Jeker. "I said, 'Dad, you have to talk to her'. He's trying to get his estate lower and lower so he doesn't have to pay estate tax."

In the end, Ms La Torre Jeker and her father successfully got her aunt to change her will. While some expatriates may be helping family members through similar issues, many more are broadly concerned about potential tax implications on the inheritances they may receive, experts say.

The good news for most expatriates is that when someone passes away, if their estate is subject to tax, the amount usually gets deducted before it reaches a beneficiary. This would reduce the overall value of the inheritance, but doesn't require the beneficiary to worry about trying to come up with the funds on their own.

"When someone gets an inheritance [in the US] they're not getting taxed on it," says Ms La Torre Jeker.

In the UK, a 40 per cent tax is paid through funds from the deceased's estate and it's only due if the estate is valued over the current inheritance tax threshold of £325,000 for an individual, according to HM Revenue & Customs.

Yet receiving a home as a gift can have certain tax implications.

For expatriates in the Emirates, it could establish domicile for the purposes of inheritance taxation, warns Mr Truong.

That means an expatriate who doesn't intend to retire in their home country - but wants to avoid possible inheritance taxes - "needs to consider the ramifications of owning a house in that country", he says.

"You need to know the rules relevant to your country of origin. For instance, stocks held in the home country could possibly be moved to an offshore portfolio bond, thereby eliminating capital gains tax upon sale. This cannot be done with physical property, however."

nparmar@thenational.ae