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Navigating Your Legacy Planning, Probate, Taxes, and Asset Protection Objectives

12 Sep
Grandparents playing outside with their grandchild

Navigating Your Legacy Planning, Probate, Taxes, and Asset Protection Objectives

How To Beat Estate Tax And Probate

When I bought an apartment in Portugal three years ago, my standard offshore holding structure ran into a snag. Portugal has a blacklist of tax-advantaged countries that includes Nevis, where my LLC holding structure is set up. Using that Nevis entity to hold title to the apartment would have cost me unnecessary taxes in Portugal.

Therefore, I worked with my attorney and set up an intermediary entity in the Dominican Republic to hold title. The DR entity is owned by the Nevis LLC.

That may sound complicated and in fact is more complicated than I’d like. However, it allows me to preserve the big-picture objective behind the Nevis holding company, which is to minimize the effect of probate for the kids.

An attendee at this week’s Retire Overseas Conference in Houston suggested that I simply title the property in the names of my kids. That, he rightly pointed out, would avoid probate.

Yes, titling the property in my children’s names would eliminate probate in Portugal when my wife and I die. However, it wouldn’t satisfy my long-term legacy-planning objectives. The grandkids would have to go through probate when my kids die.

I’m concerned about probate, but I’m also concerned about legacy planning.

Avoiding Generational Degradation Of Assets

Wealth built up by one generation typically disappears within the next two. Estate taxes, probate costs, trust-fund spendthrifts with no respect for the money they didn’t earn, and bad investments all combine, usually, to disappear assets. I’m doing my best to raise my children so they understand the value of what we have and so that they feel like stockholders in the family’s assets. I want them to take ownership and therefore to be inclined to take care of what we’re building.

However, I probably won’t be around long enough to have the same influence on my grandkids or, for sure, my great-grandkids… so I’m trying hard to put strategies and structures in place to help my family retain whatever wealth my wife and I manage to leave behind.

In addition, putting this (or any such investment) property in the kids’ names would mean that whatever rental income the apartment generates would technically be my kids’ rental income, creating a current tax and reporting obligation for them.

Furthermore, titling the apartment directly in my children’s names would mean the property would be considered a gift under U.S. tax law, creating, again, tax consequences.

The annual gift exclusion under U.S. tax code for 2019 is US$15,000. That’s per parent and per child.

In other words, a couple can give each of their kids up to US$30,000 without affecting the lifetime estate tax exemption amount.

If we gave the kids more than US$30,000 apiece in 2019, we would either have to pay the associated gift tax in 2019 or keep track of the amount over US$30,000 to hold, eventually, against the estate tax exemption when we die. We could do either of those things, but I’d rather not.

In the case of real estate that you want to give to your children to help reduce your estate for estate-tax purposes, a better option can be to give them shares of the entity that holds the property. You can gift shares in quantities that have a value right at or just under the annual gift exclusion.

What Are Your Asset Protection Priorities?

I know… this can be complicated. The trouble is you’re dealing with competing agendas, all important—namely, probate, estate planning, minimizing taxes, and asset protection.

It can be possible to achieve all of those things with an offshore real estate purchase. When that happens, you’re golden. However, you have to be prepared sometimes to compromise. Sometimes you’ll have to let one or more of those agendas go in the interest of keeping things from becoming overly intricate.

It’s a matter of priorities. Portugal proved particularly difficult for me (more challenging in some ways than any previous property purchase I’ve made in any of the 23 other countries where I’ve invested).

Part of the reason, though, that this purchase became complicated, I admit, is my own stubbornness. I wanted to find a way to achieve all four objectives.

I didn’t want to create an unnecessary tax burden by using an entity from a country on Portugal’s long blacklist. However, I also wanted to organize things to avoid probate in Portugal… without creating an ongoing administrative headache.

I could simply have put the property in a Portuguese entity, but that’s costly. The ongoing accountant, legal, and administrative costs of a Portuguese company would eat up much of the rental income from this single property.

In the end, the option that got me nearest to achieving all my goals while creating a minimum level of paperwork and tax consequences was to put the property in a Dominican Republic entity, as the DR is not on Portugal’s blacklist.

Now that I’ve figured out a strategy that works, I’m ready for my next Portugal investment.

Lief Simon