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It is now commonplace for individuals to invest internationally to gain exposure to international markets (real estate, shares, currency) and to hold assets through special purpose vehicles. Investment managers will tell their clients international investment is essential to achieve diversification.
Individuals may also obtain international exposure indirectly, for example, if they work for an international company and are awarded stock in that entity, they have an interest in an overseas company.
While international diversification is part of modern life, it does not make estate planning easier. With a range of assets in different locations, one will need to consider the succession law in relation to each of these locations to work out what will happen to these assets on death.
As a starting point, it is important that individuals, regardless of the size of their estate, have effective wills in place. Even if an individual has a lifetime trust, it is still important that he has a will in place to ‘catch’ assets not transferred into trust.
If an individual does not have a valid will in relation to an asset, he is ‘intestate’. Where an individual dies ‘intestate’, he loses control over who will inherit his estate and default provisions will automatically kick in instead. The applicable intestacy rules will turn on where the assets are located and the domicile of the deceased individual.
Take, for example, a Hong Kong domiciled individual who passes away leaving a wife and children and a house in Hong Kong worth HK$10million. In this situation, the surviving spouse does not take the entire house. Instead, the Hong Kong intestacy rules will kick in and the spouse will take property up to HK$500,000 plus personal chattels but half of the balance is held on statutory trusts for the spouse, with the other half being held for the surviving children, which would result in a complicated outcome that, in practice, no one actually wanted. In contrast, under the intestacy rules in England and Wales, the surviving spouse of an English domiciled individual will take property up to GBP250,000 plus personal chattels as well as half of the balance absolutely, with the remainder held on statutory trusts for the surviving children. The intestacy provisions in England and Wales are therefore more generous than that in Hong Kong but still not satisfactory.
If an individual ignores the importance of planning for succession after death or the will is not valid, he loses control over who administers his estate, and the ability to choose where the assets go.
When preparing a will, the first questions to be addressed are: what are the person’s assets and where are they situated?
The initial question in terms of considering the range of assets is, itself, not always easy. There are some assets where situs is going to be obvious – directly held real estate will be situated where the real estate is located; company shares are generally situated where the company is registered. Other assets are more difficult. For example, bank accounts may be administered in one jurisdiction, but held in another. Similarly, with an investment portfolio, it is not always clear whether you own an account, the underlying asset or an interest in a trust/fund.
The determination of the situs of the assets is going to be very important when considering whether one should have more than one will. Some practitioners favour the approach that an individual should have different wills for each jurisdiction, and others have a preference for as few wills as possible. Those who favour the multiple wills approach tend to do so on the basis that multiple wills speed up matters post-death: probate or the equivalent procedures can be pushed for in more than one jurisdiction at the same time. As a rule of thumb, we would generally recommend as few wills as possible. With multiple wills, care must be taken to avoid gaps (i.e. missing jurisdictions) and to steer clear of ‘accidental’ revocations. An effective will should also address the burden of debts and taxes. With internationalisation, it is not inconceivable that the liability and the assets may be in different jurisdictions. If an individual has more than one will, the wills should provide for the allocation of debts and other liabilities, and should be consistent across the board.
As estate duty was abolished in Hong Kong in February 2006, Hong Kong domiciliaries do not need to be concerned about inheritance, estate and/or gift tax with regards to their Hong Kong estate. However, it may well be that an individual has assets in jurisdictions which impose inheritance, estate and/or gift tax with regards to such assets. Where an individual has assets in jurisdictions with some form of inheritance, estate and/or gift tax, he should seek proper advice when undertaking estate planning to ensure that his wishes regarding succession will be achieved through effective will structuring and in a tax efficient manner.
For example, inheritance tax is the form of estate and gift tax that applies in the UK. An individual who is domiciled in the UK is subject to inheritance tax on his worldwide assets, whereas a non-UK domiciled individual is only subject to inheritance tax on his UK property. Where there is an inheritance tax exposure, the first GBP325,000 of a person’s estate (known as the ‘nil rate band (‘NRB’) is taxed at 0%, and amounts in excess of the NRB are charged at the rate of 40%.
Spouse exemption will, generally, provide a 100% relief from inheritance tax in respect of intra spouse transfers. As such, a simple estate planning technique is for spouses to leave their UK assets to each other under their wills. In the UK, where there is a domicile ‘mismatch’ (that is, where the domicile position of the married couple is different, for example, where one spouse is UK-domiciled on death and the other is not), the spouse exemption is capped at the amount of the NRB, that is, GBP325,000. However, the non-UK domiciled spouse has the ability to elect to be treated as UK-domiciled for inheritance tax purposes (such that 100% spouse exemption is available), and assuming the non-UK domiciled spouse was not resident in the UK, he/she will cease to be treated as UK deemed domiciled after 4 complete tax years.
Finally, in terms of post-death procedures, in most common law jurisdictions, on death, a personal representative will need a grant of representation before he can deal with the assets. This requires a will to go through a formal court process (which is commonly known as the probate process) and once the will has been authenticated to be valid, the court will issue a court order in the form of a grant of probate authorising the personal representatives to ‘unfreeze’ and to deal with the assets comprising the estate.
In terms of time scale, once the requisite inheritance tax forms have been filed with Her Majesty’s Revenue and Customs (‘HMRC’) and any inheritance tax due has been paid, a typical application for probate in England and Wales will take about two weeks. In contrast, a typical application for probate in Hong Kong will take a couple of months, and will likely take longer in the case of an intestacy or if there are other complications.
Certain jurisdictions have a mutual recognition probate procedure and so a grant of representation issued in one jurisdiction may be ‘re-sealed’ in another under a relatively simplified procedure without the need to take out a fresh grant. For individuals with assets in Hong Kong and the UK, a Hong Kong will can easily be re-sealed in the UK. Likewise, an English law will can also be ‘re-sealed’ in Hong Kong with regards to Hong Kong assets.
