What happens to your stocks when you die?
They’ll get stuck. Just kidding. 😉
Some of my colleagues and forum members were asking me this question as I was promoting to them the benefits of investing in the stock market. I know. This should have been written last month during Halloween.
But seriously, this is one question that any investor should not be ashamed to ask. As a matter of fact, this should really be discussed by any investing family person with his or her family members and loved ones even during ordinary days. And with disasters such as the recent typhoon, we really need to be ready.
Someone from your family must know the things to do when you die. One of these is taking care of your estate.
“Will My Stocks Go To My Family When I Die?”
One of my colleagues who opened his first stock investment account asked me this. He said he could not remember writing down the names of his wife and children on the account information form during his application. He’s worried that the stockbroker will not honor his family members as his beneficiaries should they apply to withdraw the proceeds of his stocks upon his death.
That was a valid question. And that will help him plan out his wealth for future distribution to his spouse and children.
I’m not a lawyer nor have I focused my career that much on estate planning and wealth management. But I have encountered a client years ago who was trying to solve a problem on the inheritance among her siblings that her father did not plan out when he was still stronger and mentally capable. The siblings tried to kill each other over a wealth that a father failed to write down on a will. You’ve seen that in the movies. Well, it’s happening in real life.
Going back to my colleague’s question, my answer is, Yes.
However, it would not be that easy for his heirs. His shares in a Philippine company is considered taxable. Before his bereaved family members can claim all of his stocks, they have to pay the “estate tax”.
While he’s still alive, he should either consider looking for a professional administrator, a lawyer, or an estate planner. This estate planner will assist his family in settling all his estate including his stocks in court. For sure it will cost him or his family thousands of bucks for acquiring such services. But what is a professional fee if he’s got 8 to 9 digits in his assets left to his family and everything will be taken care of?
He has to make everything convenient for the loved ones that he will leave. Including assigning someone who will take care of his estate tax.
Note: (Estate pertains not only to investments but all your assets such as your house and lot, condo units, cars, savings and time deposit accounts, franchises, businesses, farm lots, poultry/animals/pets, equipment, furniture, etc.)
What is Estate Tax?
The Bureau of Internal Revenue (BIR) defines estate tax as:
…..tax on the right of the deceased person to transmit his/her estate to his/her lawful heirs and beneficiaries at the time of death and on certain transfers, which are made by law as equivalent to testamentary disposition. It is not a tax on property. It is a tax imposed on the privilege of transmitting property upon the death of the owner. The Estate Tax is based on the laws in force at the time of death notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary.
Are stocks or shares in a company really considered as part of estate? Yes.
The BIR also classifies the following as part of gross estate:
– Shares, obligations or bonds issued by corporations organized or constituted in the Philippines
– Shares, obligations or bonds issued by a foreign corporation 85% of the business of which is located in the Philippines
– Shares, obligations or bonds issued by a foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines ( i. e. they are used in the furtherance of its business in the Philippines)
– Shares, rights in any partnership, business or industry established in the Philippines
Note: Check with your respective stockbrokers on how your heirs/beneficiaries will claim your stock proceeds from them in case of your demise.
**UPDATE FROM COL FINANCIAL:
DOCUMENTS TO BE SUBMITTED BY SURVIVING SPOUSE IN CASE CLIENT IS DECEASED.
- Deed of Extra-Judicial Settlement of Estate with Affidavit of Self-Adjudication
- Proof of filing of the Deed with the Registry of Deeds where estate is located. (stamp at the back of #1).
- Proof of publication with Affidavit of Publication of the Deed of Extra-Judicial Settlement.
- Proof of payment of estate tax with tax clearance.
- Certificate of Marriage between spouses duly issued bye the National Statistics Office (NSO).
- Certificate of Death of client.
- Proof of identification of client and surviving spouse.
Surviving spouse may then open an account with us to transfer all stock and cash positions from the deceased client’s account to the surviving spouse’s account. Surviving spouse will have to submit identification documents and POB and accomplish account opening forms.
How Much is the Estate Tax on Your Stocks?
If you have less than Php200,000 fair value worth of stocks at the time of your death, you would probably leave this world peacefully because you are exempted from paying estate taxes. But of course, you will probably leave other assets apart from your stocks. Let’s just assume that it’s the only wealth that you will leave to your loved ones.
But if you have more than that, you will have to pay the estate taxes according to the BIR’s matrix below:
So for example you have Php12,000,000 worth of stocks upon your demise, your family will have to pay the government Php1,215,000 plus 20% of Php2,000,000. Your total estate tax payable will be Php1,615,000.
Are you certain your spouse or any of your family member has Php1,615,000 worth of cash on hand to pay all the estate taxes when you die? Better plan things out. Or your family members will not be able to claim that Php12Million soon.
In the U.S., from now until next year, anything you and your spouse collectively own which is worth over $10,000,000 will be subject to 35% estate taxes. If you have no surviving spouse like you you are single or your spouse died before 2011, your estate will not be taxed if your assets are less than $5,000,000. However, these rules will expire in 2013. Let’s see what the Obama administration will say about this.
This is where your life insurance will matter most.
Why Do You Need A Life Insurance?
When you buy a life insurance you will be required to fill out and appoint the name/s of your beneficiaries. When you die, that family member such as your spouse, legal-age children, siblings, or parents (tough oldies, huh?) will have the right to claim your insurance proceeds.
The insurance proceeds can be used then to pay off the estate tax dues. Your family will surely cry tears of joy in gratitude for buying a life insurance. They will then have the money to pay for your estate taxes and therefore claim all your stock proceeds.
Check your insurance policy and see if it can cover your future estate taxes.
Advice: Consult with your trusted insurance broker/financial advisor on how to determine the right amount of insurance to protect your investment and to give financial security for your family.
What Are the Requirements and Procedures to File an Estate Tax Return?
If you are not getting the services of a lawyer or an estate planner, you should discuss with your spouse the distribution of your wealth among your children. Of course, don’t forget your spouse’s share of the pie. 😉 [Extrajudicial Settlement of Estate]
More importantly, discuss with your spouse the procedures on filing the estate tax return. It will be very tedious but it would be helpful for your other half to manage the things to do when this sad part of your journey comes.
I suggest that you visit the BIR website to know the details on Filing an Estate Tax Return. Or better yet, ask for the services of your CPA or lawyer friend.
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Rock your way to abundance!