jonathan crowther provides advice on holding assets in your own name
The most common and popular method of holding assets is directly in one"s own name, what might be termed 'naked ownership". Its popularity lies in the simplicity and effectiveness of its 'brass-in-pocket" approach. However, while naked ownership may be the default form of ownership for most of us, it is important to realise that it is in itself just one of the generic forms of ownership with its own strengths and weaknesses.
Over and above personal preference, there can be a variety of reasons for owning assets in one"s own name. For instance, in some countries, as a matter of public policy, real estate can be held only in the name of an individual; tax systems are often biased towards individual ownership, for example, in the UK relief from capital gains tax for a residential property is not available to a corporate owner; or quoted companies will only confer shareholder benefits where the shares are held directly rather than through a nominee.
As you please
A fundamental attraction of naked ownership, however, is that the asset is the individual"s, to do with as he pleases. Many individuals find that transferring ownership to corporate entities or trusts becomes irksome in practice since ‘their" assets are now de jure and de facto under the control of a third party, who may hold views different from their own as to what should and should not be done with those assets.
But in those countries which apply forced heirship rules, the hegemony of the naked owner can prove illusory on death, since not only the death estate but also lifetime gifts (by clawback) will be distributed according to the inheritance rules of the state rather than the wishes of the individual.
The birth of democracy in Athens (following the death of the tyrant Draco, from whom we get our word 'draconian") was linked to a law rewrite by Solon, which introduced testamentary freedom into Athenian law, because "a man should be allowed to make gifts to his friends".
The reversion to forced heirship rules in Roman law has resulted in 'gifts by stealth" throughout Europe which may be why Europeans are so wedded to banking secrecy.
Individuals brought up in Anglo-Saxon legal systems are often blithely unaware of the existence of Roman or civil law systems and therefore of their potential impact.
The temptation, once an individual"s "eyes are opened and they know that they are naked" is to hide, but the advent of anti-money laundering legislation, both onshore and offshore, has rendered this solution not only ineffective but also dangerous.
Banking secrecy can also have the unfortunate side effect that the legitimate heirs of an individual remain quite ignorant of the existence of their bank accounts and investment portfolios. The value of so-called orphaned assets held by financial institutions is substantial and growing as a result.
Where property is held nakedly it is essential that a properly executed will be put in place. The basic rule is to have a will for each country where real estate is owned and another governing movable property. It is important to note that the rules governing the validity of wills vary from country to country. In Spain, for instance, it is only the last will lodged with the government registry that is effective.
The next step in ownership planning is to hold property jointly, typically between husband and wife. Many husbands (and wives) can take serious offence at the suggestion of joint ownership and a surprising number of married couples are committed to financial privacy between themselves. But there is no question that joint ownership can have considerable legal and tax benefits.
Under joint ownership on the death of one spouse, the jointly-owned assets automatically vest in the survivor, so by and large there is no need for expensive probate and the assets, such as bank accounts, remain operational in what is a traumatic period for the survivor.
In the UK and many other jurisdictions, there is also an inter-spousal exemption from gift and inheritance taxes, although this may not be the case, for example in Spain.
To be safe, wills should be executed over jointly held assets and usually husband and wife have 'mirror image" wills leaving everything to the surviving spouse. In some countries, for instance France, it is necessary to actually elect for this type of matrimonial regime to apply to obtain its tax and continuity of ownership benefits.
For couples where the husband is resident abroad and the wife remains resident in the UK, the use of a Form 17 can allocate jointly held bank accounts, securities and real estate to the non-resident spouse to achieve tax efficiency, although care must be taken to ensure that the declaration to the Revenue reflects the reality of the equitable ownership.
Joint ownership confers 100% potential ownership on each joint owner, or an undivided interest. For UK inheritance tax, this is treated as an effective 50:50 ownership.
An alternative to joint ownership is tenancy in common where each owner has an actual percentage interest which they are free to dispose of as they wish independently of the other co-owner, but only up to the amount of their interest. This type of ownership has been employed in utilising the nil rate inheritance tax band by having one of the interests go into trust on the death of the first spouse.
Where one spouse has died it is not unusual for the surviving spouse to make one or more of their children or even a remoter relation a joint owner. The law as between spousal joint owners and other joint ownership arrangements is quite different and may cause significant tax and administration problems in due course.
There is a principle operating here of employing a generic type of ownership beyond its natural limits which can end in tears. It is always essential to be aware of the tax, legal and operating limits of generic types of ownership beyond which use can become abuse.
Next month"s article will look at the bare trust, a vehicle which has been very much over-used in the UK in recent years for school fees planning, and secret trusts.
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