Insights
Trust-a gift tax saving strategy
Trust is a common tool to transfer assets and wealth. A trustor transfers assets to a nominal owner, trustee, who under a fiduciary duty, manages and then transfers the assets to a beneficiary.
In Taiwan gift tax, when the trustors are not necessarily the beneficiary, gift tax occur. Under this condition, the trust is also known as other interest oriented trust.
When determining how much value should be applicable to the gift tax in the other interest oriented trust, Taiwan tax authority has a specific way to calculate the value.
Let’s say a parent decide to transfer only the interest to his son after a year with his own saving of a hundred million NTD. He then put the a hundred into a trust. For that transfer of the interest, gift tax applies.
The tax authority determine the interest value by looking at present values. The tax authority takes the present value of a hundred million, not the interest, using the Chunghwa Post saving rate, aka a local risk free rate. Then, the spread between the present value and the value of a hundred million is the value applicable to gift tax.
What role does a tax saving strategy play in this case?
Let’s assume the Chunghwa risk free rate is 1.04 pc, the spread is then 100-100/(1+0.0104)=1.03 million. The taxable gift value is then 1.03 million.
If the father instead gives the interests to his son after a year of saving at a bank, then the value applicable to the gift tax is the interest value in the future time.
The tax authority, for generalization purpose, uses the universal cost of capital, aka the Chunghwa saving rate.
The takeaway is that the greater the gap of the risk free rate and a real discount rate for an asset, the greater the difference of perceived and true values, the greater the saving effect in the trust.