Inheritance tax
In Taiwan, in 2021, tax revenue of inheritance tax accounts for 1.2% of total tax income of Taiwan government, roughly 33.5 billion NTD in the tax year, according to Department Finance in 2022.
Though not as significant as the percentage of income tax which account for almost fifty percent of the tax income, 1.2 trillion NTD, a few tax saving strategy exist.
For the siblings who are the second or maybe third generation and whose parents or grandparents are from Taiwan, below are some principles in the field of inheritance tax that might have tax saving effects
Inheritance instead of gift
Most of the time, estate is comprised of real estate. When the estate owner considers transferring titles before his/her decease, gift tax appears. In addition, upon the occurrence of gift tax, land tax also occurs. Whereas in the case of inheritance, land tax defers. If the estate consists of significant amount of real estate, it is perhaps better off for the owner to not gift it but to transfer it
Waiver of inheritance to avoid gift tax to grand children
The inheritance tree diagram, which decide the order of the inheritance, is the key to understanding this tax saving strategy. The family member in the top of the tree waives the rights to the inheritance and the following members are thus entitled to the rights to the inheritance. It is a legal way to avoid gift tax if the inheritance meant to go to younger or remote family members.
The disadvantage is that the waiver also waives the right to deduct certain amount from the estate, making the taxable estate amount larger than otherwise.
Debt
If the owner of the estate has debt or liability, the related tax act allows for debt deduction. The net estate is arrived by deducting the amount of debt from the estate, reducing the taxable estate amount
Life insurance
Before decease, the owner can reduce estate amount by having life insurance policies in place. The amount received by the beneficiary upon decease does not count into estate pool, thereby achieving the effect of transferring wealth as well as mitigating inheritance tax obligations. Having the life insurance also means the opportunity to have itemized deductions. But also note that when having a life insurance in which the proposer and the beneficiary are not the same person, basic income tax could be applicable.
Real Estate
In Taiwan, there is a difference of market value and the perceived value of a same real estate. That is when tax saving effects happen. When in the world of inheritance tax, the tax authority has a system to value a real estate, while in the real estate world, market mechanism decides the value. If a person has, let say a hundred dollar, in the bank account, the estate amount is a hundred. But if that person buys a property using that a hundred, the hundred is no longer perceived a hundred by the tax authority. People should be advised the liquidity or risks associating with real estate and its transactions.
Equal distribution
The matrimonial property regime, aka the principles of governing the disposal of the net asset of the husband and wife before or after the marriage, is the key to this inheritance tax saving strategy.
Put the saving strategy in a simple sentence, when one of the parents unfortunately deceases, the other can claim the equal distribution of the asset of the deceased, before estate is assessed by tax authority, therefore reducing the taxable estate amount. Note that the time period to execute this distribution right is limited. Also, tax authority DOES verify whether the other spouse truly receives the amount of the equal distribution.