Parents in Bermuda often transferred real estate to their children during their lifetime in order to avoid the payment of stamp duty by children, often referred to as a death tax.
Today, however, parents no longer must transfer real estate during their lifetime, thereby losing control over the property, in order to avoid stamp duty.
The far preferable method of eliminating stamp duty is to apply for a Primary Family Homestead Certificate ("Certificate"). Such a Certificate eliminates stamp duty payable after death on the designated dwelling.
A Certificate can be applied for either during the life of the owner, or after death by estate representatives. If more than one dwelling is owned, it is advantageous to obtain the Certificate on the most valuable property. If a deceased owned more than one dwelling, estate representatives can only designate the actual residence immediately prior to death, as the primary family homestead.
If the deceased did not reside in any of the dwellings immediately prior to their death – because they were in residential care, for example – then the estate representatives can only apply for designation of the least valuable dwelling.
A designation during the owner's lifetime provides a surer opportunity to obtain the highest stamp duty relief. If the owner is later in residential care pre-death, the dwelling representing the highest relief should already have been designated.
Designating a dwelling as the primary family homestead often extinguishes the need for a transfer of property during the owner's lifetime. However, owners of multiple properties may still find lifetime transfers useful in particular circumstances.
For example, after-death stamp duty on a home with a market value of $1 million amounts to $85,000 – while in comparison, the stamp duty on a lifetime transfer of a $1 million property is just $34,000.
A lifetime transfer at less than market value is by "Voluntary Conveyance". The advantages of such a conveyance are that the owner's intentions can be effected during their lifetime, and stamp duty can be determined and paid during their lifetime.
The disadvantages of such a conveyance are that stamp duty is payable within 30 days of the conveyance, and exclusive legal control of the property is lost.
Some control can be maintained by way of joint ownership or by reservation by the person conveying of a "Life Interest" in the property -- but both have pitfalls. For example, owning children may refuse to sign a mortgage – to finance medical treatment, or for essential window upgrades. An owning child may also get divorced, resulting in the property being sold under a divorce settlement or court order.
If owners are comfortable with co-owning property, ownership is either as joint tenants or as tenants in common.
In the case of a joint tenancy, the last survivor ultimately becomes the outright owner. This is usually fine with spouses, but possibly not with multiple children, especially when grandchildren are involved. Potentially only the children of the longest survivor would benefit, to the exclusion of other grandchildren.
Tenants in common do not suffer the survivorship rule; however, any owner is free to transfer their share to a third party.
A reserved Life Interest is not ownership, but creates the right to occupy or collect rent to the exclusion of all others, including the owners. If a Life Interest is reserved, stamp duty is reduced using actuarial tables based on the life expectancy of the person with the Life Interest. The longer the life expectancy, the greater the reduction in stamp duty assessed.
Choosing not to make a lifetime transfer maintains full control to sell, let, mortgage etc. In such cases, property may instead be gifted by Will. A Will can be changed at any time, but a lifetime transfer is more expensive, harder to reverse or change (if at all possible) and has further stamp duty implications.
When disposing of a dwelling, a Will combined with a primary family homestead designation, not only ensures exemption from stamp duty but also that the dwelling passes to the intended beneficiary.
The procedure to transfer the deceased's assets to heirs is known as Probate. Once probate is obtained and the liabilities, debts and expenses of the estate have been settled, the assets are distributed according to the Will.
If there is no Will, then the distribution is according to the Succession Act 1974 – and property is shared by relatives in the highest categories set out in the legislation to the exclusion of others in the lower categories. Naturally, spouses and children are specified first, but anomalies mean that a Will is more certain of transferring assets to those intended to benefit from an estate.
Owners have individual concerns and preferences for estate planning purposes and each family has its own unique dynamics. Owners should make long-term plans and obtain appropriate legal advice to be sure that their desired wishes are attained – and in the least expensive manner possible.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.