Avoid Owing the Tax Man Well After You Die
Hildeberto (Hil) de Frias · December 28th, 2007
The Primary Family Homestead Exemption (PFH Exemption) is one of the most effective (and probably least expensive) estate-planning tools available to Bermudians.
So, what is the PFH Exemption? Simply put, it is an exemption from duty on the value of a deceased person’s interest in residential real estate. For most Bermudians, the most valuable asset they own at their deaths will be Bermuda real estate.
Most Bermudians are introduced to the potential impact on their estates of stamp duty (commonly called “Death Tax”) when they get around to making their wills. With the highest death tax rate currently standing at 15 percent, most Bermudians are quite shocked to learn that a significant sum may be owed to the Government coffers after they die. In the past, it was often the case that the initial visit to an attorney to prepare a Will developed into more complex estate planning and additional expense.
These days, however, Bermudians have the PFH Exemption as an estate-planning tool, and it’s a mighty useful one at that. In order to qualify for the exemption you must be Bermudian. You must also make an application to the Tax Commissioner and provide certain documents in support of the application, such as proof of identity (e.g., copy of your driver’s licence), proof of Bermudian status (a copy of the relevant page of your passport) and proof of ownership of an interest in residential real estate (e.g., a certified copy of the conveyance or other title document showing how you acquired your interest). Once you have made your application it will take a few weeks for the Tax Commissioner to process the application and issue a certificate certifying that your interest in the property is exempt from the assessment to “Death Tax” on your death. It really is that simple and will potentially save your heirs thousands of dollars in death tax. How much is saved will depend on the value of your interest in the property in question. But the best part for many is that they do not need a lawyer to make the application!
Those Bermudians fortunate enough to own more than one residential property on the island often ask which property they should apply for the PFH Exemption, as the exemption is limited to a single application. The simple answer is you should apply for an exemption on the one in which you own the most valuable interest. If you own one property outright worth, say, $800,000 and you own a one-third interest in another worth $2,000,000, you should apply for the PFH Exemption on the first property because your interest in that property is worth more. Remember, it is the value of your interest that is exempt from death tax and not the value of the entire property.
Clients often believe that the PFH Exemption only applies to the property in which they reside. This is not entirely true. You may make an application for the PFH Exemption for any interest you own in residential property in Bermuda. If, however, you do not make the application during your lifetime and you die owning an interest in more than one property, your executors may apply for the PFH Exemption but they will be restricted to the property in which you resided at your death. This is true even if your interest in that property is worth less than an interest you may have in other properties. If you did not reside in any of the properties, your executors will be restricted to making an application on the interest that is worth the least. The dramatic benefit to planning ahead is easy to see.
So don’t sit back and leave it to your heirs to deal with. Make an application today. You will be surprised at how easy and inexpensive it is to do and your heirs will be grateful in more ways than one.
Hil de Frias is a partner in Mello Jones & Martin property, trusts, and estates practice group. www.mjm.bm