Ethics case study 5: Inheritance tax
Outline of the case
Joe has strained personal finances. His job in asset management is insecure, his wife does not work, and he has high expenses in the form of mortgage payments and school fees for his daughter.
Fortunately Joe's father is wealthy, having built up considerable assets through hard work during his education and career as a finance professional combined with inheritances and frugal living. He's named Joe as the principal beneficiary in his will. He's in poor general health and Joe expects a considerable inheritance within the next few years.
Joe's father considers himself skilful and savvy with managing his personal finances. In the past he helped elderly relatives pass on their assets to him during their lives and ensured their estates had no inheritance tax liability when they passed away. Were Joe's father to pass away his estate would be liable to substantial inheritance tax however, surprisingly, he seems unconcerned by this.
Joe is concerned however. An inheritance tax liability could be substantial and prevent Joe using all of his potential inheritance to secure his family's financial future. The richest person in the country recently died and used a range of exemptions to pass on his entire fortune without incurring any inheritance tax whatsoever. It seems to Joe that paying this tax is just for fools!
Joe feels that his father's awareness and mental agility have declined with age. Specifically he feels that he is overconfident in his health, underestimates the value of his assets and does not properly understand the inheritance tax rules. Joe has suggested to his father that he engage some professional financial advice, however, he angrily refuses viewing financial advisors as incompetent, conflicted and extortionately expensive. He is determined to use Joe as a financial advisor where required at zero cost.
Joe's keen to do everything he can to help his father manage the inheritance tax liability of his estate properly, principally though passing down assets to Joe during his life.
Joe and his wife anticipate the inheritance and spend time browsing high end holiday resorts, new cars and houses. Joe's daughter comes home from school with a poor end of term report, a pattern she has fallen into recently.
Joe's father takes him to lunch at his favourite restaurant and asks after the family. Joe expects that his father would not be impressed by his extravagant plans and his daughter's poor work ethic, so instead replies that everyone is working hard, and his daughter is doing great at school. He makes a note to delete any social media posts featuring his family in expensive restaurants and exotic holiday locations. He explains to his father how much any financial gifts would be well used and that such gifts would also of course minimise tax liability.
Joe visits his father's house, being aware that he's lonely and needs help with odd jobs. He spots some valuable jewellery. He vaguely recalls his grandmother telling him when he was a young child "one day this will be yours". He tells his father the jewellery is his and places it in his pocket. His father is reluctant to agree but accepts Joe's claim when Joe mentions that he may be too busy to visit for a while.
He sees an open envelope from his father's doctor, opens it and reads the contents. When using his father's computer, he notices his fathers bank statement. He lingers on the screen to read it.
He makes a rough calculation of his father's potential tax liability. The estate will contain some illiquid assets, Joe plans to reduce the tax liability by deliberately submitting unrealistically low asset value estimates. He's confident the tax authorities will not notice.
At work Joe's manager notices that he's been distracted and takes him aside. Joe relates the challenges he's been facing with his family's finances and explains all the strategies he's adopting to minimise inheritance tax liability. After the meeting his manager feels uncomfortable with aspects of Joe's ethical conduct and considers whether this is a cause for concern to his employer.
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