20th May 2019
Inheritance tax planning is most certainly a balancing act, is fraught with concerns and challenges, and is one that I see individuals struggling with quite often. When you die you may want your estate to pass to your children or other loved-ones but them having to potentially pay a significant % of the estate in Inheritance Tax may reduce greatly the amount that goes to those you intended, and increase the amount that goes to Revenue. I often hear people say ‘sure I won’t be here to worry about how much tax they have to pay’, and I fully accept that logic. I do however also know that many of us would prefer not to see a significant portion of our assets go to the Revenue due to a lack of planning or perhaps a little foresight.
This week on Ireland’s #1 finance blog and podcast I will share some ideas that I hope will help anyone that is struggling with this particular conundrum, or indeed may have this conundrum but doesn’t yet realise it! I do hope you find it an excellent guide in the main aspects of inheritance tax planning, and I would also caution that everyone’s scenario is obviously different, and what might work for one person may not be the optimum route for someone else, so please do bear that in mind as you digest this!
If you are passing your estate to a child, each child can inherit €320k before paying any tax on the assets. A relative who is not a child of yours can inherit €32,500 before paying tax, while a ‘stranger’ can inherit €16,250 before paying tax.
If your total estate will be valued at more than €320k on your death, and 1 child is inheriting the lot, they will pay Inheritance Tax on anything over that value. Inheritance Tax, or Capital Acquisitions Tax as it is also know is currently 33%. If you have 2 kids and they are getting the estate equally, they will be liable for tax if estate is valued at over €640k (€320k *2). The more beneficiaries you have the greater the ovearall estate value can be before tax is due. If you have 5 kids for instance, you’d need to be passing on an estate of more then €1.6m for inheritance tax to be a potential concern.
By way of example, if you have a home valued at €500,000, a pension pot of €200,000, some savings and investments of €200,000, your estate is valued at €900,000. If you were to pass away, or if you are a couple and you both pass away with an estate of this value, and your 1 child inherits the lot. That child is entitled to €320k tax free, and the balance of €580k will be taxed at 33%, meaning a tax bill for them of over €190k. In essence that is your entire savings and investments portfolio that will be handed over to Revenue. Those savings and investments which you most likely built up over years and years of hard work, careful investment management and indeed probably lots of ups and downs. Those funds are not going to reach your child, they are gone to the Revenue. That is a bitter pill to swallow, and one which many of us would much rather avoid if at all possible. Here are some ideas which I hope might help.
Inheritance Tax Planning:
If you are in the situation where you have assets; property, investments, cash, land, pension funds or other, and you intend leaving your estate to your loved-ones it can often pay large dividends to plan ahead and try maximise the benefit to you and to your beneficiaries and minimise the benefit to Revenue.
A. Calculate Your ‘Possible’ Estate: While none of us like to predict our ultimate demise, the obvious thing to do in inheritance planning is to being with the end in mind. There will always be a large shovel of salt required in predicting future scenarios however a basic analysis of current total ‘net worth’ is step 1. Consider what your total assets are worth, everything that form your estate on death. This will include, personal possessions, all property, land, deposit accounts, investments, pension funds, shares etc. Next step is to deduct any debts you may have, if any. The final figure represents your ‘net worth’.
In order to attempt to put a future value on your estate, consider how much of that net worth you are spending each year, or are likely to spend over the coming years, above and beyond your regular income. If you are spending more than your income it is likely that you will reduce your ‘net worth’ over time. You can broadly then estimate what your ‘net worth’ will be right now, 5, 10, 15, 20, 30 years into the future.
If you are leaving your estate to children you can therefore easily divide your estate value by the number of children you intend bequeathing your estate to. If that figure is more than €320k then there may very well be an inheritance tax situation.
B. Complete Your Will: While it might not alleviate a tax bill, having an up to date will is a very important aspect to estate planning. It will help distribute your assets according to your wishes.
C. Consider Setting Up A Trust: Subject to certain family law provisions assets placed or settled on a trust will not legally form part of the estate on death, legally having been placed in beneficiary’s ownership on the setting up of the trust. (as covered with Pauric Druhan in Podcast 101).
D. Set Up A Section 72 Policy: Covered in detail in Blog 68, a Section 72 Insurance Policy can be an effective way to generate sufficient cash which your beneficiaries would get tax-free, and designed to be used to pay inheritance tax. In the above example if you had a S.72 and were paying your insurance every month, subsequently died, the proceeds from the policy would not count towards your overall estate and indeed if it was of the value could be used instead of them having to use your hard-earned life savings to pay the Revenue.
E. Gift It: The well known ‘small gift exemption’ of €3,000 per year is an often under-used, despite widespread awareness. Under revenue rules any of us can receive €3,000 per year from anyone in every calendar year with no CAT liability. They also point out that we can receive this from several people. If you are a couple and are concerned that your estate will go to the Revenue, you both can give gifts to that value, to as many people as you can or wish to! If you have kids or grand-kids that can equate to many thousands of euro each year that you can gift, and subsequently greatly reducing any potential future tax bill. If you had say 3 kids and 6 grand-kids, as a couple you could potentially gift a total of 54,000 per year if you each gave each of them €3,000 per year! Gifting it now as opposed to on death removes it from the estate and reduces the potential amount over their individual allowances.
Another aspect of ‘gifting’ is the idea of passing an asset to a beneficiary now instead of waiting until you die. This can be a particularly useful approach in instances where you do not need to retain ownership of the assets, and where there is a significant probability that the assets will increase in value between now and your death. Surely it would make more sense to gift an asset of say €300,000 to a child now rather than wait for 20 years to pass it on. If such an asset was to grow at 3.5% for 20 years it would be valued at €600,000 when you finally pass it on. Depending on the asset type there could be a tax saving of €100,000 by passing it earlier than later.
F. Leave It To Charity: Any such legacy left to a registered charity is exempt from tax, and can be a really useful way of reducing your estate below tax thresholds, in addition to making a really meaningful legacy to a charity of your choice. Why not give it to a charity or cause that is dear to your heart rather than leave it to loved-ones for them to hand it over in tax…..when you think about it, it really is an opportunity worth considering.
G. Spend It: The last but certainly not least option open to anyone with an estate that is likely to be tax ineffective in passing-on, is to be calculating in your spending habits! For many us when we are in the ‘accumulation’ phase of life, we are looking for ways to save money and put some aside for future needs. When we graduate out of full time employment with hopefully enough liquid assets it can be difficult to instantly switch into ‘spending’ mode! After-all we may have been 30, 40 years or more in ‘accumulation’ phase, and those habits aren’t necessarily easy to shift! While we absolutely will need to be prudent in ensuring we will have sufficient income to cover our basic essentials for the rest of our lives, we also will want to ensure that we spend money while we are willing and able to do the things we really want to do; be it travel, hobbies, giving, volunteering, caring for others, supporting loved-ones or whatever is really important to you.
Now is the time to set out a ‘spending-plan’ for the resources we have. This plan will ultimately enable and encourage you to enjoy your money, something which doesn’t come naturally to us all! If we don’t do this we may find that we are fearful of spending it, we are still in ‘accumulation’ mode. We could turn around at 80 years of age with too much money, perhaps getting to an age where we may not be fit or well enough to do the things we want to, and we subsequently pass it all to the next generation, who then have to pay a chink of it to the Revenue………this would seem like a lost opportunity to many of us.
Ultimately there are a couple of basic ideas behind estate planning and inheritance tax planning that are very useful to consider:
If something is going to both bring you pleasure AND will reduce the amount of your estate that goes to Revenue surely it is something that should be explored further. If we go back to our earlier example, surely the €200,000 would have been better spent on something fun and memorable, given to a good cause, or handed over to a loved-one prior to death so that you can see the value and difference it makes to someone!? Over to you!
Thanks for reading!
Paddy Delaney QFA RPA APA
P.S. If and when you need professional help in planning your own investment and retirement income I’d be delighted if you’d consider Informed Decisions. I take a deeper look at your planning and investment needs to create cutting edge approaches and strategies to help you achieve your goals.
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