Welcome back to another edition of the Informed Decisions Blog, Ireland's #1 Financial Planning Blog & Podcast! This week we will take on an obscure topic, a topic which is often left till the bitter end before we give it consideration! When it comes to focusing on your Financial Planning, Financial Independence or 'building wealth' it pays, quite literally, to begin with the end in mind!
Speaking of Financial Planning I am delighted to share with you that the 'My Money Matters' Programme I was invited to help create with Count Her In is now alive and well (and carrying a decent introductory discount!) It was a really great thing to be involved in, to be creating a Programme which I believe will have a hugely positive impact for people that want to make positive changes in their finances. It made it all the more rewarding to get paid a few euro for my time and expertise in helping them create it! Seriously, we hope it is of real and tangible long term benefit to anyone who feels it would be of help.
How Can We Die With Too Much Money!?
We'd like to now introduce you to this weeks' fictitious characters, Sinead & Johnny. For simplicity we'll say they were both born in 1948, meaning as of 2018 they are 70 years old. Sinead is from the South East, but living in Dublin since she was a young lady, lured by the handsome young Johnny at the time! Sinead worked on and off over the years, while also rearing their 2 children, Sheena & Joseph, who are now in their early and late 40's. Sinead's husband Johnny worked all his life, most of it in 1 large factory, originally as a labourer and then moved into supervisor and management roles. Johnny loved working and only retired fully from paid employment at the age of 69. Since then they have both been enjoying the spoils of their 50 years of work, travelling, going away for weekends with friends & family, and enjoying the company of their 5 grand-kids!
As they look back on their life now they are delighted and grateful for what they have achieved and experienced. They raised 2 'fine' children who have gone and had their own families and are living a full life. They were never what they would have called 'wealthy', for many years just making ends meet, as they raised their family in often difficult economic conditions. They never drove the biggest and flashiest cars, they didn't have the high-profile jobs that their kids have now; they worked hard and were what they would class as 'careful' with their money.
By being so diligent with their spending and savings they built up a lot of assets. They live in a home that is, thanks to recent price increases, worth €750,000. They have savings in 2 different banks of €190,000, they have shares they bought 20 years ago that have gone up in value to €50,000. Johnny has a pension from his work that is valued at approximately €300,000. In addition to that they have an investment which they took out with a local broker that is valued at €80,000. They drive very reasonable cars, combined value of approximately €20,000 right now. They have no loans at this stage, nor any forms of life insurance.
Despite the fact they never consider it, never-mind do the maths, by adding all of the above assets you'll see that they have total assets worth almost €1.4million (yes, €1,400,000!). When they realise this they add gratitude for the good fortunes they have been blessed with also!
It is worth mentioning that the assets above; house, investment, deposit account and shares were all bought or paid for with Johnny's take home pay, his Net Income. Before we get our income we usually pay tax on that income, it was deducted by his employer and paid to the State on his behalf, but he did pay tax at lets say an average of 20% of his life-time income over the years. So it is totally fair to say that he has paid his fair share of tax at this stage.
Bearing in mind they are fit and well it has not been on the table for discussion, however they are both aware that they are not going to live forever, and are thinking that their kids Sheena and Joseph are going to inherit a lot of assets when they are both dead.
What Will Happen Their Assets When They Die?
Unless otherwise stated in their Will, then their combined assets will pass to their two kids when they are both dead. The statistics suggest that at least one of this lovely couple will live for another 15 years however let's give our story a sad ending, lets say both Sinead and Johnny were to to die in 2018 with assets of this value. The assets would indeed pass to Sheena & Joseph, however there will be a tax bill waiting for them.
Under Revenue rules a 'child' can inherit assets from a parent of up to €310,000 without paying tax on that inheritance. Johnny can inherit €310k and Sheena can inherit €310k. So of the total assets (€1.4m) €620,000 will pass to the 2 guys tax-free, however the real disaster here (aside from Sinead & Johnny's demise of course!) is that the majority of their assets will again be taxed, their assets they have built up and which they so dearly wished to pass to their loved-ones will be ravaged by tax, and it can potentially cause a lot of hard-ship and hassle for their loved-ones in finding the best way to settle that tax bill forced upon them.
Sheena and Joseph will get a tax bill from the Revenue of €257,000 (€1.4m less €620k = €780k. Tax Bill is Capital Acquisition Tax (33%) of the €780k). No matter what way you dice it that is a huge amount of money to be taken out of the Sinead & Johnny's estate, an estate they worked & saved hard for, and to add insult to injury an estate built with earned income, on which they already paid shed-loads of tax! You might say 'well sure the kids are getting enough, surely they can look after that bill', but that is besides the point....tax has already been paid on these assets, they have worked mighty hard to build these assets, why on God's green earth would we hand over, in this case almost 20% of the entire lot to the Revenue, if it can be avoided!?
They have died with too much money, plain and simple.
How Can I Reduce My Inheritance Tax Bill?
You may be of an age that you begin to consider your own mortality, or indeed you may have parents who are very much considering their mortality, either way this episode aims to share some ideas worth considering, and to raise awareness about the key areas of consideration.
Irrespective of which side of that fence you might sit on, there is no question that raising the topic of planning to pass your wealth to your loved-ones is a prudent conversation to have. I'm sure had Sinead & Johnny been aware of it that they would have gone to great efforts to avoid paying over €250,000 of their estate to the Revenue.
'They have died with too much money' is the clue here. The smaller your estate/Net Worth on death, the smaller the chance it will be ravaged by tax. The most cost effective way to reduce the size of your estate is give it away while you are alive! Sure it will take an approach that prudently frees-up cash from certain assets, but it is a tried and tested way to manage the huge inheritance tax burden that can arise.
Can I give money to kids and grandkids while I'm alive you might wonder? Absolutely you can. Assuming the money was in joint names then Sinead and Johnny could have gifted €3,000 each to each of their 'loved-ones'. That would be €54,000 per year to their 9 loved-ones (2 children, 2 children-in-law and 5 grand-kids). Many aren't aware of the ability to gift from each parent, and indeed the ability to gift to fiance's or spouses of your children.
If they had done that for the last 10 years they would have reduced their estate by over €500k, bringing the taxable portion to much smaller levels (less than €100k).
Do it or 15 years and the tax bill is gone entirely, meaning all their assets would have been passed to their kids and grandkids totally tax free, at no additional expense and no risk.
What Are Section 72 & Section 73 Plans?
These are creations of the Financial Services industry endorsed by the Revenue and are sold to people as a means to reduce or indeed eliminate a potential Inheritance or Gift Tax Bill down the road. They cost money and I am told are not as much fun nor rewarding as giving the money to loved-ones while you are alive! Having said that they can work very well for some people in building an effective Financial Plan and planning their inheritance in a tax effective manner, particularly if the estate is of a size and time is against them in gifting enough in the time left! We will devote full episodes to both these types of plans in the near future.
What Could Sinead & Johnny Do If They Live To 85?
As mentioned above statistics would suggest that at least one of them should live until they are 85. Based on that fact, and given the Tax Bill that would be triggered if their assets passed to their kids they should really start their gifting programme as part of their Financial Planning now! In addition it would make financial sense to add the grandkids to their Will, they can currently gift €32,500 to their grandkids upon death with no tax bill (that would pass on €162,500 tax free upon death).
And last but certainly not least is the concept that Sinead & Johnny start (if they haven't already!) living the life that they want to live to forget about the costs, providing they have a plan on the amount they want to spend and the things they want to spend their money on, it is surely time that they got to enjoy their money. After-all, if they spend it then it won't be in their estate when they pass on, which will help reduce the tax-bill left for their loved-ones.......don't die with too much money!
Please share, send to anyone who might benefit from knowing this stuff, it might be difficult to send it to a parent, but it is unavoidable folks!
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