In Blog 61 we mentioned Section 72 plans and said the following....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.
So, as promised a few weeks ago we now going to try explain what exactly a Section 72 is, and isn't, and how to ensure that, if this is something you are thinking is for you, how to ensure it does what you want it to do for you, to achieve the goal you have in mind.
Speaking of goals, that is what we are on a mission to do here at Informed Decisions, to help you achieve the goals that are important to you. I completely empathise that our industry doesn't always make it easy to see the wood from the trees but that is our mission, to help you get whatever it is that is important to you. You can join our community here, and please do share this with anyone you feel may benefit from it. Boom!
Will You Die With Too Much Money!?
We saw Johnny & Mary in Blog61 pass away with too much money (net worth). As a result their kids (Sheena & Joe) had to pay almost 20% of their parent's hard earned worth to the revenue, as a result of poor estate planning. Estate Planning here is Ireland is relatively simple in most cases. Yes there are things that need to be considered, and things can change (including the rules/goal-posts) however the principles remain unchanged.....and a primary one is that you do not want to die with too much money.....you want, ideally, to have the bulk of it out of your possession by the time you do die....otherwise there is a strong chance your estate will be heavily heavily taxed. When don't obviously know when we will do it, but when you do it you ideally want to do it with as little money as is feasible!
There are ways and means of ensuring that is the case, you can spend it, you can give it to charity, you can pass it to loved ones, however these are not always feasible options. In cases where it is not practicable, for whatever reason, to give it away or spend it then there may well be another option that could help.
What Is A Section 72 Policy?
Section 72 Insurance Policy is basically like an insurance plan to pay the potential inheritance tax bill that will trigger when your estate passes to your loved-ones (beneficiaries). It is life cover, same as any other life cover, but this one was set up under exclusively and specifically for the purposes of paying that tax bill for your loved-ones. Now you might be reading this and saying that you are on in your 30s or 40s and that you couldn't possibly need to be thinking about this sort of a racket, but perhaps you have elder relations who might want to be thinking about it if they are in danger of dying with too much money!
To portray how this type of plan differs from a regular life cover plan lets look at a quick example. If Mary had a regular life cover policy in place and when she died it paid out €100,000, that money would form part of her estate, and lets say her daughter, who also inherited a house worth €600,000, would be forced to pay 33% tax on the €100,000 (€33,000). She would also have to pay 33% on €290,000, which is the value of the house above the threshold of €310,000 (€95,700). Mary's daughter now has a tax bill of €128,700 to pay. She may or may not have access to that cash, she may have to sell the house, she may be living there....it throws up all sorts of issues potentially.
If, on the other hand Mary had in place a Section 72 policy of €100,000, which along with the house with a value of €600,000 was passed to her daughter on death, it is an entirely different picture. Her daughter still have the tax bill of €95,700 to pay on her inheritance of her mothers' home, however the €100,000 Section 72 policy now goes directly toward paying that bill....the €100,000 does not form part of the estate as it was set up as a Section 72 plan, and there is therefore no tax due on it. Well technically there will be tax due on the amount of that policy which does not go towards an inheritance bill, which will amount to 33% of the €4,300....which is a trifle better than the €128,700 she was facing in the previous scenario!!
How Do We Set Up A Section 72 Inheritance Plan?
If you, or someone you know is married or in civil partnership and wants to put in place a plan like this to cover both persons then they can do this pretty straight-forwardly (subject to underwriting etc obviously!). If a couple who are neither married or in civil partnership want to put this cover in place they have to do it in 2 separate plans unfortunately, which will likely cost a little more.
Many people recommend that the most suitable type of cover to put in place is a Whole Of Life plan which has no expiry date on it. What this means ultimately is that provided you keep paying the premium, and you keep living the cover will be there in event of your death, whether that happens tomorrow or in 100 years from now (if that makes any sense!?).
Technically you can put a Section 72 in place with a regular Life Cover plan, which usually have an expiry date set when you take the policy out, which could mean it expires before you die. In reality that could mean you die after the policy expires, so there's no cover in place at the time of your death, and you've paid a shed-load of money over the term of the place yet it would not pay out any benefit; totally and utterly defeating the point of putting in place the plan in the first place!
In God We Trust!
Now we aren't actually talking about ecumenical matters but what we do want to make sure people are aware of is the need to put these plans in 'trust'. Essentially that means filling in an appropriate 'trust form' when applying for the plan. This will do several things, and will hopefully ensure it is done right at the outset. It will notify the revenue as to the purpose of the plan (Inheritance purposes). It will ensure that the cheque being paid out at the end goes to the right person, and for the right purpose. It will also ensure that the cheque doesn't go into the deceased estate, instead being paid direct to go toward paying the inheritance bill......a must do, so make sure that's done right at the outset!
What Should We Watch Out For?
In relation to the type of plan that you are taking out, most commonly we see the Whole Of Life plans being used. There are many different types of Whole Of Life plans in existence in the market, and picking the wrong one can be the difference between the plan working out and the policy doing what you intended, and it being a bit of a shambles. One such difference is guaranteed and reviewable. There are many 'reviewable' plans which mean that the price that you pay each month can go up as you get older, resulting quite often in the price being so restrictive that people are forced to cancel the plan, usually when they have paid for many years into the policy, and essentially losing benefit.
A more suitable option to explore would be what is known as 'guaranteed' whole of life plans. With these plans they will often start off being a little dearer than the 'reviewable' version, however they stay at that price for the full duration, whether that is 1 day or 100 years...the price if fixed. Usually represents far better value and results in the plan staying in place, and the policy paying out at the end of days.
It is also worth noting that for a Section 72 to be valid in the eyes of the revenue the policy must be set up by the person whose death is being insured, and they too must pay the premiums. So, a son or daughter cannot take out a Section 72 on their parents for example, to cover a potential tax bill the son or daughter might face when their parents pass away. If that is the preference then it might be best to explore the route of putting in place a 'Life Of Another' policy. We'll cover it another time but that is essentially taking out life cover on another person, paying the premium, and receiving the cheque when they die.....sounds like it's ripe for abusing but there are terms and conditions associated!
The cost is obviously something to keep an eye on! If someone is in ill-health, or a heavy smoker or indeed particularly old it can be prohibitively expensive to put the plan in place in the first instance, the monthly cost may be beyond what is affordable to them (even though they may have a large net worth!). Only be speaking to and getting a number of comparative quotes will you know if it is manageable or not for you. Again, a reminder to compare apples with apples, so don't necessarily opt for the cheapest you see, you could inadvertently end up with a reviewable plan as opposed to a guaranteed plan as mentioned earlier.....just because you were only watching the price.
If you can't or don't want to spend the money or give it away before you die then a Section 72 plan may very well be a really useful and cost effective last resort to help cover the tax bill that inherently (no pun intended!) arises when someone dies with too much money. The very worst case scenario is that a vast swathe of the estate is handed over to the revenue, this might just be a means to protect against that fate.
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