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Friend s of the Elderly : Planning a Will - July, 2014

Posted by Jill Kerby on July 30 2014 @ 09:00

 

WHERE THERE’S A WILL THERE’S A RELATIVE:  GOOD PLANNING WILL HELP KEEP EVERYONE HAPPY

 

Leaving part of one’s estate to loved ones is a very Irish trait and is rooted in both our love for the land – even if it is only a little patch of city garden and bungalow -– and our close family ties.

The Celtic Tiger years prompted many early an inheritance.  Parents and grandparents gifted down payments to the next generation or went guarantor on high-end mortgages that were otherwise unaffordable, and unfortunately proved to be so a few years later. 

For many older people these early inheritance gifts turned out to be a seriously expensive mistake: not only was the homebuyer left with negative equity but the giver’s personal balance sheet became seriously eroded as their own property value dropped sharply.

Despite the mistakes of the boom years, the issue of inheritance remains one that still needs to be addressed.

And the first step is to write a legal Will.  Without a Will, the deceased is deemed to have died “intestate”, and their estate is distributed according to the terms of the Succession Act 1965: 

-       Where there is a surviving spouse but no children, the spouse inherits everything and the transfer is entirely tax free.

-       Where there is a surviving spouse and children, the spouse inherits (tax-free) two thirds of the estate and the children, the remaining one third in equal portions. The children’s inheritance is subject to the tax threshold of the day, currently €225,000 per child. The balance is subject to the current capital acquisition tax (CAT) of 33%.

-       Where there is no surviving spouse or children the deceased person’s estate is distributed first to surviving parents, then siblings, then nieces and nephews. The tax-free threshold between siblings and nieces and nephews is just €30,500.

-       Where there is no lineal descendent, the estate becomes the property of the Irish state.

Writing a Will means that you have full control over who you leave your money, assets and goods and in whatever order and amount you wish.

That said, it should be noted that you cannot disinherit a lawful spouse and while you can do so to your children, such Wills have been successfully challenged by children in the courts. 

Meanwhile, adopted children are treated exactly the same as all birth children (regardless of whether their parents have been legally married) and, subject to certain time/residence conditions, foster children are also treated the same.

TAX EXEMPTION

If you leave someone who is not a lineal relative an inheritance, the tax free amount they can receive will be just €15,075. The balance is taxed at 33%.

However, a person who has shared your family home for three continuous years, say, a child, sibling or other relation, a same sex partner (who is not already a civil partner) or just a friend, can inherit the property tax-free if they are not the owner or part owner of a property already and they do not sell the property for at least six years after receiving the inheritance.

Certain business and agricultural land transfers are also subject to some CAT relief.

The complications that can arise from these CAT rules is another reason why it’s important to get legal advice when making anything other than a straightforward Will. This is especially the case for separated and divorced couples, though inheritance is usually addressed during the separation or divorce proceeding and may also be part of a judge’s ruling.

Avoiding inheritance tax is difficult but possible if the person decides to dispose of part of their money and assets during their lifetime. 

The easiest way to do this is to take advantage of the tax-free €3,000 annual gift provision which allows anyone to gift that amount to another person each year, regardless of their relationship.

In other words, a parent can gift each child and grandchild – or anyone else – up to €3,000 every year, tax free. 

For example, if you have three children, three daughter’s or son’s in law (or equivalent partners) and six grandchildren, as was the case for my own in-laws, a total sum of €36,000 a year could have been gifted, with no tax liability for anyone and no effect on the beneficiary’s lifetime tax-free threshold.

The money can then be used to help pay for education fees, health costs, mortgage debt (or a mortgage downpayment) or other purposes.  Multiply this tax-free endowment by 10 years and €360,000 can be gifted to family members during the parents’ lifetime. Upon their death, their remaining estate can be distributed within the current tax-free thresholds. (See above)

A substantial, tax-free gift dispersal like this is possible only for the wealthy, so a word of caution:  no matter how generous you are, you need to ensure that you keep sufficient savings or assets intact for your own immediate and long term needs before giving them away in the form of early inheritances.

Special life insurance  – known as a Section 72 policy – can be purchased to offset large inheritance tax bills on your estate – but these are expensive and require good, independent financial advice.

We’ll look at the costs of – and the need to pre-fund – long term health and nursing care in a future article.

 

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