It might not be the easiest topic to think about but getting your ducks in a row in relation to issues of inheritance is one of the wisest financial decisions you can make. In times of bereavement, money should be the last of your worries. John Lowe of MoneyDoctors.ie discusses the issues and suggests what to bear in mind to ensure you can help your parents to get their inheritance sorted out in good time.
Currently less than 30% of the adult population in Ireland have made a Will. 99% of Irish citizens have small “estates” ( assets… home, maybe an extra property, a few accounts, car, golf clubs etc ! ) and uncomplicated relationships. Not only can you draft your own Will but you can request on your passing that your representative – generally the executor/trix – complete the Grant of Probate .. a simple operation to authorise and effect the wishes of your Will that does not require legal representation unless you have a complex estate or relationship. You will save € 000s.
Two simple issues :
- The Will
Firstly, make sure there is a will in place. While your parents may think that the 1965 Succession Act ensures that their next of kin will inherit their assets, a will speeds up legal proceedings and ensures every detail is taken care of in accordance with your parents wishes – which can also help to avoid some nasty arguments between the bereaved. As well as expediency, a will offers clarity by appointing one or more executors, one of whom will become the personal representative of the deceased. This means that they are responsible for collecting assets, repaying any debts including funeral expenses and distributing remaining assets. By appointing a personal representative before their death, your parent will avoid the need for you to make an application to the courts for a suitable person to occupy that role.
Without a will, a person dies intestate and certain rules come into play pertaining to division of their assets. In the case that you are a child of someone with a spouse or civil partner, two thirds of your parent’s estate is left to their partner and the remainder divided equally between you and any other children; or, if your parent has no spouse or civil partner, all assets are equally divided between you and any other children. Where a will is in place, a spouse is entitled to one third of their partner’s estate, regardless of the terms of the will. Also ensure there is an Enduring Power of Attorney signed so that should your parents not be in a position in later years to make decisions or sign, this legal document will give a nominee the power to act on their behalf.
- The Tax
The thorn in the side of many an inheritance, Ireland’s inheritance tax – or Capital Acquisitions Tax (CAT) – is a hefty 33%. As a child, you are entitled to inherit a certain amount tax free from your parent under the A category threshold (up to € 335,000 in your lifetime) ; after this point, you are charged 33%. So, if you are due to inherit a property worth €480,000, you are liable to pay 33% tax on the difference between the €335,000 threshold and what the property is worth: in this case, CAT tax of €48,750. Not something easily affordable to many.
In order to plan for this – and assuming that they are married – you should first ensure that your parents arrange for their joint estate to be left to the second parent to pass away, as they will not have to pay tax on inheritance from their spouse or legal partner.
There are two other CAT categories…
- B .. aunt/uncle, brother/sister, nephew/niece, grandchild – threshold € 32,500
- C .. anyone else including me ! – threshold € 16,250
At this point, there are certain exemptions that may apply to you. If you have always lived in your parents’ home, stay there after their deaths for 6 years at least and don’t own another property, you may be exempt from inheritance tax; similarly, in some instances, you may be able to avail of business or agricultural relief that reduces the valuation of the asset by 90%, meaning your potential tax bill is significantly reduced, if not quashed.
Lastly, if your parents have life insurance through a Section 72 life assurance policy, you literally have insurance that covers the cost of inheritance tax. This means that the proceeds of that policy are not taxed when used to pay an inheritance tax bill. Many parents take out this form of policy in order to ensure that their children can inherit their estate without needing to pay any tax. But beware if your tax bill comes to say € 80,000 and the policy pays out € 100,000, then the surplus € 20,000 is put back into the assets of the estate and taxable after thresholds met at 33% !
It may seem like a complicated road and one that doesn’t bear thinking about, but like any financial quandaries, planning in advance can help hugely with inheritance. If you’re feeling uncertain, pop me an email for advice tailored to your own situation or better still, tomorrow after 12 noon, click on this link for the launch of a Do-It-Yourself Will & Probate service – www.moneydoctors.ie/wills .