While it might not be a topic that gets you all revved up, Estate Planning is considered to be a key aspect of managing one’s long-term personal finances, regardless of how simple or complex their financial situation. 

Key Estate Planning Points

• Make use of the small gift exemption to the max you can
• Ensure you have a will in place
• Is section 72 really a good idea
• Estate planning is an essential part of your financial plan
• Things to consider, if Estate Planning is on your mind

So, what is estate planning, or as some call it ‘generational planning’? Simply put, this is putting a plan in place to pass any of your surplus wealth to the next generation while not paying more tax than is absolutely necessary!

Estate assets will include the property, cash, pensions, and investments that you hold at the time of death. And I say ‘surplus wealth’ because ideally, you’ll get to enjoy your money first and foremost, before you worry about passing it on the next lot to enjoy, right!?

First, let’s start with inheritance tax.

Estate Planning Inheritance Tax

There are tomes written about Inheritance Tax in Ireland already but just a quick summary! Inheritance tax applies to each individual that you choose to leave all or a portion of your assets to. Thankfully, there is some relief thanks to a tax-free inheritance threshold. The level of this threshold will depend on the relationship you have with the person inheriting the assets.

There are three categories. Sons and daughters get the highest threshold, which is currently €335,000. So they can receive €335k from parents in their lifetime before they have a tax bill. The second category includes grandchildren, nieces, nephews, and siblings, for whom a much lower threshold of €32,500 applies.

The third category which has the lowest tax-free inheritance threshold, is any other person with whom you have a relationship. This person has a threshold of €16,250.

Once the amount goes over these thresholds, Capital Acquisition Tax (CAT) comes into play. This tax is a whopping 33% of the assets over the individual’s threshold. Interestingly, before the Global Meltdown, up to 2008, and before the Gov had to try recoup some losses, CAT rate was a paltry 20%!

If you or your partner die with say a 4 bed-detached house worth €600k, pensions of €1m total, and €400k of cash/deposits and investments, your estate on death is valued at €2m. If you have 2 kids, they inherit €1m therefore. They can each receive €335k, and they owe 33% tax on the €665k excess. They each have a tax bill of €219,450.

The Revenue has taxed your estate (which was all built by you with post-tax earnings!) a total of almost €440,000.

But what could you have done any differently? Well, not an awful lot to be honest; but here are some things that we all need to be aware of:

Annual Gifting

One way to increase how much you pass to your loved ones while you are alive, outside of the tax net is to take advantage of the Small Gift Exemption. You are allowed to gift anyone on the planet up to €3,000 a year, totally tax-free. This doesn’t eat into their inheritance tax threshold. It also applies to each individual, so a husband and wife can gift up to €6,000 a year to each child/friend/loved one each year.

Doing this over a lifetime will add up to a considerable amount of money being passed to loved ones, and being removed from your estate before inheritance tax comes into play. This is known as the small gift exemption.

If you are going to do this for kids, for example, it is worth investigating what best to put these funds into over the years. If you put €6k per year into a deposit account in the name of a child, over the course of say 20 years, inflation will do a lot of damage to that – almost certainly wiping out the benefit of the tax relief which motivated you to do it in the first place!

A way to grow these funds is to invest them while the child is under 18, where you can manage the investment decisions until they are old enough to manage it themselves. Though not perfect, one could check out Bare Trusts offered by some investment firms for that sort of thing if desired.

Section 72

Section 72 is a type of life insurance product that is put in place for the exclusive purpose of paying a future CAT Bill for your beneficiaries. Using the earlier example, you would guesstimate what your estate will be when you die, and what the potential CAT bill will be for your beneficiaries.

You then put in place a Section 72 life cover policy that would pay that amount when you die. That pay-out is not considered part of the estate, and is intended to be paid to executors to pay to Revenue to clear the CAT for your 2 kids in that scenario.

This can mean that you can leave assets to loved ones without them having to cover the tax obligation themselves. Can be useful in the scenario where beneficiaries are inheriting assets that they can’t or don’t want to have to sell in order to cover a CAT Bill, such as a home or certain investments.

However, while this might seem like a great way to ensure your assets aren’t lowered through tax it can be difficult to get and is hugely expensive. Using our earlier example, if a couple in their 60’s wanted to put a Section 72 plan in place for a c€500k lump-sum payout, it will cost them around €1,000per month. A broker can get a maximum of 225% of year 1 premium as an initial commission if they sold such a plan to you, so they’ll get up to €27k initial commission for selling the policy, and between 10% and 30% annually thereafter. You can see the incentive for the promotion of Section 72 policies!

For you though, it is much like a gambling bet! If you don’t live long after taking the policy out, you don’t pay much for the cover, so you win, so to speak! However, if you do live a long time, you pay the monthly policy premium for a long time, and ultimately end up paying more for the cover than the lump sum that will pay out when you die!

Putting a Will In Place

Regardless of how large or small your estate is on death don’t neglect having a Will in place. A Will is an essential part of estate planning and it ensures your assets are distributed as per your wishes.

If you don’t have a will in place your estate will end up going to the courts for them to decide how it is distributed. This can end up costly and time consuming. The biggest winners in these cases end up being the lawyers who can charge substantial fees for the privilege.

It can also cause unwanted family rifts with members arguing over their share. A Will that is well planned and discussed with family in advance will make the whole process of winding up your estate much smoother and cheaper. See blog 220 for more on considerations in making a Will, will ya!

The goal is to make things as tax efficient and seamless as possible. So please do ensure you have a Will in place, something that only 27% of Irish adults had in 2019 according to the Law Society of Ireland. 

Spend It!

Another option, and one which I believe will give most people a great sense of satisfaction, is to spend freely, assuming you can afford to. Assuming you haven’t accumulated too many multiples of what your retirement expenditure will be, you should be able to spend freely for the coming decades, without also leaving too much on the table to be ravaged by tax!

Though some beneficiaries might not thank me for it, my advice is to prioritise your own lifestyle and needs. To use your accumulated assets for yourself. If there is a high probability of their being excess, then great, we can plan to gift and donate while you are alive, so that you can see them get the value from it, and to feel their unending gratitude for your generosity!

But a surefire way to avoid your estate getting ravaged by Inheritance Tax, is to spend it before you go!

Estate Planning Final Thoughts

A well thought out financial plan will help you navigate what might be the best balance, and know what to avoid when it comes to estate planning in Ireland. However, no matter how diligent a plan might be today, there is no knowing what level of assets you will need for your own uses in the future.

None of us know what our run-rate will be on spending in the future, or when we’ll die! Like anything, it is a case of keeping an eye on it over the years.

Many people try to strike a healthy balance, by spending what they want to spend (or can afford to spend), doing some level of gifting, helping loved ones out when they need it and will appreciate it, and really just prioritising their own needs and lifestyle.

In my view, unless you are highly likely to leave many many millions behind you, Estate Planning is pretty simple, and can be summarised in a few headings.

• Spend at a rate that has a high probability of being sustainable for your remaining years
• It does help to have a line of sight on what your run-rate of annual spending will be – so do some homework to figure this out, and tracking in initial years
• Decide on doing some annual gifting or not, and whether that will start now or later
• Ear-mark a portion of assets for gifting to loved-ones or charities, for some point in the future (particularly if you are not sure you will definitely not need these assets yourself!)
• Spend your income with pleasure and totally guilt-free!

I hope it helps.

Paddy.