The “Bank of Mam & Dad” has been one of the most reputable and long-standing financial institutions in the state. As financial planners, when we sit down with couples and ask them about their long-term goals and objectives we do get some quirky ones back; “I’d love a Ferrari, a racehorse, a yacht, a lighthouse off the coast of Co. Kerry”, etc.
That’s all perfectly fine. It is, after all, your money. Our job is to help you use it as efficiently and effectively as you please.
However, there’s a request we commonly hear from parents when we discuss long term goals for them. As The Who so eloquently put it in their iconic soundtrack, most parents want to make sure “the kids are alright”.
Gifts for your kids, not for the taxman
Back in 2009, a child could inherit or be gifted €542,544 from their parents in their lifetime before having to pay tax (Capital Acquisitions Tax, known as CAT), with the rate at the time being 22%.
Now, the picture is a little different. The cap is now €335,000 and the current CAT rate is 33%. The value of property assets has increased across the country, and over the long term there’s been a build-up of efficient pension plans or investments. So when the time comes to pass on assets, or in the unfortunate instance of parents passing, the liability most children will inherit will be substantially above that figure from 2002.
A recent report from the Commission on Taxation suggested that the current cap of €335k should actually be reduced even further which shows where this may be heading down the line…
So, what can you do to start efficient estate planning to reduce this liability for the kids?
There’s the annual small gift exemption, which allows each parent to gift €3,000 per annum to each child. This can be invested in bare trusts (minor accounts) and be invested and allowed to take advantage of compound growth over a period of 20/25 years in some instances. This value can be passed to the child without impacting their lifetime cap of €335,000.
The other option for couples who have significantly built up their assets is what’s called a ‘Section 72’ policy. This is a revenue-approved “whole of life” insurance policy taken out by the parents, which will ultimately go towards paying the inheritance tax bill for the children when the time comes to pass the assets to them.
It works like this:
• Firstly the total value of the assets are calculated. For the sake of example, let’s say the total asset value comes to €3million.
• The insurance value of the policy is then worked out at 33% of the assets in question, and this is the sum that’s insured. In this example, the insurance value is €2,010,000.
• The parents pay the monthly premiums on the cover, with the benefit passing to the children upon death to settle the tax liability at that time.
Nobody really likes paying insurance premiums and the whole premise for any sort of cover is that you really hope to never need it! However, with a Section 72, this effectively works as a savings plan for the children. For instance, if you were to pay the same figure as the premium each month directly to the children in a savings or investment plan, this would just increase the tax liability down the line and eat into that €335k lifetime allowance. Section 72 policies serve essentially the same function, but in a tax-efficient manner.
As with any estate planning the first step is taking the time to sit down and assess where you are at as a family. The earlier you start this journey, the more seamless and cost-effective any transition will ultimately be.
And in some cases, maybe the long-term goals are to let the kids fend for themselves – which is totally up to you also!! Each to their own as they say. But remember, if you want to have a discussion around estate planning – no matter how that looks or who you’re leaving your assets to – don’t be afraid to pick up the phone. The kids will thank you for it… eventually.
This article was written by
Private Client Manager
Metis Ireland Financial Planning Ltd t/a Metis Ireland is regulated by the Central Bank of Ireland.
All content provided in these blog posts is intended for information purposes only and should not be interpreted as financial advice. You should always engage the services of a fully qualified financial adviser before entering any financial contract. Metis Ireland Financial Planning Ltd t/a Metis Ireland will not be held responsible for any actions taken as a result of reading these blog posts.