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 least of your worries.
John Lowe of MoneyDoctors.ie tells you what to bear in mind to ensure you can help your parents get their inheritance sorted out in good time and without fuss or hassle. There are two simple issues:
1. 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 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, 2/3rds 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.
Remember under the Succession Act 1965, spouses who are still married and have written a Will CAN elect to bequeath 2/3rds of the entire estate to their children and 1/3rd to the surviving spouse as the spouse is entitled to only 1/3rd 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, approved via the High Court, will give to the power to act on their behalf. For more information, click on the link www.moneydoctors.ie/wills.
2. 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 (up to €335,000 in your lifetime) tax-free from your parent; 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, €47,850. Not something easily affordable to many and normally the asset itself – the home – has to be sold in order to pay this liability.
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 - 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 six years and don’t own another property, you may be exempt from inheritance tax on that property; 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 liability of the 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. Any surplus funds from the policy go back into the estate for a taxable redistribution.
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.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ.