Inheritance Tax in Ireland: How does one plan?
Part 2. Preparation
Last week, I wrote about the unexpected bill many face upon inheriting a loved' one’s estate. This week, I discuss how one can prepare their estate and their loved ones for a potential tax liability.
Discuss your estate. Estate planning seems like an activity reserved for the ultra wealthy and this perception may be why so many have not made estate planning a priority. Have a practical conversation regarding who is to inherit what and be specific. An asset left to an adult grandchild will have a higher tax liability than that same asset being passed to a child.
Once you have decided who is to receive the proceeds of your estate, quantify the tax liability for each beneficiary. You will likely require assistance with this portion, your financial advisor or accountant can help. Some beneficiaries may have the ability to meet their tax liability, others may not. Last week’s post details 3 hypothetical scenarios and the subsequent tax bill -every estate will be unique. There are a handful of exemptions to tax that may help reduce your loved one’s tax liabiliy, again, preplanning will help to clarify your circumstances.
Make a plan. Your plan may be to avail of gift tax exemptions and dispose of some assets before passing. You may wish to simply advise each beneficiary of their pending inheritance and the tax bill that will follow, allowing them to prepare. Or you may want to avail of Revenue’s section 72 allowance to offset some or all of the tax liability for your beneficiaries.
If you have a substantial tax liability and want to reduce or eliminate same, what can be done?
Revenue Section 72 allows an individual (or couple) to effect a life insurance policy to offset their estate’s inheritance tax -once it meets certain criteria. Three providers in the current Irish market offer Revenue approved policies, (Zurich, Royal London and Irish Life). The life policy must be set up under Section 72 at inception. Once in place, the proceeds of the policy are paid tax free if used to pay inheritance tax. The only “gotcha” is that life insurance is medically underwritten and some people may not qualify for a policy. If in good health, a section 72 policy is an affordable way to add liquidity to your estate. While policies can be taken out up to age 74, consideration should be made before retirement to avail of favourable premiums.
I do not have a blanket favourite market provider as they each have their strengths. However, with respect to Section 72 Policies, Royal London hands down, have the best product. With Royal London’s guaranteed whole of life policy, an option they call “life changes” is available. The life changes option offers flexibility should your circumstances change -extremely valuable in a policy held for the long term. I have detailed the life changes option below. Policy brochure here.
Case Study:
The following case study will illustrate the use of Royal London’s guaranteed whole of life policy with the life changes option. The Life Changes option guarantees the premium remains level and outlines the most you will ever pay into the policy from inception; payments cease upon your 100th birthday while cover continues in full (on a joint life policy, the payments cease on the 100th birthday of the younger life). In addition, the Life Changes option allows the policy owner to cease premium payments at any time, after the policy is in force 15 years, in exchange for: 1. A reduced death benefit. 2. Lump sum encashment.
Going back to Case 1 from last week’s blog involving Peter & Elaine’s estate. Peter and Elaine have identified a tax liability for their son and wish to effect a section 72 policy in the amount of €75,000. Peter and Elaine are aged 48 and in good health. The policy premium is €79.72 per month. Full quote there. As you can see from the attached quote, the following figures would apply in various scenarios:
If after 20 years, there is a change in either their ability to pay the policy premium or their tax liability, Peter and Elaine can cease making premium payments and opt to either: 1. Keep a reduced benefit for their son in the amount of €27,760. Or 2. Surrender the benefit and receive a lump sum of €12,599. This option is available after year 15 onward at any time, values guaranteed.
If both Peter and Elaine have passed after the policy is in force 35 years (age 83) they will have paid €32,208 into the policy and Tom will receive €75,000.
They live a long healthy life and reach their 100th birthdays, the policy is “paid up”. Their premium payments cease and €75,000 is guaranteed to be paid upon their death. (they would have paid €48,627 over the lifetime of the policy) Their estate will receive more than they will pay in, even if they live to age 100.
Estate planning is personal and one solution does not fit all. I hope the above brings awareness and clarity to a subject often thought of in an inopportune time. While I endeavored to simplify the above, I am conscious this is a complex subject, please feel free to contact me to chat through any queries you may have.
Rachel O’ Shea, Protection Manager
021 452 1328 roshea@olearylife.ie