As our clients progress through their financial lives, we see a consistent trend. Thoughts tend to move from thinking about the “here and now” to a much greater focus on the future. While the age at which this happens varies from client to client, retirement coming onto the horizon is an obvious driver for this mind shift. Alongside this, or maybe lagging by a few years are thoughts and conversations about passing wealth efficiently to loved ones. Of course, this opens the whole discussion about estate planning.
This in turn creates a very important conversation, and that is the purpose of your wealth accumulation. Are you accumulating wealth solely to live life to the full in retirement and that it is there to be enjoyed by you as you live out your life? Or are you accumulating to give your loved ones a helping hand at some stage in the future as they navigate their wealth journeys? Or is it a bit of both?
None of these objectives are right or wrong, they’re just different. But we believe everyone should carefully consider them. Apart from the importance of having clear objectives and purpose in your life and for your money, there are also tax considerations when it comes to passing money to children.
Estate planning differs from other areas of financial planning in that the tax opportunity/problem belongs to your children who will inherit the assets, rather than the parents who are passing on wealth. Different people like to approach this issue in different ways, and again, who are we to say who is right?
Some people approach this from the perspective of having accumulated the wealth themselves, it’s theirs to spend as they wish. Whatever is left over after they’ve shuffled off this mortal coil will be inherited by their children. If some tax must be paid on this, well, the kids will just have to pay this out of cash inherited or by selling some of the assets if necessary.
Others want to leave everything all tied up with a bow on it, as neatly as possible for the next generation. They want to live their life to the full too, but they want their inheritance to be structured so that even the tax bill is planned for. The benefit of this approach is that they can then ensure that maybe a particular asset such as a holiday home won’t need to be sold to pay a tax bill, but instead can stay in the family as a legacy and memory of the parents.
The difficulty in Ireland today is that the amounts a person can inherit tax free, known as the Capital Acquisition Tax thresholds are so low, and the tax rate is high at 33% on inheritances above these thresholds. While the thresholds for children receiving inheritances are not generous, they are significantly lower again where the relationship to the person leaving the money is more distant. It doesn’t take an enormous inheritance to exceed the thresholds, resulting in tax bills for those receiving it.
The good news is though, that if the parents and/or the children are minded to addressing the issue while the parents are alive, there are strategies that can be deployed to mitigate the tax bill. These can include using specific life assurance solutions, or indeed the parents can gift money to the children tax free using the Small Gifts Exemption while they are alive. As with most areas of wise financial management, a little bit of foresight and advanced planning can produce remarkably more positive outcomes for all. When it comes to enjoying your retirement and leaving a tax efficient legacy behind you, maybe you can have your cake and eat it…
If you’re wondering what slice tax might take from your legacy, feel free to give us a call.