Q&A: Will inheritance tax treat stepchildren and children equally?

‘Under inheritance tax law, a stepchild is treated exactly the same as any other offspring’

My husband and I got married 19 years ago. I have a daughter from my first marriage, he has two sons. My daughter (28) has been living with us all this time, his sons have their own house each.

Our will states that in case he passes away before me, I will inherit everything (including our mortgage-free house). In the event I pass away first, he will inherit everything. Once both of us have passed, our children (all adults) will inherit a third of everything each.

What has been on my mind is that I have not legally adopted his sons (whose mother has passed away), nor has he adopted my daughter (who has always been living with us. Her father is still alive.).

Even with all three children entitled to a third each after both of us have passed away, will they be treated differently as far as inheritance tax is concerned? For example, if I pass away first and he inherits everything, then he passes away, will my daughter have to pay a higher inheritance tax than his sons? And vice versa?

Also, even if the will states that all three will receive a third each after both of us have passed away, will the surviving spouse be entitled to do as he/her pleases with the inheritance (including the primary residence). For instance, would I be able to gift parts of my inheritance to my daughter during my remaining lifetime? Or, again, in the event that I pass first and he inherits all, will he be able to gift an amount of his inheritance during his remaining lifetime to either of our respective children?

If we both have passed and the will becomes effective, will there be different inheritance tax implications for his sons respectively and my daughter, depending on who passed away first?

Ms H.M., email

You’ve clearly got a very harmonious second family and have put some effort into ensuring that they are all treated equally, especially in the event of your deaths. That is to be commended. However, you still clearly have a few issues rattling around in your head, causing you some stress.

You're certainly right to check on the situation regarding the rights of stepchildren because there are some disturbing inequities still in Irish law. However, the good news for you is that this should not affect your family.

Essentially, under inheritance tax law, a stepchild is treated exactly the same as any other offspring.

Section 2 of the 2003 Capital Acquisitions Tax Consolidation Act – which governs Irish inheritance tax – defines the term "child" as including a stepchild or an adopted child. There is no difference in treatment between the two categories and, if you had had children together, no difference in how either are treated compared to those.

That means anything they receive from a step-parent will be assessed under Category A – the highest tax-free threshold for gifts and inheritances – which covers parents giving to children. That threshold is currently €335,000. This covers all gifts/inheritances received from any parent – three in your daughter’s case as gifts or inheritances from her father also come under this heading.

So, in answer to your final question, no, which of you dies first makes no difference to the tax treatment of any of the children.

Succession

The issues for stepchildren and inheritance in Irish law come mostly in situations where there is no will. This is because while they are treated as equal in all respects for inheritance tax, children and stepchildren are treated differently under succession law.

So where there is no will, a person is deemed to have died intestate. The rules under intestacy set down very precisely who inherits. Essentially, if there are children, they are entitled to a share of the estate – how much depends on whether a spouse/partner is still alive – but stepchildren do not have the same right. They are not mentioned in the Succession Act, which governs intestacy among other things.

Children born in or outside marriage or legal partnership are included, as are adopted children. The descendants on each of these is also covered by the Act... but not stepchildren.

It’s academic in your case, for now, as there is a will, but if there wasn’t, your daughter would have no claim on your husband’s estate if you predeceased him even though she had been living with him in the family home since she was nine years old, however, she would have a legal claim on her father’s estate (assuming he left no will).

In similar circumstances, your husband’s children from his first marriage would have no claim on your estate if he predeceased you.

Strange, unfair, but true.

Changing inheritance

Your other niggle is what happens after the first of you dies – specifically, can either of you selectively gift to some children and not others despite the terms of your will?

Before I deal with this, just a quick word on your will. You mention this in the singular. I am aware of “joint wills” in the US – though I am not familiar with how they work – but I have not come across them here. My understanding is that, in Ireland, each of you would have to have your own will, not one common shared document. I’ve no doubt someone will let me know sharpish if that’s not the case.

That being so, the answer is that there is nothing to stop the surviving spouse allocating what are now their financial assets in any way they deem fit. So, yes, you or your husband, whoever is the survivor, could change the terms of their wills to favour one child over another. You really are relying on trust – which, to be fair, you would like to think should suffice in a loving relationship.

And challenging a will if left out of it would also be more difficult for a stepchild as it is the Succession Act that applies.

Bear in mind there is nothing to say that a surviving spouse might reasonably change the provision in their will to take account of changing circumstances – one of the three children falling on hard times or ill-health. The thing is, in law, there is nothing to stop them doing so – at least over assets that are theirs to pass on.

Wills can be written specifically so that someone has use of an asset during the remainder of their lifetime before it passes, in a preordained manner, to a third party but when you are looking at a simple division of assets in thirds after you are both gone, it won’t really work for you.

As far as gifting is concerned, it is an option open to either of you, even now, to make your own choices about your own assets during your lifetime – so you could gift your daughter money or an asset without necessarily giving the same to your stepsons, and so could your husband. The same is true after one of you dies.

Assuming this is not a joint will, there is nothing to stop either of you rewriting the terms before you die but you should think carefully before doing so. Wills, especially ones that are seen to treat people in an unbalanced fashion, have a habit of leading to lasting hurt and disharmony.

On final thing, just in case. I note that you have contacted me from a UK email address. That’s not a problem but do bear in mind that anything I say here is in relation to Irish law and practice. At times, the position can be different in the UK, notwithstanding the common heritage of our legal systems.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into.