Time to talk about death and taxes

Cultural taboos may make it seem that there isn’t a right time to talk starkly about death and finances, but economic analysis suggests that now is the moment to do so. Figures from Goodbody’s 2018 Death and Taxes report show that there is an imbalance of wealth distribution in Ireland, with households under the age of 45 holding significantly fewer assets than European counterparts, while Irish wealth is concentrated in the cohort of over 65s.

A result of this is a significant transfer of wealth from one generation to another as the population ages, and an increasing number of people seeking financial advice in how to do so most effectively.

"Our starting point when we meet a customer is to ensure that they have their basic housekeeping in order," says John Phillips, head of relationship managers at AIB Private Banking. "That means finding out what plan they have in place, if they have a will in place, if they have an enduring power of attorney in place. We really want to ensure that the structure and the basics are sound before we start any conversation about passing money on."

“We also want to check if clients are aware of liability from a tax perspective in terms of inheritance tax,” adds Phillips, who points to some of the common pitfalls people can overlook. “A lot of our customers will have property outside of Ireland, but many people are not aware that you may need to have a will in the location that the asset is held, and that an Irish will doesn’t always cover that unless there are double taxation agreements between the respective country and Ireland.”

Potential complexities

Being aware of the potential complexities, as well as the different reliefs offered in passing on wealth is key to doing it efficiently, suggests Tony Doyle, head of retirement planning at AIB Private Banking.

“The people we are talking to on this side of the business are generally in the middle of their careers, looking ahead to a retirement age that could be anywhere between 50 and 75,” says Doyle.

“In terms of passing wealth down, the ARF [Approved Retirement Fund] is a pretty effective instrument, if one can, in the main, preserve the capital by paying the withdrawal amount. The idea is that the capital can then be passed on to a spouse or other beneficiaries through the ARF. So pension funds are there to provide money income in retirement, but in the event that there is money left over, they can also be a very efficient way of passing money down to the next generation.”

While planning what will happen to an individual’s estate may often be the task of the person passing on the wealth, ideally it can involve the beneficiary at an early stage as well. “We are really looking to build a lifetime relationship with the customer, and often that turns into intergenerational relationships,” says Phillips. “The important part is finding what is right for the individual customer. Everything has to be on a phased basis, and has to make sense from a family perspective. What you need to have as a customer is a very smart, sensible, long-term strategy.”

Parent to child

While transfer to spouses and other family members is common, the data from Goodbody’s research shows the majority of dispersion of wealth in Ireland is from parent to child. The tax implications of passing on wealth for the child is something that is coming to the fore, suggests Catriona Coady, private client tax and pension specialist at Goodbody.

“With the older client base, the work we do is helping them to understand the value of their estate, and then the extent of the tax liability that is likely to arise for their beneficiaries. Sometimes, that can come as a bit of a shock when they look at the entirety of their assets and the amount of tax that the beneficiary will have to pay” says Coady. “In more recent years, parents are interested in section 72 and section 73 policies, which actually pay inheritance tax and gift tax. These can be a little less complex to understand. So rather than putting in detailed tax planning, some clients will prefer to use these as a way to fund the tax liability of the beneficiary.

“There is also the ability to offset CGT against CAT,” says Coady.“That can happen again where a parent may want to pass the investments to a child, but the parent knows they will have a CGT liability. And then the beneficiary knows they’re going to have a CAT liability. There is an offset available once the beneficiary holds on to the assets received for two years from the date of the gift or inheritance.

“Beneficiaries are often concerned about using some of their inheritance to provide for their own young families, so being aware of something like the €3,000 annual small-gift exemption would be important,” she adds.

Awareness of the caps and limitations of passing on, and inheriting wealth, in different forms is vital to do so effectively. “There are business reliefs, agricultural reliefs, and pension reliefs that may be relevant, depending on the individual case” says Coady. “A financial review and plan gives a roadmap to help meet your own goals and objectives, from planning for your retirement, to creating sinking funds for children’s education, as well as dealing with succession planning and inheritance. It certainly gives you a good indication of what it is you need to do from a financial perspective and to keep your financial house in order.”