Leaving Revenue out of your Will

I’ve seen some nasty fights over Wills in my work. The one thing everyone can agree on is that no one wants to see the Revenue benefitting from a Will. Sometimes this can be challenging but with enough thought and planning you can ensure the Revenue take as little as possible whilst still ensuring your wishes are carried out. The suggestions below represent much of the advice I’ve given clients in this area. I’ve split this topic into two parts. The first five steps are in relation to the impact of your own Will. The second five steps are covered in the next article and concern where you yourself may be a beneficiary of a Will.

Thinking about your own Will

Step 1: Sit down with someone you trust and read your will.

You may not think you’ve much by way of assets but if there is a family home, and if you have basic mortgage protection in place, the beneficiaries of your estate will now own a debt free asset of €300,000 or more depending on the market value of your home. There may be other assets too. Put your best estimate of the value of your estate and move onto Step 2, the beneficiaries.

Step 2: Consider the beneficiaries.

Who is going to benefit from your estate? Will it be your kids? If your kids are young, or under 18, when you die, the legacy you leave for them will be available to them only when they’re 18. Now picture your children as you know them, will they be mature enough to spend their €200,000 inheritance wisely? Will they fly their friends out to Las Vegas for a wild week and come home with barely enough money to pay their rent? If you don’t have children, will you leave it to your brother or sister. Will you give them an equal share and if not will that cause resentment? That leads us to step 3, what are the tax consequences?

Step 3: What are the tax consequences.

Making a legacy to your children, your siblings, your wife or your boyfriend will all have very different implications. If you are married or in a civil partnership, any assets you leave to your spouse/partner will pass free of tax altogether. Firstly, there is no capital gains tax (CGT) when you die. If you owned assets that appreciated in value after you bought/acquired them. they will be free of CGT which is very positive and applies to all assets whether given to spouses or other beneficiaries. Secondly, there is no Capital Acquisitions Tax (CAT) for a spouse/civil partner.

The situation for your children is different. Your children can receive up to €335,000 in gifts and inheritances cumulatively since the 5th December 1991. Once that threshold has been crossed, everything else received from a parent is taxed at 33%. An only child may therefore have to pay some CAT. This is less likely where there is more than one child inheriting.

However, a gift or inheritance taken by lineal descendants like nieces, brothers, grandparents, etc, has a lifetime threshold of €32,500. You may be very fond of your brother but if you leave him your house and it’s worth €350,000 or more, they could have a tax bill of €100,000. At Revenues discretion they pay allow this to be paid, with interest, up to a period of five years but it’s still a lot of money and your brother may be forced to sell the house you’ve left him. Revenue don’t care that you’ve given him a non-cash asset, they still want their 33% once he’s over the threshold.

Finally, a boyfriend or girlfriend get hit hardest of all. Not only have they lost you but they are treated as being in the lowest threshold of all. 33% tax kicks in at €16,250 once they received gifts or inheritances from a stranger. Now, you’re hardly strangers, you could have been living together for 20 years but at present, that’s how our tax system treats them and they will pay 33% CAT if they have received cumulative lifetime gifts since 5th December 1991 of €16,250. If you have been together a long time, maybe you should get married? It’s not very romantic but if you’ve bought a €400,000 property and assuming for simplicity that it stays at that value, then on the death of either of you, you will have inherited €200,000 (€400,000 x 50%) and will pay as much as €60,000 in tax to Revenue. Do I hear wedding bells? The next area to consider is a trust, which is step 4.

Step 4: Consider a Trust.

You probably think you’ll live a long and happy life and hopefully you will but does anyone of us know when that will be? If you’ve young children, you will only want them to inherit when they’re mature enough to do so. A useful mechanism for this is a type of trust known as a discretionary trust. Essentially, if you and your partner were to die suddenly, you assign someone responsible who you trust to pass on the assets and cash in your estate to your children when they need them (education, college, accommodation, etc) and then when they’re ready (perhaps when they’re 25,30,35 years of age), distribute the balance of the assets to them as they see fit or based on a letter of wishes from you as to how the estate is to be distributed.

It’s a lot of power to place in the hands of one person, and the trustee may decide to favour one child over the other but many parents feel that it’s a far better outcome than two 18 year olds wasting their inheritance before they reach 21 years old. That leads us to step 5. What if you haven’t made a Will.

Step 5: I don’t have a Will

If you die without making a Will, which is far more common than you would believe, the rules of the 1965 Succession Act, determine what happens when someone dies intestate, or dies without making a Will. If you die and there are no children, the spouse inherits everything, If you and your spouse have kids, when you die your spouse will get two thirds and the children will receive one third split between them. There are many other consequences that you would not want to arise and tax downsides too. If you’re separated, and you haven’t tidied up the succession rights. your ex can end up with a huge portion of your estate and presumably you wouldn’t want that.

The message is simple. If you don’t have a will, arrange to sit down with a solicitor and put something in place that reflects your wishes. It doesn’t have to be perfect and you can always edit the will or make a brand new will at anytime.

In the next article I will consider the situation where you are the potential beneficiary of a Will and how to avoid unnecessary tax bills.