My friend David Woods in the USA does a weekly video on The Wealth Channel American College and I really appreciated his latest one.

David used to be a pilot with the USA Air Force before he took up the much riskier occupation of becoming a life insurance agent!

David talked about pilots properly preparing their flight plan before take off and then making sure they flew that flight plan. Naturally having to make adjustments along the way in the event of changing weather conditions or perhaps an attack by another plane!

Reflecting on what he said I got to thinking about it in the context of estate planning and the total disregard that some Irish people have to planning their estates! In other words their total lack of enthusiasm in planning their flight from this world!

What prompted this train of thought was an estate planning seminar I attended last week given by Sinead from Standard Life. She mentioned that American people were much better at estate planning than Irish people.

I absolutely agreed and thought about the Irish mentality when it comes to planning their estates. You see Irish people think differently from Americans. American people know that they are going to die and plan for what happens afterwards. Irish people on the other hand sort of know that it is going to happen to most Irish people but perhaps not to them and even if it does happen to them it is a long way in the distance and anyway if they think about it too much they might bring the day closer! Much better not to go there!

This trait of procrastination is really such a pity because it means that Irish estates have a much larger tax liability than they should have. These inheritance tax liabilities can be reduced substantially at little or no cost if just a little forward planning is undertaking.

Let me give you an example of what I mean;

Let’s look at a typical Irish estate. Husband and wife with two married children both with three children so in total six grandchildren. They have been very good responsible parents and have an up to date will in place which leaves instructions that all of the estate passes to the surviving partner on the first death and on the second death is divided equally between the two children.

Because of the wealth that people were able to accumulate in Ireland up to 5 years ago it is not unusual to come across estates of between three to four million euro in value. We will assume for this exercise an estate value of just €2,000,000                  

Family Home and contents               €600,000

Holiday home                                    €400,000

Investment property                          €500,000

Investments                                      €300,000

Bank deposits                                   €200,000

These values are net of any borrowings.

So let’s assume the husband dies first which is statistically what is likely to happen. There are no tax issues and the estate passes to his wife free of tax.

His wife dies two years later and assuming the values are the same as now then each child will receive € 1,000,000. The tax free figure in Ireland is currently €225,000 so the balance of the inheritance is taxed at 33% so each child pays tax on €775,000 at 33% a tax amount of €255,750. Total tax liability on estate is €255,750 x 2 = €511,500. That is a lot of tax!

What can be done to reduce the tax bill?

Two simple examples:

 1- Change the will so that on death €30,150 is left tax free on the second death to each of the six grandchildren. The total left to the grandchildren is 6 x €30,150 =€180,900. The cost of doing this is zero and the inheritance tax saved is €59,690. You either use this tax break or you lose it!

2- Each calendar year it is possible for both the husband and the wife to gift €3,000 tax free to each child each grandchild and each son and daughter in law. This is on top of the €225,000 threshold.

In this example there are two children and their two partners plus six grandchildren so we have in effect ten people to whom gifts of €3,000 x 2 can be made tax free each year.

The tax free gifts that can be made are €60,000 each year and if these gifts can be made for the next 10 years the total gifted tax free would be €600,000 and the tax saved at current rates would be €198,000. You either use this tax break each year or you lose it!

Ted Dwyer Family Business

 March 2014

Ted Dwyer is the Founding Director of City Life Wealth Advisors a family business in Cork