Tax me once, shame on you, tax me twice, shame on me

When it comes to the future, many business owners and investors I meet are mainly concerned with growing their investments more and more throughout their lives with visions of a healthy retirement nest egg. Of lesser concern are the implications that go with the level of growth achieved, and what happens to the nest egg when they themselves go through the pearly white gates. Fair enough you might say. After all, why should you concern yourself with issues that ultimately won’t concern you?

But let’s imagine after 30 or 40 years of hard work you finally build your beautiful dream home. It took blood, sweat, and tears, it was over budget but you’re proud of it and delighted to leave it to your children. Fast forward some time and your offspring inherit the house but the roof was removed before the keys were handed over. How did it happen and how much will it cost to replace the roof? At a very emotional time in their lives, your loved ones have been left with a considerable financial issue to deal with.

This is the result of an approach I see all the time, that is, a short-term view toward retirement. You probably didn’t know such a thing existed and you probably think you’re doing all the right things with your pension and investments. But the most common consequence of taking care of your retirement alone is neglecting the long-term management of your estate. Put simply, leaving loved ones with a tax bill on assets you’ve already paid tax on. Considering the above example, you paid tax to build and live in your house, and without protection, your children must pay tax to inherit it. Roughly speaking, this is the cost of an entirely new roof. It’s grim and it’s something people don’t give enough thought to. And sadly, when you’ve passed it’s too late for your family to do anything about it.

It’s not all doom and gloom though. Thankfully, while you’re fit and healthy, discerning estate planning can protect your hard-earned cash from double taxation and protect your family from unnecessary stress and financial burden. Some solutions include:

1. Section 72 – A section 72 policy is a Life Insurance policy that a parent will put in place and pay the premium on. This policy will cover the inheritance tax liability for their children. So if you calculate that your child will have an inheritance tax liability of €200,000 then that is the amount of life cover to put in place.

2. Small Gift Exemption – Anyone in Ireland can receive €3,000 from another person in a calendar year without having to pay capital acquisitions tax. So as parents, you can gift each of your children €6,000 per annum. This is done through a bare trust which is set up under the children’s name. Even taking fund performance out of it, if left for 10 years, this is €60,000 you can give to your kids that they won’t have to pay any inheritance tax on.

3. Buy agricultural land – If you have agricultural land on a long-term lease, your children can inherit this with the value reduced by 90% for tax purposes. So, for example, if the land is worth a million euros, this is reduced by 90% to €100,000 for the purposes of capital acquisitions tax.

4. Section 73 – If a parent is planning on gifting an asset to their child, a section 73 plan can be put in place to cover off the tax that will be due. This is a type of savings plan that must be paid into regularly for a minimum of 8 years. After the 8 years is up, the policy can be surrendered to cover off any tax liability.

My advice is to look forward to the future but be smart in your planning. And above all else, protect everything and everyone you’ve worked hard for. If you have any queries on estate planning drop me a line at Conor@trustmatters.ie. I’d be delighted to answer your questions.

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