Don’t leave problems in your will

Aidan McLoughlin is a solicitor and accountant with Aston Wealth Management, part of the Financial Engineering Network group of authorised advisers. Soaring property prices mean that people of otherwise modest means need to think carefully about how they should distribute their estates after their deaths, particularly where children are concerned or in the cases of unmarried couples, he says.

“The wealth effect that is occurring in Irish society today, from property here and abroad, from the creation of share millionaires in high-tech and other industries, and even from pension funds which survive after the death of the pension holder, means that the 15-minute jaunt down to the local solicitor isn’t adequate any more.”

To avoid alienating members of the family and the possibility of a day in court, all estate planning should start with writing a valid will, says McLoughlin, or even two in some cases where there is an overseas property.

Wills should do more than disperse the assets. They should take account of tax liabilities and flexible ways to avoid or delay the payment of capital acquisitions tax (CAT), such as through the setting up of trust funds “that will allow the wealth to be successfully passed to the next generations”.

Unmarried couples

Unmarried, co-habiting couples, siblings who reside together and gay couples are particularly vulnerable if they do not write wills in each other’s favour to protect their joint assets, especially the family home.

Without a will, their assets will be divided under the Succession Act 1965, and they will be treated as strangers, the Group 3 category relationship, leaving them entitled to inherit just €22,825 tax free.

Where siblings or other blood relatives are concerned the tax-free threshold is €45,644. The balance will be subject to 20% tax.

Recognising the unfairness of this, not just to unmarried couples, but to elderly siblings living together, the law was amended slightly.

Since 2000, the family home is exempt from CAT where the disponer (the person disposing of their assets) and beneficiary have lived together continuously for at least three years prior to the death of the disponer, the beneficiary is not already the owner of another property and keeps the home for at least six years.

This does not offer 100% relief from CAT, as is the case between legally married or separated spouses, and other provisions should be made for other taxable assets, such as a second property, shares and pension entitlements.

Legal and financial advice should be sought when preparing your wills. In Law and Finance in Retirement, John Costello, a solicitor, notes that leaving a “life interest” in your estate is an alternative to an “absolute” interest. This means that the interest is granted for the lifetime of the beneficiary, after which it reverts to the terms of the will.

“A life interest substantially reduces inheritance tax liability,” he writes, “. . . as it depends on the age of the beneficiary when he/she receives the benefit.”

Second families

Whether you write a will or not, a legal spouse (even a legally separated one) cannot be disinherited, unless he or she has signed away his or her rights under the Succession Act 1965 through a deed of separation. If you die intestate — without a will — and are separated, your spouse receives your entire estate if there are no children and two-thirds of it if there are, with all your children sharing the rest equally.

Divorced spouses are not entitled to spousal rights of inheritance but divorce here does not mean an entirely clean break and the surviving ex-spouse can still make a claim on the deceased spouse’s estate, though they will be treated as a “stranger” for tax purposes.

Inheritance can become complicated where there is a separation, a new relationship and two sets of offspring. Unless the first spouse has signed off their rights to your estate, they cannot be disinherited. You can make provision in your new will for your new partner, but the terms can be challenged depending on the size of the provision and how it affects the division of assets to the spouse and any children.

Unless careful provision is made to protect the ownership of any property you own and share with your second family (the family home, if there is one, is already subject to the terms of a separation agreement), it too could be considered the inheritance of the first spouse and family.

Children, unlike a spouse, are not automatically “entitled to a specified share in the deceased parent’s estate,” says Costello, but unhappiness with the size of their share or even being cut out of the parent’s will altogether can translate into a legal challenge.

This usually results in “an application to the court asking it to find that the parent has failed in his/her moral duty to make a property provision for that child in accordance with his/her means, whether by will or otherwise”.

Childless couples

Inheritance laws offer a degree of flexibility to non-traditional families or in the case of small businesses, where there are no natural children to inherit. The Group 1 tax-free threshold of €456,438 that applies between a parent and child (or adopted child) also applies, for example, to foster children who have lived with and been cared for and maintained from a young age up to 18 for at least five years. In the case of children who inherit from their step parents an aggregate of the amount received will be taken into account under their Group 1 tax-free threshold.

Unfortunately, nieces or nephews who lived with the aunt or uncle (but did not work in their business) can inherit only €45,644 tax free under the Group 2 relationship that applies to siblings, nieces and nephews and other linear ancestors/descendents.

Overseas properties

Thousands of Irish people now own holiday, investment or retirement properties abroad. They need to consider the inheritance tax implications of these properties and may be advised to have two wills, says McLoughlin. How you plan to leave your property depends on a number of factors, he says, including how inheritance tax applies in the foreign country, whether you are a resident there, or are an Irish resident for tax purposes, and whether a double taxation agreement applies between Ireland and that country. Inheritance tax can sometimes be avoided by purchasing the property through a limited company or, in France, for example, by including a “tontine” clause in the purchase contract that protects a surviving spouse.

Business estates

The value of a business can also be reduced by 90% under CAT business relief, with the balance of the value of the property subject to the appropriate threshold.

Many small business owners give their business to their children before they die to maintain continuity of the firm, but McLoughlin warns this can be unwise.

“The recent case of Coman’s public house in Dublin might be a case in point here where the parents transferred the business to their sons for tax purposes and then subsequently regretted the decision,” McLoughlin says. The subsequent court case has proved expensive and unsatisfactory for the parents. Business succession and inheritance is fraught with difficulties “unless it is very carefully planned”.

Farm estates

It isn’t uncommon for childless farmers to leave their farms to a relative, such as a nephew or niece who has worked full-time with them on their farm.

In such a case, the nephew or niece will pay inheritance tax only over €456,438.

Since agricultural land is already subject to CAT relief — under which the value of the property which includes land, woodland, the farmhouse and buildings, farm machinery and livestock and bloodstock is reduced by 90% — the inheritance tax bill may be very low.

If no will is made, the farm will be divided under the Succession Act.