Everlake Estate

Planning Guide (Tax Year 2022)

Estate Planning Overview

Estate planning is the process of anticipating and arranging for the management and disposal of a person’s estate after their death. The process is carried out during the person’s lifetime with the intention of maximising the value of the estate by minimising gift and inheritance tax and other expenses The earlier that the process of estate planning begins, the better.

Estate planning includes planning for incapacity (enduring Power of Attorney) as well as a process of reducing or eliminating uncertainties over the administration of a probate

The ultimate goal of estate planning should be determined by the specific goals of the client (testamentary freedom) and may be as simple or complex as their needs dictate. Guardians are often designated for minor children and beneficiaries in incapacity.

We work closely with specialist legal advisers to ensure that you receive the most competent legal and tax advice. Many Financial Brokers in Ireland will simply recommend a Section 72 policy. The main reason for this is the inherent conflict of interest presented by the commission payment available. It is our belief that many, if not most, of these policies are simply unnecessary.

Estate Planning Essentials – Wills & Trusts

Executors and Trustees

Executors are responsible for collecting in the assets, discharging any debts of the estate and administering the assets in accordance with your Will.

The trustees are responsible for the management and administration of any discretionary trust established under your Wills.

It is usual to appoint a minimum of two people to act as both executors and trustees.

In the cases of a couple, you might note that if you each leave your entire estate to the survivor, you could decide to appoint only the survivor as executor if you wish, and then appoint alternative executors and trustees to at only on the death of the survivor.

Trustees

Your trustees will have absolute discretion as to the manner in which distributions are made from the Trust Fund. Structuring your Will in this way allows for the orderly payment of inheritance tax and also enables the trustees and your children to plan distributions from the Trust Fund so that your children receive their share in your estate in the most tax-efficient method possible and at a time when they have sufficient maturity to manage the assets in accordance with your wishes

A schedule to your Will sets out the powers that your trustees will have to enable them to administer the trust. These should be drafted broadly to give your trustees full flexibility to deal with the assets that might be comprised in your estate at the relevant time.

Guardians for Minors

Guardians are responsible for the upbringing of your minor children if you were (both) to pre-decease them.

Provision for Children

Generally, any provision which you make for your children, whether it is on the death of the first or second of you, should pass to a discretionary trust for your children’s benefit.

If you decide to leave only a portion of your estate to the survivor of you on the first death, then the survivor can be included as a potential beneficiary of the trust. This would mean that the survivor could receive distributions from the trust fund, if necessary. You could also include charitable organisations as potential beneficiaries of the trust, as this can facilitate tax planning.

Discretionary Trust on First Death

Those who are married or in a Civil Partnership, should decide whether they would like to leave their entire estate to the survivor of them on the first death, or if they would like to leave a portion of their estate, such as one-third or one-half, to the survivor with the balance passing to a discretionary trust for the benefit of their children (and the survivor if they wish).

Letters of Wishes

A Letter of Wishes is a reflection of your personal wishes. It is legally non-binding, but provides guidance to the trustees and it is usual for trustees to follow a Letter of Wishes unless there is a good reason to depart from same.

Generally, these letters outline that your children should be treated as fairly as possible in the distribution of your estate.

If any of your children have any special needs or requirements, the letters outline that the trust fund should be applied to meet those needs as a priority. The letters also ask your trustees to ensure that your children have sufficient maturity before any significant amounts of capital are appointed out to them. This gives you the opportunity to set out the minimum age at which you wish your children to first receive appointments of capital from the trust.

Letters of Wishes can also outline some of the possible tax planning opportunities that may be available for your children prior to any appointment of capital to them and ask your trustees to consider these or any other reliefs prior to any appointments of capital to your children.

Finally, these letters also outline who you have appointed as guardians of your minor children and ask your guardians to involve your family, where possible, in the raising of your children if this is in accordance with your wishes.

Foreign Assets and the Law of Succession

Your will should include a declaration that you are Irish domiciled (if appropriate) and that you wish for Irish law to govern succession of your foreign assets. This wording should ensure that succession of your overseas real property is governed by Irish law.

You should obtain specific advice with regard to succession of these properties in the relevant jurisdictions. In the absence of specific tax advice, you could leave these properties to the survivor of you on the first death and then equally between your children on the second death.

For example, UK Citizens holding US assets should consider ensuring a declaration is included in their Will stating that UK Law should apply. The reason for this is that UK Citizens receive an unlimited spousal exemption from US Estate Taxes whereas Irish residents only receive a $60,000 exemption.

We cannot guarantee that this approach will not give rise to any adverse tax consequences in the relevant jurisdictions without obtaining advice specific to your situation. However, this approach should at least avoid any complications which could arise if the properties were left on trust for your children, as the legal systems of some European countries, such as France, do not recognise trusts.

Approved Retirement Fund (ARF) Provisions

Your Will should provide that any ARF will pass to a fund to be established for the benefit of the surviving spouse. This wording should ensure the best tax treatment for the survivor in respect of the funds in the ARF.

Taxation

The table below summarises the Capital Acquisition Tax (CAT) rates applicable to inheritances and gifts.

Under the current tax code, no captial acquisitions tax (CAT) arises on inheritances or gifts between spouses.

Inheritance tax will arise for your children, however, when they receive an inheritance or gift of more than their tax-free threshold amount. This currently stands at €335,000 for gifts/inheritances received by children from parents and €32,500 for gifts/inheritances received by grandchildren from grandparents.

This threshold applies to all lifetime gifts and inheritances received since 5 December 1991. Capital acquisitions tax is levied at 33% on inheritances which exceed the tax-free threshold amount.

Certain business and agricultural assets can benefit from relief. The effect of the relief is to reduce the valuation on these assets by 90% and to reduce the effective Inheritance Tax Rate to 3.3%. It is important to take appropriate advice to ensure these reliefs can be availed of.

Foreign domiciled individuals are only subject to Irish CAT on Irish sited assets.

There is a tax cost for having the flexibility of a discretionary trust, known as discretionary trust tax, being an initial tax charge of 6% of the value of the Trust Fund, with an annual charge of 1% arising thereafter. The 6% charge and the 1% charge cannot arise within the same year. The 6% charge would be reduced to 3% if all of the assets in the Trust Fund are appointed out within five years of your death. A charge to discretionary trust tax will not arise until your youngest child reaches 21 years of age.

Your Letters of Wishes should ask your trustees to obtain relevant taxation advice at this time in order to ascertain whether there are any ways to minimise the charge to discretionary trust tax.

Lifetime Planning Enduring Power of Attorney

An Enduring Power of Attorney is a document that enables you to appoint someone as your attorney who would manage your financial affairs for you and take personal care decisions on your behalf in the event that you should for any reason become incapable of doing so in the future.

You are required to give notice to two people of the creation of an Enduring Power of Attorney, one of whom must be a family member (who is not also acting as attorney). It is usual to draft the Enduring Powers of Attorney on the basis that a married couple would appoint each other as attorney in the first instance. However, this may not reflect your wishes.

It is also recommended that you also appoint a substitute attorney, who would act in the event of your attorney predeceasing you or being unable to act.

Living Wills/Advance Healthcare Directives

An Advance Healthcare Directive/Living Will is a document which allows you to make an advance expression of your will and preferences with regard to medical treatment. Specifically, you can refuse medical treatment in an Advance Healthcare Directive/Living Will for any reason, even if it may result in your death.

The Assisted Decision-Making (Capacity) (Amendment) Act 2022 was signed into law in December 2022 and gives legal effect to Advance Healthcare Directives/Living Wills. An Advance Healthcare Directive/Living Will is an expression of your personal wishes.

Family Partnerships

A family partnership involves family members becoming partners in the business of investing the assets of the partnership and entering into an agreement of regulating the terms of the partnership.

A family partnership is typically drafted on the basis that the parents will each retain a % interest in the partnership and your children, or other relatives, will share the remaining equity in the partnership.

The key element within family partnerships of this type is control of the business of the partnership. This is typically achieved by way of weighted voting rights so that, while the decisions of the partnership are taken by a majority of votes cast by the partners, the parent(s) generally reserve for themselves the ultimate control of decision making by way of weighting the voting rights in their favour. Effectively, this means that you could out-vote your children in any matter and retain control of the partnership.

There are some fixed costs associated with establishing a family partnership and some ongoing costs in the form of accounting and tax compliance. Accordingly, we recommend that a partnership is formed with a reasonably substantial capital sum either by way of loans or gifts (ideally €1,000,000 or more).

Settlement for a Minor

Where a child is currently a minor, they do not have legal capacity to become a partner of the partnership in their own right. Therefore, it will be necessary for the parents to be appointed as their trustees and to hold their partnership share upon a bare trust for their benefit until they reach the age of 18.

Inter-Family Loans

Do you have children that have credit cards, car loans, mortgages, or other debts they are repaying? If so, their interest rates are likely to be much higher than the savings rates available. You could consider lending them some money and 'replacing the role of the bank'.

A typical €10,000 car loan at 7.5% per annum means a monthly payment of €200 per month. Why not loan your child €10,000, clear the loan early, and have him/her repay it to you over 5 years at a reduced interest rate? Both parties gain from this, and you are sharing your family resources.

Of course, there is some risk with this strategy, which is that you will not be repaid, he/she will get divorced, become ill or die. For a larger loan you could insure against this, or use legal contracts, but for a smaller loan, perhaps the risk is worth taking?

Of course, if you have more than €100,000 (€200k for a joint account) sitting in the bank you are already taking a risk as The Deposit Guarantee scheme will not protect anything above this sum.

We are big believers in families sharing resources together wherever possible Switching between banks, Post Office, and credit union will make some difference, but if we're honest, the difference is minimal.

Creative financial planning for your family when done right can save everyone money and help foster good attitudes in your family to manage money and working together. It's not without its risks, but these risks shouldn't put us off from trying things either.

In principle thinking outside of the box like this in a family context probably makes more sense than buying a prize bond which will probably only make you cents.

Taxation of Loans

The main issue to determine with regard to the loan is whether you wish for the loan to be interest bearing or interest free and to consider the tax implications of each of these options.

Pursuant to s.40 of the Capital Acquisitions Tax Consolidation Act 2003, an interest free loan would give rise to a small, deemed gift to your children in respect of this free use of money on 31 December each year

The value of the deemed gift which would arise for your children under this option will be equal to the best deposit rate obtainable for the funds. However, provided that you are not otherwise utilising the small gift exemption in a year, the deemed gift arising should be covered by the annual small gift exemption of €6,000 from both of you combined (if you are both acting as lenders), so that no capital acquisitions tax liability should arise for your children.

As an alternative, you could provide that interest at a fixed rate (such as 1%) is to be charged under the loan but that such interest is to be rolled up and is not repayable until the repayment date i.e. either when the loan is repaid by the partnership or when the loan is written off by you. This latter option would, however, ultimately give rise to an income tax liability for you in respect of the interest payable.

Lifetime Gifts & Risk of Marital Breakdown

A worry for some families when their children are younger is “what if we make a sizeable transfer now and in the future and there is a relationship breakdown with their partner/spouse” .

In the event that a child marries and that relationship breakdowns and ends in divorce, a court considers all the assets of the couple, irrespective of how they are acquired (e.g. their share of a family partnership). Therefore, some or all of this share (or the value of it) could be transferred to their former spouse.

One way to address this is to establish the Family Partnership by way of a loan rather than a gift, This means that the capital in the hands of the child is genuinely theirs and the loan outstanding remains repayable on demand to the parents.

So, in this instance, the original “family money” is not at risk unless the loan is subsequently forgiven and turned into a gift.

Another way to look it is with reference to Pascal's wager. If you are not familiar with it, Pascal's wager, is a practical argument for belief in God formulated by French mathematician and philosopher Blaise Pascal. He argued that people can choose to believe in God or can choose to not believe in God, and that God either exists or he does not.

It's not a perfect model because the quantum of the tax is 33% whereas the loss on separation is potentially 50%. But broadly speaking, the choices are to keep the assets and certainly lose due to Inheritance tax, or gift the assets and possibly save tax but run the risk of a loss due to a possible future relationship breakdown.

On balance since the risk of tax is a reasonable certainty whereas the risk of relationship breakdown is not, arguably it is better to plan to make the gift/loan. The issue is how much is the right amount.

The only way to try to protect assets is via a Discretionary Trust but that has a discretionary trust tax for the privilege of 6% on the way in, plus 1% per annum.

Section 72 Whole of Life Assurance Policies

Failing all else, for some clients we might recommend a Whole of Life Section 72 policy.

Although these are popular with many brokers, we believe that lifetime planning is a more effective way of addressing estate planning.

However, these policies may be suitable for those with estates comprised of large property portfolios and or clients with high guaranteed incomes (such as final salary pensions).

A Whole of Life Section 72 policy is a regular premium protection policy. The purpose is to provide a lump sum ‘life cover benefit’ if the life assured dies or has a terminal illness as defined in the policy conditions.

Under current legislation, the benefit payable on death will not be liable to income tax or capital gains tax, provided the policy remains in your own beneficial ownership throughout the lifetime of the policy.

The death benefit is payable in accordance with your directions and may be taxable as part of your estate. If you wish, you can apply to have this policy effected under Section 72 of the Capital Acquisitions Tax Consolidation Act 2003 (“Section 72”), generally used for inheritance tax planning. Cover must be either on a Single Life basis or Joint Life Second Death basis for Section 72 to apply. For Section 72 to apply on a Joint Life Second Death basis, the cover must be for a married couple or civil partners.

The policy must be issued at the outset in accordance with the provisions of Section 72. It is not possible to gain Section 72 status for your policy at a later date. The proceeds of the policy are currently exempt from inheritance tax in so far as they are used to pay inheritance tax arising on the death of the Life Assured in the case of a Single Life policy or the surviving Life Assured in the case of a Joint Life Second Death policy.

Any part of the proceeds not so used will be liable to inheritance tax. For the policy to maintain its Section 72 status it must comply with all relevant laws and Revenue rules for as long as it is in force.

Before making any changes to your policy you should check if the Section 72 status will be affected by the proposed change. Once Section 72 status is lost it cannot be reinstated.

Case Study: Male aged 57 next birthday

A €1m sum assured policy has an annual premium of €22,500 pa (subject to underwriting Feb 2022) so the payoff looks like this:

For illustrative purposes. Tax rates could change

Even after 30 years the effective gross of Irish Tax return is still coming in at around 3.8% per annum and because the proceeds are tax free if used to pay CAT, there is an additional uplift in value to the estate of 33%

This gives a projected effective annual return of a little over 5.75% pa with virtually no investment risk at all over a 30-year period.

These can represent reasonable value compared to a very low risk option like cash if taken out when in good health and reasonably young age, but in reality most investors should be better off with an equity portfolio over these time frames

The Next Step…

The Everlake team of financial advisors is dedicated to achieving excellent outcomes for our clients. We operate at the frontier of innovation and embody a willingness to challenge the status-quo at every turn.

Our high ethical standards apply to every aspect of our relationship with you, and through our culture of continuous learning. Each member of our team is highly qualified and capable of delivering world class financial planning solutions to you.

Arrange a meeting with one of our advisors to discuss your retirement planning by emailing enquiries@everlake.ie or book a call directly through Calendly here.

We look forward to working with you.

The Everlake Team.

Disclaimer

Important

This document has been prepared for information and educational purposes only and should not be relied upon by any individual without seeking specific guidance on the suitability of any course of action for their unique circumstances.

Taxation

The level and bases of taxation are based on current legislation (tax year 2022) and may change in the future. If you are in any doubt about the suitability of these conclusions, we recommend that you consult with a suitably qualified tax adviser to confirm these assumptions. The Central Bank of Ireland does not regulate tax advice.

References to Taxation have been obtained from sources which we believe to be reliable and are based on our understanding of Irish Tax legislation at the time of writing. We cannot guarantee its accuracy or completeness.

The rates and bases of taxation may change in the future. We recommend that you obtain specific tax advice for your own personal situation. We will refer you to a suitably qualified tax consultant on request.

Investments

As with any investment strategy, there is potential for profit as well as the possibility of loss. Past experience is not necessarily a guide to future performance. The value of investments may fall or rise against investors’ interests.

Any person acting on the information contained in this document does so at their own risk. Recommendations in this document may not be suitable for all investors. Individual circumstances should be considered before a decision to invest is taken.

Income levels from investments may fluctuate. Changes in exchange rates may have an adverse effect on the value of, or income from, investments denominated in foreign currencies. We do not guarantee any minimum level of investment performance or the success of any portfolio or investment strategy. All investments involve risk and investment recommendations will not always be profitable.

Warning: the value of your investment may do down as well as up. This service may be affected by change in currency exchange rates. Past performance is not a reliable guide to future performance.

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