Estate Planning: How to Avoid Tax Traps for Loved Ones

Estate Planning is a critical aspect of financial management that is becoming more significant as assets are being passed between generations. This process may bring potential tax liabilities, so it’s essential to understand the different methods available to address these concerns. In this blog, we will dive into the intricacies of estate planning in Ireland, including the taxes payable and ways to reduce potential liability.

Understanding Estate Planning

Estate Planning is not about reducing the overall tax bill but rather about providing the means to pay these taxes, ensuring that assets remain available to the intended beneficiaries. Estate Planning encompasses strategies to ensure that wealth and assets are passed on to the right beneficiaries, minimizing the tax liability that might occur during the process.

What Tax Is Payable?

Let’s look into the specific taxes involved in Estate Planning.

Top of the list is Capital Acquisitions Tax (CAT). Capital Acquisitions Tax, or CAT, covers any Gift or Inheritance received over your lifetime, including cash, property, shares, cars, etc. In Ireland, €605 million in CAT was paid in 2022, with €524 million being on inheritances and €77.5 million on gifts, the balance coming from other taxes. Imagine a scenario where a family member has passed away and left behind a lump sum of €500,000. According to the CAT thresholds, the distribution might occur as follows: If the sum were left to their child, the first €335,000 would fall under Group A, with the remaining €165,000 being subject to Capital Acquisitions Tax.

If the lump sum were left to a niece or nephew (or any other family relation), the first €32,500 would fall under Group B, with the remaining €467,500 being taxable. If the sum were left to a friend or non-family member, only the first €16,250 would fall under Group C, and the remaining €483,750 would be subject to tax.

Understanding these thresholds is crucial in estate planning, as it helps to predict the potential tax liabilities and to plan accordingly. This could influence the decision of how and to whom the assets are left in order to minimise the tax liability for the recipients. It may be advantageous to consult with a professional who specializes in estate planning to explore the best options for your specific circumstances.

How to Reduce Potential CAT Liability

Understanding and availing of the various thresholds and planning policies is key to reducing potential CAT liability.

CAT Thresholds:

  • Group A – €335,000: Normally for children of the person giving the asset.
  • Group B – €32,500: Normally for any other family relation.
  • Group C – €16,250: For anyone else.
Policies to Cover Tax Liability

By establishing policies that meet the criteria established by the Revenue Commissioners, you can use these to pay any Gift or Inheritance Tax on behalf of the person receiving the asset.

Gift Tax Savings Policy

The following terms and conditions must be met for this policy:

  • Must be approved by Revenue.
  • Owner(s) must pay the premiums.
  • Premiums must be paid for at least 8 years.
  • Premium cannot alter by more than 50% of the initial premium.
  • Proceeds must be used within 12 months to pay the Gift Tax.
Inheritance Tax Life Cover Policy

The terms for this policy include:

  • Must be approved by Revenue.
  • Owner(s) must pay the premiums.
  • If established jointly with spouses, benefits are payable on the death of the second person.
  • Surplus proceeds not used to pay tax will be liable to the appropriate Tax payable at that time.

Estate Planning is a multifaceted process, requiring understanding and careful navigation of various taxes, thresholds, and policies. By considering the information outlined above, you can develop a strategy that aligns with your financial goals and ensures that your loved ones will benefit from your assets in the way you intend. It may be beneficial to consult with a financial expert specialising in estate planning to customize a plan suitable for your unique situation.