Over the next few weeks of this New Year, this column will take you through the basic steps of what constitutes good personal financial planning.
I can’t think of a more appropriate year to get your money and spending behaviour into order. If 2009 is anything like 2008, then you won’t be disappointed by the effort.
I never start a personal finance seminar without mentioning something that anyone with dependents or assets should consider: making a Will and considering the impact of your ‘succession’ decisions.
Yet typically, no more than a third to half of any audience I address has bothered to write their last Will and Testament and that includes people with young children.
The main reason to write a Will is so that you, rather than the state, gets to decide exactly to whom you would like to bequeath your money, property and possessions.
If you die ‘intestate’ or without a Will, the terms of the Succession Act 1965 take over, and your estate will be distributed first to your spouse, who gets it all if you have no children.
If you have a spouse and children, they receive two thirds and a third in equal shares respectively.
If you have no spouse or children, your parent(s) get your entire estate; if they are dead, your siblings take equal shares (or their children, equally, if their parents are dead), or your cousins and then nieces and nephews if there are no siblings, etc.
The Succession Act is very fair, but it is also completely detached from the nuances of your own personal relationship with any of these people.
I love my brothers and sister dearly, but if I were a single person, I wouldn’t want them to exclusively inherit my house, pension fund, savings and all my personal effects.
And as a married person with a child, by not having a Will, under the Succession Act, my son would inherit a third of my estate, which isn’t a big problem since he’s just 15 and my husband, as legal guardian, would have full control of its value until he turned 18.
By then, he would be entitled to what was left of his inheritance and if there was insufficient cash to give him, assets – perhaps even the family home – might have to be sold.
It isn’t unusual for adult children to gift back their inheritance under the Succession Act to a surviving parent if claiming it causes undue financial hardship, but there is no legal compulsion to do so.
Given these sorts of unintended consequences, it is far better to write a Will and spare your family and friends the inconvenience of you dying without leaving clear instructions about what happens to your estate.
You should also know that you can’t entirely disinherit a spouse, and that children left entirely out of a Will often successfully challenge that decision in the Courts.
Most solicitors charge modest fees, usually well under €200 for writing up a simple will, which should also include the names of any guardians of any children under the age of 18.
If you want to set up a trust for your children, in the event, say, that both parents were to die or simply because you don’t want any of the children to inherit too much money too young, this will cost you more.
But a trust can be a very good idea on tax grounds as well, in order to postpone the payment of capital acquisition tax (CAT) if your estate is particularly large and their individual inheritance exceeds the parent-child tax-free threshold of €521,208 in 2008.
This is expected to rise by at least three per cent inflation in 2009 to c€536,844 – the actual increase had not been published by the Revenue at time of writing – you can write your own Will at www.wills.ie.
So how much tax will your beneficiaries have to pay? First, there is no transfer, inheritance or gift tax between spouses and the aforementioned amounts apply between parents and children or grandchildren, as well as adopted and step-children if your son or daughter pre-deceases you.
The next group of beneficiaries – siblings, nieces and nephews and other linear ancestors/descendents – are entitled to a tax-free inheritance of €52,121 in 2008 (c€53,684 in 2009), while a stranger – someone who is not a blood relative – can receive €26,060 tax-free in 2008 (and c€26,842 in 2009).
The Finance Bill increased the CAT tax rate in 2009 from 20 per cent to 22 per cent, so a child who inherited say, €600,000 worth of assets (i.e. a property, cash or life insurance benefit) would pay €13,894 in inheritance tax to the state compared to €15,775 in 2008.
There are some exemptions to CAT other than that enjoyed by spouses: the family home is exempt if the beneficiary(ies) have been living with the deceased for at least three years prior to the inheritance and it is also their only, principal private residence.
The property must not be disposed of for the next six years or the tax relief is withdrawn.
Some relief from CAT for businesses being passed on and for agricultural land is also available; in the case of the latter, its value is assessed at just 10 per cent of actual value.
So as a New Year gift to your family, sort out your succession planning. Write your will and have a good ‘heir’ day.