A striking features of our economic recovery is the speed at which the narrative of doom and gloom has turned on its head, writes Deirdre Lyons.
All around, we now see signs of optimism. After five years of ‘getting by’, Irish businesses and families are beginning to think about the long-term as opposed to the immediate.
For many businesses and families, thinking long-term involves considering if and when to get the next generation involved in the business, or about the safest and most sensible ways to pass on wealth to children.
Tax is a key consideration for those thinking of passing on wealth. Ireland’s tax system has radically altered in the past decade, with increases across most heads of tax while many reliefs have been restricted or abolished. The tax-free thresholds for gifts and inheritances have more than halved in recent years while rates have risen significantly.
So if in March 2009, an estate valued at €2m had been inherited by two children from their parents, the total tax due would have been €189,982. A similar scenario in 2015 (after the December 14th) would give rise to tax of €475,200.
More than ever, careful planning is needed to ensure that family assets and wealth are passed to the next generation in the most tax-efficient way possible.
AGE-OLD CONCERNS
Of course, while the tax and legal environment can change significantly from year to year, there are certain age-old concerns around the transfer of money or assets to children.
Many parents will be asking themselves some important questions like: “Will my children be able to manage this business or this money?”; “Will receiving large sums of money now kill their ambition?”; “Will passing certain assets to certain children cause family tension?”; “What happens if one of my children gets separated or divorced?”; “What if my spouse and I find ourselves in financial difficulty in the future, having passed on assets now?”
It is vital that parents address these – and any other – concerns before any transfers or transactions take place. Then, they can begin to think about how to manage the tax and legal sides of succession planning as effectively and efficiently as possible. In either case, advance planning and good advice are key.
START SMALL
Succession planning can seem quite daunting – there are a number of factors to think about and many parents are not certain what they would like to see happen to certain assets. This can be particularly true in a family business or farming context, where children may not be ready to take over.
There are certain steps that any family can take to start them on the road towards a good succession plan. The first step is to have a financial plan.
Before passing on any assets to their children, parents need to ensure that their own financial needs are provided for. A good financial plan can help parents to identify the level of capital they need to retain, and the investment mandate needed to support their income requirement.
There are certain steps that any family can take to start them on the road towards a good succession plan
Another basic but vital step in the succession planning process is a review of existing wills. Parents need to ensure that their wishes are realised and that maximum use is made of any tax reliefs or exemptions. Where more complexity is involved, it is best to involve a specialist solicitor.
Parents should also consider putting in place an enduring power of attorney, which involves nominating a person to look after your affairs in the event of incapacity.
Another consideration for parents is that under the terms of the small gift exemption, any individual can gift €3,000 to another individual tax-free each year. This means that two parents between them could gift €6,000 to each child or grandchild each year, without impacting on tax-free thresholds.
THINK BIG
Where larger or more complex assets are involved, navigating the tax and legal environment becomes even more crucial. Managing family dynamics is often just as crucial, as large financial bequests have been known to cause disharmony between siblings.
Families need to start thinking early about if and when the next generation is coming on board, and how this might be structured most effectively (and harmoniously). The reliefs around business and farm transfers are both more limited and more complex than before, so good advice is key.
For parents wishing to help children get on the property ladder, there is an exemption in the law of gift and inheritance tax which means it may be possible to achieve this tax efficiently.
LEGACY ISSUES
Deirdre Lyons, Davy Private Clients
For parents concerned about children’s financial education – or lack thereof – there are certain ways of passing money to children where the parents retain legal control, for example, family partnerships.
Some families with significant wealth may be thinking about a charitable legacy or how to provide for good causes in a structured, sustainable way. Charitable foundations may be one way of achieving this, and where they are structured correctly, tax reliefs can apply.
No two families are the same, so tailored advice and planning is key. If you are thinking about succession planning, a good first step would be to review your will and appoint an enduring power of attorney, consider any tax reliefs you can avail of on transfers of money or assets, and speak to your adviser about creating a financial and succession plan.
The only question is when to take that first step – today would be good.
