Wednesday 26 October 2016

Can you afford to leave an inheritance?

You could easily live until you're 90 so don't let inheritance jeopardise your retirement

Lousise McBride

Published 15/05/2016 | 02:30

Inheritance cartoon by Tom Halliday
Inheritance cartoon by Tom Halliday

Many parents will have little, if anything, left to pass onto their children in the future as the higher cost of growing old eats into inheritance pots.

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Longer life expectancy - coupled with the enormous healthcare costs faced by many in their old age, has increased the cost of the retirement years. Elderly people are therefore dipping into their nest egg - and the wealth built up over their working lives - more than they may have expected to.

"Someone retiring at 65 today has a 50pc chance of living until they are 90," said Declan Lawlor, consultant with the Retirement Planning Council.

Your increased longevity will clearly eat into any inheritance pot you had been planning to leave to your children because you will need more money to fund your day-to-day expenses in retirement - as well as any healthcare bills which arise in your old age.

So should you wish to leave a decent inheritance to your children or other relatives when you pass away, how can you do so without leaving yourself short financially?

Put yourself first

"Try to ensure you have sufficient income to maintain a reasonable standard of living in retirement," said Lawlor. "Look after your own needs first - and take the view that your children will get what's left over after that.

"Remember, if you are in your 90s when you pass away, your own children could be at retirement age by that stage too. So there may be less pressure on you to leave an inheritance as chances are, your children will have paid off their mortgage by the time you die.

"Either way, the inheritance you leave for your children shouldn't be at the expense of your own retirement."

Do the sums

Estimate what your income and expenditure will be over your retirement years. Should you be taking money out of your nest egg each month to fund your lifestyle in retirement, be sure you are not taking out too much.

"Ask yourself what will your pension pot be like in 10 years' time if you continue to take a certain amount out of it each year," said Oonagh Casey Grehan, partner with Fagan & Partners.

"This should give you an idea if you will have enough money left to fund the rest of your retirement. Go on the basis that you will live the longest stretch possible."

Prepare for nursing home bills

As it could cost as much as €80,000 a year to stay in a nursing home, you must prepare for the eventuality of such bills. It is very hard to plan for nursing home costs - and to put together an inheritance which reflects such expenses (if they arise).

In the first instance, you might not need a nursing home. In the second, should you need a nursing home in the future, it is difficult to gauge just how much money you should set aside to cover those bills.

"Nursing home costs are only going one direction - and who knows what State support will be around for those bills going forward," said Lawlor.

Don't jeopardise any nursing home care you will need in your old age - just so you can leave a generous inheritance to your children. All the same, there are steps that can be taken to ensure the family home - or other land or wealth built up over your lifetime - stays in the family.

So good estate planning is crucial - particularly if you are cash-poor but asset-rich and planning to sign up to Fair Deal (the State scheme set up to provide financial support to those in need of nursing home care).

Under Fair Deal, some of your assets may be sold to repay nursing home bills when you die. This may not be strictly what you wish to happen - particularly if you have land or property which you wish to keep in the family. If most of your wealth is tied up in assets, you could restructure your wealth at least five years before you expect to go into a nursing home - to avoid the State getting its hands on those assets when you die.

Taking advantage of the tax relief on nursing home expenses is one way you could limit the impact of nursing home bills on your children's inheritance.

You can claim back two-fifths of the cost of nursing home bills in tax relief. Be careful, however, about how this tax relief is claimed. You must be a higher-rate taxpayer to be eligible for the top 40pc rate of tax relief. If you are not a higher-rate taxpayer, you will only get 20pc tax relief on your nursing home expenses; if you're not paying any tax at all, you won't get any tax relief.

"Many elderly people do not have high incomes, even though they may have assets such as their house or cash deposits," said Michael Gaffney, tax expert with KPMG. "Therefore they can't avail of the tax deductions because they don't pay high taxes. In this situation, if their children are high-rate taxpayers, a good idea would be for the children to pay the nursing home charges on their behalf. It costs the children less if they can use the full tax break. Meanwhile, the inheritance for those children is not reduced by nursing home costs."

You are still entitled to tax relief on nursing home expenses even if you have signed up to Fair Deal. However, only the portion of the nursing home bills which are paid for by yourself (or by your family or friends) qualify for the relief - you cannot claim the tax break for expenses subsidised by Fair Deal.

Clear the air

Inheritances can often spark bitter family feuds - particularly if some children feel they have not received their fair share or if children are left with equal responsibility for assets.

"Try to avoid leaving children as co-owners of assets or businesses," said Gaffney. "Ideally leave something for each child to own outright. Where it is necessary or desirable that children do own assets jointly, have a set of rules written down which set out how any conflicts are resolved. This can cover voting rules or at the extreme, it might dictate that if there is a fundamental disagreement, the asset is sold and the proceeds shared."

Making a will can help stem family feuds. Die without making one (that is, intestate) and it is the law which decides how your estate is divided up.

Your children can challenge your will should they feel they have been inadequately provided for - but only if you have made one. "The option to challenge a will doesn't exist if the parent didn't make a will," said Tom O'Malley, a commissioner with the Law Reform Commission (LRC).

The LRC is currently examining whether or not the law should be changed so that children can challenge a will even if their parent died intestate.

"We are also examining if Section 117 of the Succession Act (which allows a child to challenge a parent's will) should exist at all, given the likelihood that most children today will be self-sufficient by the time their parent dies," said O'Malley

Wise up on tax

Avoid leaving assets which trigger high inheritance tax bills in your estate - use that wealth to cover your costs in retirement instead, and keep the more tax-efficient assets for your estate.

"Some assets, such as farms and most family businesses, are not subject to high gift or inheritance taxes," said Gaffney. "So the logical approach is to give those business assets to the next generation, and hold on to other assets such as cash or investments as a buffer for health and living expenses."

Whether you have a string of assets, or only one or two, get up to speed on the exemptions to inheritance tax (such as the dwelling house exemption) as you could take action now that could slash or eliminate the inheritance tax bill that your children would otherwise face.

While it is a good idea to do what you can to prevent your children getting hit with large inheritance tax bills, don't overlook the tax implications for yourself - particularly if you start to pass on your inheritance while you are still alive. You could for example end up with a large Capital Gains Tax bill if you transfer land or property to one of your children.

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