Ensure your windfall is a blessing rather than a curse
Ireland is experiencing a golden age of inheritance, as the billions accumulated by grandparents and boomer parents trickle down to children and grandchildren in a great intergenerational transfer of wealth.
More than one third of households have received an inheritance, the Central Bank pointed out last month, with the combined value of these inheritances standing at an estimated €97bn. Indeed, the proportion of households headed by people in their 50s who received an inheritance had jumped to 22pc by 2020 from 14pc in 2013. Money was the most common type of asset to be inherited.
But suddenly coming into a hefty sum of money can be a blessing or a curse, depending on how you handle it. If you inherit a life-changing lump sum, people can appear from nowhere willing to help you spend it, you could be tempted to blow it all on a fancy car or extravagant holidays, or the inheritance could cause conflict with a sibling or other relative who didn’t inherit anything.
If you’ve been fortunate enough to receive a cash inheritance, here’s a step-by-step guide to ensuring this windfall provides you with long-term financial freedom:
If you’ve inherited a meaningful sum from a parent or another close relative, take your time to grieve before making any major financial decisions.
“If someone has never had a big nest egg before, having to make decisions about money that they’ve never had to make before can put them in a vulnerable position and can be very daunting,” says Tony Delaney, chief executive of financial services firm SYS Group.
You’ll need a small team of qualified professionals to give you the right advice, including a tax adviser, a regulated and independent financial planner or adviser, and a wills and probate solicitor. Seek recommendations from friends, colleagues or relatives who have used these professionals themselves.
“It’s important to sit down with the right person to discuss what you should do with your money, especially for younger people whose parents have passed away and who may not have anyone to guide them,” says Kieran McAuliffe, a financial planner and director with Provest Private Clients.
“More often than not, when an inheritance goes into your bank account, you’ll get a call from the bank to say ‘we can invest your money’, but when individuals get an inheritance, we encourage them to look at all of their options.”
Ireland imposes a tax rate of 33pc on gifts and inheritance (capital acquisitions tax) above certain thresholds, so you’ll have to settle the tax bill with Revenue on time or risk interest and penalties.
The amount of tax you’ll pay depends on the relationship you had with the disponer (the person from whom you received the inheritance). If the disponer was your parent, you must pay 33pc CAT on all gifts and inheritance above the value of €335,000.
If it was a sibling, aunt, uncle or grandparent who left you the money, your tax-free threshold is just €32,500. That figure falls to just €16,250 for more distant relatives and friends.
While you can inherit your spouse’s assets tax-free, the most a partner in a co-habiting relationship can inherit from the other without paying tax is €16,250.
“Even if you receive an inheritance below the tax-free threshold, you should still do a tax return in the same year you get it in case you get another inheritance down the road that puts you above the threshold,” Delaney says.
While you are pondering what to do with your inheritance, you’ll need to keep the money somewhere safe. The first €100,000 of cash kept in Irish banks is guaranteed by the State, and if you’re lucky enough to inherit multiples of that, it may be worth spreading it across different banks.
You can also use state savings products such as prize bonds. Instead of commanding interest, prize bond holders get the chance to win tax-free cash prizes and you can cash them in after three months.
If you don’t already have an emergency fund, McAuliffe recommends keeping enough money in an account to finance between six to 12 months’ worth of your household expenses.
But in the longer term, keeping an inheritance in a standard savings account would be an exercise in futility. That’s because the value of your money would be eroded by inflation, as deposit returns are so low that even lump sums would yield little interest, and because the interest you would earn would be subject to a tax of 33pc (Dirt).
Few investments will give you the kind of guaranteed return that comes with using a lump sum to pay off debt.
Start with the debt that commands the highest interest, like credit cards and overdrafts, and then move onto personal loans, credit union loans, and car finance.
While mortgage interest rates are rising, home loans are still one of the cheapest forms of debt you will incur.
But there’s nothing like the peace of mind that comes with paying off a mortgage, if you have one.
If you don’t need the money to buy a home, you’ll need to invest most of the money to keep it productive.
Deciding on a long-term goal, like third-level education for your children or boosting your income in retirement, will help determine the level of risk you will need to achieve the needed return.
For someone who has never invested before, Delaney recommends paying in monthly to benefit from euro cost averaging – a strategy that involves saving regularly into an investment to help reduce risk during times of market volatility and to avoid the pitfalls of trying to time an entry into investment markets.
“I also advise clients to put some money into a seven- to ten-year investment and some into a three-year investment,” he says.
“We then look at an investment portfolio so they are completely diversified and have different risk buckets.”
Because there’s an exit tax of 41pc on the profits from unit-linked funds and capital gains tax of 33pc on sales of shares, McAuliffe recommends beneficiaries who are close to retirement and in the higher tax bracket to invest in pension funds.
“At the higher tax rate, you can get 40pc of your contribution back,” McAuliffe says.
If your spouse, civil partner, or parent has died and left a small cash amount behind in a joint bank account that you shared with them, the money will typically be transferred to your name – as long as you sign an indemnity form guaranteeing that the bank will not be at a loss if there are other claims on the money.
But if the monetary inheritance is substantial and the deceased has made a will, it will take time for you to receive the cash. Indeed, you will be essentially beholden to the executor of the estate, according to Elaine Byrne, one of the country’s leading wills and probate solicitors. The executor is the one who will take out probate, namely getting the Probate Office to certify that the will is valid and that all legal, financial and tax matters are in order. Wills only take effect when the Probate Office accepts that the will is valid.
Getting probate in Ireland can be a tortuous process – a recent survey carried out by Royal London’s Irish operation found that it takes an average of 16 months from a person’s death to the distribution of their assets.
In Byrne’s experience, the usual waiting time for probate to be completed is 12 months.
“As a beneficiary, you really can’t do anything,” she says. “The beneficiary is entitled to know that, say, €10,000 has been left to them in the will but they are not entitled to see the will until the grant of probate comes through. So the beneficiary is quite in the hand of an executor and if the executor isn’t actively progressing it, they could be waiting a long time (for their inheritance).”