My elderly parents have a substantial estate which, if they were to pass away, would (if divided equally among the children) exceed the amount allowed to be given tax-free to a child. I have heard that there is a type of bond/policy that can be taken out to cover this liability.
Could you advise if there is such an option? Also, it is possible that one favourite child might be given a much larger portion of the estate so, if it is very expensive, it might not be worth it.
Ms A.D.
Everyone moans about inheritance tax, everyone thinks it is unfair, most especially as they see thousands of euro disappearing from the inheritance they have had the good fortune to receive to pay a Revenue bill.
The reality, of course, as Central Statistics Office figures show us, is that, for the vast majority of us, it will never be a factor. The data, which relates to 2020, show that just over one-third of households (36 per cent) had received any inheritance or gift in excess of €3,000.
And where children did inherit from their parents, the median inheritance value was €100,600 – at a time when the tax-free threshold was €335,000. Even among the wealthiest 20 per cent of families in the State, the median inheritance at that time was €192,400, still well below the threshold.
Property and asset values have clearly risen in the intervening years but inheritance tax is clearly more a “bogey man” than a reality for most people.
Last year, Revenue collected €861.9 million under this tax heading – capital acquisitions tax, which also covers lifetime gifts. In raw terms, that’s a lot of money but it accounts for just 0.7 per cent of the Revenue’s tax take.
And in a society that regularly complains about a growing economic gap between the haves and the have-nots, that tax is the nearest we have to any sort of wealth tax. That does not stop the issue exercising people consistently.
But, as your own experience shows, it does not mean that there won’t be some families out there for whom inheritance tax will be a significant financial issue. That can present financial challenges, not least because there is nothing to say that the children are financially comfortable just because their parents have been.
At 33 per cent, for those to whom it applies, the tax can present a significant bill. So can you insure against it?
Well, yes you can. There is a device called a section 72 policy which is specifically designed to meet the cost of inheritance tax after a parent dies. It is so named because how it works is set out under section 72 of the Capital Acquisitions Tax Consolidation Act 2003, the legislation governing inheritance and gifting.
The key thing here is that the insurance policy must be taken out by the person who will leave the estate – in your case, your parents – not by the recipients. That can be an issue for people who are asset rich but cash poor.
There is nothing stopping the child or children paying the premiums on such policies, at least in part – perhaps using the €3,000 small gift exemption. After all, the policy is designed to benefit them.
These policies can be useful especially where there is a valuable family home and a strong desire that it not be sold to meet the cost of any inheritance tax bill.
The key thing, as with any insurance policy, is to assess what you are covering. The monthly premium will reflect the exposure, among other factors. Your parents are aware of what is in their will so they, with the advisers, will have to assess what that might mean in terms of the inheritance tax exposure of their intended beneficiaries.
The policy is very specifically designed – and approved by Revenue – to cover any inheritance tax bill. As such, the proceeds of the policy are not themselves taken into account in assessing the size of a person’s estate.
If the policy matches the inheritance tax bill, good. If rising asset prices means it falls short, the beneficiaries will find themselves subject to some inheritance tax. And, if falling asset values or rising tax-free thresholds means the policy covers more than the inheritance tax bill, the surplus will form part of the estate assets.
Your parents don’t need to take out individual policies for individual beneficiaries; what they are trying to cover is the entire bill for inheritance taxes that their children – and, depending on how their will is framed and their intent, other beneficiaries – may incur.
There are not many companies offering this type of insurance in Ireland. Last I checked, it was just three: Zurich Life, Royal London and Irish Life.
As with all such policies, there are criteria for eligibility. The most important one from your perspective is age. Section 72 policies must be taken out before the person taking the policy hits the age of 75. And, as I understand it, some of the providers have age limits that are significantly lower.
This is a factor financially because, at a time when we are now routinely living for another decade beyond our 70s, the cost of premiums will mount up to a significant sum in themselves. And if you are with a company that has a lower age limit, the impact will be magnified.
The only good news is that, unlike some other life insurance policies, your parents’ premiums will not rise as they get older. The premium is fixed from the outset, regardless of how long the policy stays in place.
The bottom line is that if your parents are older than 75, they will no longer be able to take out a policy. The other criteria is that they must be resident in Ireland, which you would expect.
Another factor to consider when looking at such policies is how to keep the premiums as modest as possible. As with other whole-of-life policies, the younger and healthier your parents are when taking out the policy, the lower the premiums – though, obviously, there is the prospect that they will be paid for a longer period. Smokers, for instance, can expect significantly higher premiums.
How much can you expect to pay? As always, insurers are wary of putting out numbers, not least as it really does depend on an individual’s circumstances, age and health. But one broker suggests that you could expect to pay at least €220 a month to cover a €100,000 tax bill, assuming you were around 60 and in good health when you take out the policy.
You say your parents are elderly. The nature of age is that our health diminishes so they may be looking at higher premiums than would have been the case if the policy had been taken out a while ago.
The other critical thing is to make sure there is no gap in premiums. If someone fails to pay a premium on such a policy, it will lapse and the family will be back to square one on inheritance tax.
Clearly, as your parents are taking on an additional financial burden and are already elderly, it would be sensible for them to take both legal and financial advice before signing up for such a product.
Finally, there is a separate policy – section 73 – which can provide cover for gifts made during a person’s lifetime. But that’s not something we will go into here.
So yes, you can insure against an inheritance tax bill but it is your parents, not you, who will have to do so. Whether they wish to is very much a matter for them.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com with a contact phone number. This column is a reader service and is not intended to replace professional advice
