My parents are both in their 70s and in good health, and are writing their will at the moment. I have a sister and a brother. My parents plan on leaving the house to each other if one dies and then to us three children.
There is an issue: I’m on Disability Allowance, a means-tested benefit. The max in savings I can have is €50,000.
I will have a State contributory pension as I already have enough stamps to secure a minimum pension and I am working on building that up. There is no means test for the contributory pension, so if I inherit after 66 years old this doesn’t matter.
The estate is a house that may be worth around €600,000. If divided by the three of us, there’s €200,000 each.
My question is, if they die before I’m 66, is there a way to put that money out of my and the State’s reach, so it won’t impact my disability allowance, by putting it into a pension? I set up a pension plan this year.
There is a suggestion that, to protect my benefits, the estate be left to my brother and sister and that they set up a joint bank account in their names so I could use the bank card for my personal use.
I’m not comfortable with that for multiple reasons. I want to have autonomy and be tax compliant, etc. I also want to avoid the route of setting up a trust.
If I inherit €200,000, I can legally have savings of €50,000 without it impacting my disability allowance. What can I do legally to that money – the €150,000 extra – to put it out of my reach and protect my disability allowance? Can I put it into my pension without any penalties?
I’ve been to a solicitor and financial adviser and, frustratingly, haven’t gotten any clarity on this matter.
Ms P.H.
Sometimes you wonder what certain people are charging for. You have done precisely the right thing, sought advice from the right people – a solicitor and a financial adviser – and they’ve given you no clarity. It really is infuriating.
Down the years, I have received many questions either from people on means-tested allowances or from their parents who worry about the impact of an inheritance.
Your situation is depressingly simple, and one that confronts anyone who is in receipt of a means-tested welfare payment. The State is happy to make a payment to people with limited resources, but if you have the good fortune to come into money that lifts you above those subsistence thresholds, you stand to lose the income from the disability allowance.
For people fortunate enough to receive an inheritance, it is generally unalloyed good news – a windfall that allows them to do things they might not previously have had the financial wriggle room to do.
If you are on means-tested social welfare, however, it comes with a bit of a kick. Yes, it does give you some measure of financial freedom but it also has to fill in the gap left by the means-tested income you will no longer receive.
It can seem a little unfair when you are in that position that good fortune comes with a financial penalty to the least well off in our society.
Disability allowance is currently paid at a rate of €244 per week, a figure that will rise by €10 to €254 next year.
As you say, you are allowed to have a certain amount of savings – €50,000 – without impinging in any way on the payment. After that, the Department of Social Protection will assume you get €1 of weekly income for every €1,000 of the next €10,000 and €2 a week for every €1,000 in the next €10,000.
So, if you had €70,000 in savings, the department would mark down €30 in weekly income as part of your means test. Above €70,000, you will be seen as earning €4 every week per €1,000 of savings.
You are also allowed to work – although, under the terms of the allowance, you must be “substantially restricted from doing work that would otherwise be suitable for a person of your age, experience and qualifications”.
The first €165 of weekly income from work – after deducting PRSI, pension contributions and union dues – is not taken into account by the means test. Half of any weekly earnings between €165 and €375 are also disregarded. Beyond that, earnings will lead to reduced payment.
Certainly, a €200,000 inheritance would mean you no longer meet the criteria under the means test for Disability Allowance. The means test would price you out entirely with savings of €123,500 or more.
But is there a way around it?
While your thought of putting any money you receive straight into your private pension seems sensible at first glance, it won’t really work.
Alison McHugh, who is tax partner and head of private client services at EY, alerts me to something called “deprivation of capital” rules. Essentially, if the Department of Social Protection decides that someone is deliberately putting capital beyond the reach of a means test, it can suspend payment of their welfare.
And, she tells me, this suspension could last indefinitely at the discretion of the department.
In making their decision to invoke deprivation of capital rules, the department would look at the amount involved and the timing. You could argue that you are using the fund to ensure you provide for yourself in older age and do not become a burden on the State, but Ms McHugh would fear that putting a sum this large into a pension immediately on receipt via inheritance would see the rules invoked.
That could be catastrophic for you as the money would be locked in your pension fund, out of your reach for several years, and you would have no weekly welfare payment.
You mention a suggestion that the money be left to your siblings on the understanding that they would open an account in their names for this €200,000 intended for you, and you could draw from it by card as required.
You are not comfortable with this option and, as Ms McHugh says, for good reason – an opinion strongly endorsed by a very senior actuary at another leading firm.
“We would never recommend this option,” she says. “You just never know.”
Lots of things can change, she notes, not least one or both of the siblings could themselves die and some or all of the funds in the account could pass to their estate, which would leave you potentially dealing with in-laws or others who have no understanding of the arrangement or interest in continuing it.
The same could happen if they became unable to manage their affairs, in which case the funds would be managed on their behalf by someone under an enduring power of attorney.
And that’s before you even consider the fact that family dynamics can change, especially where money and inheritance is involved. I could write every week about family relationships torn asunder by inheritance, especially where unspoken arrangements – or, more accurately, arrangements not reflected in the formal wording of a will – are involved.
These are complex matters and not something to be decided on lightly. However, it is worth investing the time and consideration to try to achieve your parents’ wishes for you in terms of inheriting from them
We all think this would never happen in our families and it might well not, but is it a risk worth taking? As you say, it certainly leaves you with little autonomy over your funds.
And if the arrangement is spelled out in the will then you are back to the original issue again – the Department of Social Protection and that means test. Regardless of the arrangement, the department would see this as money coming to you and would treat the funds in the account as such, leaving you back at square one.
That leaves us with something called a discretionary trust. I am aware you say specifically that you want to avoid the route of setting up a trust but, quite frankly, if you are not prepared to do so, your choices are limited to accepting you will lose disability allowance for at least a period and possibly for good, or having your inheritance reduced so that it does not affect your weekly payment.
The key here, as you note, is that you will meet the criteria at 66 to move to a contributory State pension, at which point you will no longer be subject to a means test. In your circumstances, a discretionary trust would be the way to do that.
So how does that work and what might it cost?
In your case, as this involves an inheritance, your parents would need to leave instructions in their wills for the setting up of a trust. As each inherits from the other in the first place, as is standard practice, the trust would only kick in when the last parent dies.
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The key thing here is how the trust is worded. It needs to be crystal clear that you have no access to these funds under any circumstances until you turn 66. If the department sees that you are accessing any funds held under the trust while still on a means-tested payment, or that you can do so even if you are not actually doing it, you will be considered to have control of your inheritance and it will count against the means test.
As the actuary I consulted put it: “Trust assets are generally not counted as your money under a means test because they are in a trust. If you have no access to the money in the trust until you turn 66, it will be disregarded from the means test.”
But there are costs involved both in setting up a trust in the first place and in maintaining it between the time your parents die and you turn 66.
How much it costs to set up a trust is up there with the “how long is a piece of string” debate; it depends very much on the nature of the trust, the assets involved and the work required in setting it up. This would be an arrangement with legal and tax repercussions, so it is very important not to cut corners.
No one I spoke to was prepared to be tied down to a figure, which is fair enough but, when pressed and given a rough outline of your circumstances – which is all I have – it was suggested you should expect to pay something around €10,000 to set up any trust.
Then there is the question of taxation.
There is a 6 per cent discretionary trust tax charge against all the assets going into the fund. That charge is halved to 3 per cent if the trust is wound up within five years which, of course, would depend on the time between your last parent dying and you turning 66. It would be up to the trustees to pursue the refund with Revenue.
Then there is an annual discretionary trust tax of 1 per cent of the value of the assets in the fund each year for as long as the trust remains in existence.
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Exemptions from both these charges are possible where the Revenue Commissioners are satisfied that the trust is for the benefit of one or more people who are incapable of managing their own affairs due to age or other incapacity.
As you were living independently and working, I assume this would not be available to you, but I am advised that this is not so. There is no guarantee, of course, and the Revenue would have to accept the argument, but it is perfectly possible, I am told, that you can be considered able to live independently and to work but still be considered incapable of managing a sum of this size.
Outside discretionary trust tax, there can also be capital gains tax – at 33 per cent – if assets held within the trust are sold at a profit.
The tax issues – including the requirement to file an annual return for the trust – will be down to the trustees who have legal control of the funds.
Some people use professional trustees who, naturally, will charge for their services, but EY’s Ms McHugh says it is more common in Ireland that family or close family friends are named as trustees.
That could be your siblings but, if they were uncomfortable with the responsibility – or if your parents felt it might be too much for them – another relative or family friend might be appointed. That would be at the discretion of your parents.
These are complex matters and not something to be decided on lightly. However, it is worth investing the time and consideration to try to achieve your parents’ wishes for you in terms of inheriting from them. Having spoken to several industry experts, a discretionary trust looks to be the best way to proceed, notwithstanding your reservations and the costs involved.
Otherwise, it seems inevitable that you will lose your access to disability allowance.
Of course, if you turn 66 before your last parent dies, the issue is moot and will not be activated as long as the will is specific on you having access to the funds once you turn 66.
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.
