Who doesn’t want their children to have more than they had? It’s one of the fundamentals of parenting – successive generations all doing their best to make sure their children enjoy a life more comfortable than their own. Up to a point.
Generally speaking, parents who are in a position to help their children don’t want to simply wave a magic wand and make everything perfect. They don’t want to remove the sort of challenges that will help their children to grow, mature and develop into well-rounded people. After all, overcoming challenges is part of life’s journey. The times when we struggled and overcame adversity can often be the times that we were happiest – when our characters and careers were defined.
For that reason, most parents want to provide the sort of assistance that alleviates life’s struggle without eliminating it altogether. Striking this balance is a relatively new phenomenon. Traditionally, wealth in Ireland was tied up in the family home with the farm or business passing to the eldest son when the parents died. Now that wealth has evolved from land only to other assets such as property, business assets and financial capital, many parents are in the happy position of being able to assist their children during their own lifetime.
So what are the key considerations?
1. Ask the hard questions
In the context of the above, while parents naturally want to help their children they should also ask:
- Will financial help prevent them from becoming self-sufficient?
- Will it stunt their ambition to study, work and generally push themselves?
- Will a ‘safety net’ stop them from developing good financial discipline?
- What level of assistance is the right level?
This is the start of the conversation and it’s an important conversation to have, given the number of families (countless) that have fallen out over inheritance. The best way to avoid this is to include your children in the discussion around succession planning.
Even if money is something you’ve never spoken about with your children, now is the time to open up the discussion and involve them.
2. Start planning with a broad brush
In shaping your succession plan, it is useful to begin with a statement of net worth and a schedule of income. This will help you predict what you’re going to spend in the future, which in turn will help you target the level of funds you’re likely to need for retirement. After that, you should have a good idea of what is potentially available to be transferred.
The nature of parental assistance in Ireland remains largely property-related with parents giving outright gifts, contributing towards deposits or simply agreeing to be guarantors for their children.
3. What to do, and how to do it?
In recent years, succession planning has been influenced by the confidence that has surged back into the markets, pushing up asset prices at the same time that inheritance taxes have also increased significantly.
Once parents have satisfied themselves that they have sufficient assets to meet their own needs, they should focus on a detailed strategy by asking:
- Should we transfer the asset(s) during our lifetime or as part of our estate?
- If we transfer the assets now, how do we retain control?
- Can we avail of any tax reliefs such as: Retirement relief ; and/or Business property relief / agricultural property relief for business assets?
- Are we availing of the lifetime thresholds for capital acquisition tax (CAT) of €310,000 for children, €32,500 for brothers and sisters, €16,250 for strangers. A well-structured Will can minimise the liability to CAT.
- Have we utilised the annual exemption of €3,000 per individual, remember use it or lose it.
- Should I lend funds to my children rather than gift them? A loan may be a better option as it has many advantages including;-
- Retention of capital for parents
- Deferral of CAT until loan is forgiven, expires or on the parents demise
- Remember the deposit rate not the lending rate applies to interest free loans for CAT
- Greater protection for marriage breakdown as capital retained by parents.
- Assist with property purchase for children (bank finance for balance can be more complex)
4. Consider a Family Partnership
Most parents are reluctant to transfer assets without maintaining some control over what is being passed on. In the case of business assets, that means retaining more than 50% of the business or creating a special type of share that grants control over the board of directors.
In the case of purely financial assets, the creation of a Family Partnership can ensure that:
- Parents retain control of the assets.
- Provides a platform to educate children in financial matters in a controlled way.
- Future growth of the assets is free from CAT.
A Family Partnership also gives parents the opportunity to share their financial wisdom with their children, while the structure also has the flexibility to be revised and amended as circumstances evolve. This structure can be used in addition to a corporate entity where there is an intention to sell or wind up the company.
5. Transferring assets via trust
For parents, leaving assets to minors/incapacitated individuals or children who are not ready or capable of managing an inheritance, it’s essential to draw up a Will that allows for the assets to pass into a holding structure. The nature of this structure can be a discretionary trust (full powers with trustees), a life interest trust (beneficiary retains asset for life only), or a fixed trust (beneficiary retains asset for a fixed term i.e. to 25 years of age) This means that in the event of the parents untimely demise the assets are managed by trustees, ensuring that:
- There is flexibility to distribute the assets on a phased basis rather than a full transfer upon death (this can also help if there is a shortage of liquidity in the estate to meet inheritance tax demands);
- Control is maintained by trustees who effectively step into the parents’ shoes and operate in accordance with the trust document (or parents’ letter of wishes);
- Certain tax reliefs are available, where conditions are met during the period in which the assets are held by the trust.
Trusts are complex structures and professional advice should be sought before choosing any structure as they can be tax efficient where structured correctly but can be very inefficient where all of the issues have not been considered. For example there is a 6% once-off charge and a 1% annual charge for discretionary trusts in addition to a potential 33% CAT on receipt by the beneficiary. Clients are advised to prepare a detailed financial and succession plan as part of the overall process of transitioning assets to the next generation as each case will be different.
Equalisation of the estate is another important and difficult issue to solve, (ignoring the family business which would require an article in its own right) for example where a child receives gifts during his/her lifetime and their siblings do not. A possible solution is to;-
- Include in the residuary clause in the Will wording that takes account of gifts during the parent’s lifetime when calculating the split of the residuary assets if any.
Final thoughts
We all want to help our children in any way we can.
Helping them financially can give them a solid platform for the rest of their lives, but there are a number of important emotional as well as practical questions to be addressed before taking that step.
Whatever your family situation, our advice is to start your succession planning as soon as possible and of course ensure you have an up-to-date Will in place.
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Brian Walsh is a Director of Financial Planning with Davy. He works with company owners and their advisors to ensure that any investment strategy is considered in conjunction with an overall financial plan and is structured in a tax efficient manner. You can contact Brian directly by email Brian.walsh@davy.ie.
Established in 1926, the Davy Group is Ireland's leading provider of wealth management, asset management, capital markets and financial advisory services. The Davy Group is headquartered in Dublin, with offices in London, Belfast, Cork and Galway. Employing over 670 people, it offers a broad range of services to private clients, small businesses, corporations and institutional investors, and organise our activities around five interrelated business areas - Asset Management, Capital Markets, Corporate Finance, Private Clients and Research.
Please note that this article is general in nature and is not intended to constitute tax, financial or legal advice. It does not take account of your financial situation or investment objectives. Prior to making any decision which may have tax, legal or other financial implications, you should seek independent professional advice. There are risks associated with putting any financial plan in place. The value of investments may go down as well as up.
Davy Private Clients is a division of J & E Davy. J&E Davy, trading as Davy, is regulated by the Central Bank of Ireland. Davy is a member of the Irish Stock Exchange and the London Stock Exchange. In the UK, Davy is authorised by the Central Bank of Ireland and authorised and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our authorisation and regulation by the Financial Conduct Authority are available from us on request.
The views expressed in the posts and comments of this blog do not necessarily reflect the views of the Institute of Directors in Ireland. They should be understood as the personal opinions of the author. The content of this blog is for information purposes only and the Institute of Directors in Ireland is not responsible for the accuracy of any of the information supplied.