I am an executor to my uncle's will. I have a brother who suffers from psychiatric illness/schizophrenia. Presently, he is in receipt of a disability allowance and has been for years. In my uncle's will, he has authorised the distribution of €45,000 at my discretion to this brother for his needs throughout his life.
How do I implement this request and still protect him receiving his disability allowance?
What is the upper limit of saving he can have without it affecting his allowance?
What structure would you suggest in the long term to protect his social welfare payments?
I presume we will have to pay tax after €32,500?
My uncle was aware he would not be able to handle this amount of money. This is why he left the bequest to his executors.
Ms K.O’C., Cork
The rules governing the disability allowance are that your brother must meet several criteria. Obviously you’ll be familiar with these but for others wondering about disability allowance, he must have a disability that has continued or is expected to continue for more than a year – something that is clearly not an issue in his case.
He must be substantially restricted in undertaking work that would otherwise be suitable for someone of his age, experience and qualifications, which again, it has already been determined that he meets.
Thereafter, he must be between the age of 16 and 66 (after which the State pension system kicks in), be habitually resident in the State and, finally, meet a means test.
This is the crunch. There are various elements of a means test but, in essence, the test measures both your weekly income and your longer-term financial means, your savings.
On savings, the position is fairly clear. In general, a person is entitled to have savings of up to €20,000 without it having any impact on their disability allowance. Above that level, every €1,000 of the next €10,000 (ie between €20,001 and €30,0000) is deemed to deliver €41 a week in income.
The following €10,000 delivers €2 a week under the Department of Social Protection calculations for every €1,000, with anything above that being assessed at €4 per €1,000.
However, the good news for you is that, specifically under disability allowance, your brother is entitled to a higher capital allowance of €50,000 before the means test needs to be taken into account. So, assuming he currently meets all the other conditions and does not have savings of more than €9,000, he should be fine even after allowing for this inheritance.
Why €9,000? Well, if your brother is a direct beneficiary of the will, you will need to pay tax on the inheritance. As your uncle’s nephew, your brother comes within category B of the Capital Acquisitions Tax regime. That means he can receive up to €32,500 without paying any inheritance tax.
Benefited
That means a tax bill of €4,125 on the €45,000 he has been left by your uncle and an outstanding net inheritance of €40,875 – hence €9,000 headroom before he hits the €50,000 threshold.
Those figures assume your brother has not already benefited from a substantial gift (over €3,000 in one year) or an inheritance from a sibling, a grandparent, or another aunt or uncle. If he has, any previous benefit must be taken into account.
So if, for instance, he received a €25,000 inheritance from a grandparent, then he only has €7,500 left of his category B threshold. In that case, €37,500 of his inheritance is taxable and the tax bill is €12,375.
In terms of paying any tax due, you, as the executor can do this.
If the money has been passed through you directly, then you could be personally liable for tax on the full sum, assuming you too have inherited under the will and are also in excess of your category B threshold as a result.
The level of tax applied will depend on the precise wording of the will.
Benefactors are often advised to establish a discretionary trust to provide for someone not in a position to care for themselves. This provides peace of mind for parents and other carers. It can also be a way of securing his current disability allowance and is tax efficient, especially for someone in your brother's position.
You don’t say whether this has been done in this case, If not, it is probably worth your while considering whether to do so. Regardless of whether the resident of your uncle’s inheritance will offset his allowance, there is the issue of him having direct access to over €40,000 designed for his long-term care if he is not capable of managing such sums. Your uncle was clearly aware of this issue and, from your letter, so are you.
Responsible
Within a trust, the trustees are responsible for investing the monies. Either you do this yourself, or you hire investment advisers to do it for you. In this case, with this sum, I’d be inclined to do it yourself, keeping some funds readily available and putting the rest into fairly low-risk investments so they at least keep pace with inflation.
Among the advantage of discretionary trusts are that such trusts are not liable to capital acquisitions tax when they are created. This is because the trust is under the control of trustees , probably yourself or some other relative, and not directly under the control of the beneficiary. In other words, they have no automatic entitlement to any assets within the trust until the trustees decide to grant access to some of the funds.
Of course, when the money from the trust is disbursed to your brother, an inheritance tax charge could arise. However, there is an exception for “qualifying expenses”. This essentially means expenses relating to your brother’s medical care, including the cost of any maintenance and accommodation connected with his medical care.
In addition, while discretionary trusts generally carry an upfront tax charge of 6 per cent and an annual charge thereafter of 1 per cent, trusts set up for people unable to manage their own affairs by reason of their infirmity or illness are exempt from tax.
However, the people setting up the trust do need to apply for this exemption – it’s not automatically applied. You’ll need a medical certificate to make the case.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice
