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:
o Dwelling house relief for residential property assistance; and/or
o Business property relief / agricultural property relief for business assets
- Dwelling house relief for residential property assistance; and/or
- Business property relief / agricultural property relief for business assets.
Are we availing of the lifetime thresholds for capital acquisition tax (CAT) of €280,000 for children and the annual exemption of €3,000 per parent and per individual (2016 level)?
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
- Children benefit from financial education and professional advice
- Any future growth of the asset 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.
5. Transferring assets via trust
For parents, leaving assets to minors 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 – this is known as a discretionary trust. This means 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.
The tax on the discretionary trust of a 6% once-off charge and a 1% annual charge needs to be considered as part of this type of planning. And of course the appropriateness of any strategies or structures is dependent on the individual and their circumstances.
Equalisation of the estate is another important issue, where one asset (for example the family business) is left to one child and an asset of equivalent value is left to the other(s). This can be dealt with in the Will by ensuring that any residuary clause is worded to take account of gifts received by an individual child during their parents’ lifetime.
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.
Brian Walsh is a Director of Financial Planning at Davy Private Clients, a division of J&E Davy. J&E Davy, trading as Davy, is regulated by the Central Bank of Ireland.
The information contained in this article is based on Davy’s understanding of current tax legislation in Ireland and is subject to change. It is a not a substitute for professional tax advice. You should consult your tax adviser for the rules that apply in your individual circumstances.