Section 72 Insurance.
What happens, financially speaking, when both parents die and assets are passed down to the kids?
When it comes to securing the financial future of your loved ones, especially in the face of potential inheritance taxes, the decision to start a Whole of Life Section 72 insurance policy requires careful consideration.
Let’s delve into the numbers and factors involved, using the scenario of a married couple, both aged 54, non-smokers, with 3 children, and an estate worth €2 million.
There is no CAT due on transfer of assets between spouses, so when one partner dies, the assets pass to the other without any tax due. However, on the death of the second parent, when assets pass down to the kids, that’s when things get expensive and assets start to become a bit of a liability and may need to be sold, just to settle a tax bill.
Understanding the Numbers
The combined lifetime threshold for the couple’s three children amounts to €1,005,000 (As of date of article, a child can inherit €335,000 from a parent in their lifetime). This means that the 3 children can inherit a combined €1,005,000, without having to pay any tax. Subtracting this from the total estate value leaves €995,000 subject to tax at 33%, resulting in an anticipated tax liability of €328,350. Do they have this in cash to pay this tax bill within a year of death?
To cover this tax liability, a Section 72 policy for €328,350 would require monthly payments of €402.88, totaling €4,834.56 annually. Assuming both spouses are 54.5 years old, with a potential payment period until age 100 (45.5 years), the total possible premiums paid would amount to €219,972.48, for a guaranteed payment of €328,350. The payment of this benefit does not increase the value of the estate if your Section 72 policy is set up correctly.
Considering the average life expectancy in Ireland is around 83 years*, there are approximately 28.5 years remaining for premium payments until reaching this age. Thus, the total premiums paid until the average life expectancy would be approximately €137,784.96, for a guaranteed payout of €328,350, representing 238% of the total premiums paid.
Additional Factors to Consider
Estate Tax Efficiency: By initiating a Section 72 plan, individuals effectively move cash from a taxable portion of their estate into a Capital Acquisitions Tax (CAT) tax-free environment. The premiums themselves reduce the overall value of the estate, potentially leading to a lower CAT bill.
Inflation: While the calculations provide a snapshot, it’s essential to consider the impact of inflation over the years. Inflation can erode the purchasing power of money, affecting both premium payments and the value of assets over time.
Uncertainty in CAT Calculation: It’s crucial to acknowledge the complexity of calculating an actual CAT bill. Asset values fluctuate, thresholds change, and tax rates vary over time. Predicting the precise tax liability can be challenging due to these variables.
Conclusion
In certain circumstances – Absolutely yes! The numbers above show very clearly that, financially speaking, it makes perfect sense – also emotionally. However, if one or both of these people were smokers, it would double the premium, in which case, this financial answer would change, but the emotional sense would still exist. It is so important that you also acknowledge the fact that the payment of premiums themselves from your own resources, is, in itself, further reducing the value of your estate = lower estate value = lower CAT bill. Is that not the ultimate aim?
Initiating a Whole of Life Section 72 insurance policy for estate planning purposes requires a thorough examination of various factors, including tax implications, inflation considerations, and the inherent uncertainty in calculating inheritance taxes.
While the numbers provide a framework for decision-making, it’s advisable to consult with a qualified Section 72 financial advisor to assess the suitability of such a policy based on individual circumstances and long-term financial goals.
In summary, while a Section 72 policy offers potential tax benefits and estate planning advantages, careful analysis and professional guidance are essential to determine whether it aligns with your overall financial strategy.
Get this exploratory process started by contacting us here. We can help you to calculate your CAT liability and suggest some ways to reduce this amount and fund for it in advance in a tax efficient manner.
Related Posts
Section 72 Policy In Trust.
When it comes to estate planning, one of the key concerns is how to reduce…
Securing Your Family’s Future: The Role of Life Assurance
Life assurance is a vital tool for protecting your family's future, providing peace of mind…
Navigating Mortgage Insurance: A Guide for Dublin Homebuyers
Buying a home is one of the biggest financial decisions you'll ever make, especially in…