Liam Croke: Get your affairs in order, for your loved ones’ sake

Don’t let your partner’s first cousin’s nephew’s brother end up inheriting your estate!

Don’t let your partner’s first cousin’s nephew’s brother end up inheriting your estate!

I was carrying out a financial review for a client of mine last week and whilst we were discussing what he had and hadn’t financially, we somehow got sidetracked and began talking about running. It turned out that both of us were training for the great Limerick Run – he for the marathon and me for the 10km.

Anyway, afterwards it got me thinking as to how you could become financially fit, so to speak and what preparation and training do you need to do, to have a secure financial future for you and your family. You see, I think most of us are lazy when it comes to our financial affairs – we don’t have the time, energy, expertise, or interest and we don’t have our own personal financial trainer that we can go to for guidance and inspiration. So the majority of people are financial incredibly unfit.

What, I began to think, if I was a personal trainer and I was giving classes to people who wanted to get financially fit? What would be the areas I would focus on, steps that would build that solid foundation for success? I narrowed it down to seven and one of those classes I’d give would be on estate planning.

The reason I think this area is so important is because of what this new client told me during that first meeting last week – and what I have encountered from hundreds of others in similar positions.

Little did he realise how important this area was to his particular circumstances. Comparing it in terms of running, he was going to hit the wall before he ever even completed one mile, not to mind 26, if he didn’t do something about it – and fast.

Over the last 25 years not only have I witnessed the unnecessary grief family members encounter when their deceased loved ones made no provisions in the event of their death (family disputes/grant of probate issues and delays/who is entitled to what etc.) but also the unnecessary loss of hundreds of thousands of euros as well from the lack of basic estate planning. It rocket science and it isn’t time-consuming, but boy is it important.

Back to my new client, who never thought this was an issue he should be concerned about until we met. He thought he should be focusing on cash flow, investment returns, retirement planning, debt elimination strategies – and of course these are all important areas, no doubt about it.

We will work on them with him, but equally important was what would happen if he was to die?

Although he has been with his partner for the last 13 years, they are unmarried and even though they may have what’s referred to as a “common law marriage”, where a couple live together as husband and wife without being legally married, it is unrecognised under Irish law and this has serious implications where property and inheritance are concerned.

If he was to die intestate, his partner would not be entitled to any part of his estate.

His portion of the property they reside in would also go into his estate, so in his case both of his parents who are still alive would inherit everything he had in equal shares. So, there is a vast difference between what a married couple are entitled to and what a cohabiting couple are.

And even if he did make a will and left everything to his partner, she would see a massive amount of what she inherited having to be paid to the Revenue. Because they are not married the amount she can inherit that is exempt from tax is just €15,075.

I worked out that if his estate was worth about €400,000, when you factor in his pension fund, savings, value of his portion of the property and so on the amount she would have to give up in taxes would be €126,035.

And here is the mad thing – to avoid her paying this amount all that was required is what is known as a Section 235a life assurance policy that pays the proceeds of a taxable inheritance. The cost to him for taking out this, by the way, was €21.67 per month or €0.71 cent per day.

He would have to live for about 484 more years before the amount he paid into the policy was more than what it would pay out so not only was he doing the right thing and making provision for his partner to inherit the full value of his estate, he was also guaranteeing that he would always beat the life assurance companies. That’s because the pay-out would always be more than the pay-in.

He wasn’t aware, either, that he could and actually should be gifting his partner the sum of €3,000 each year, which doesn’t affect the current threshold amount of €15,075 she is already entitled to. If he did this, in five years he would be doubling the amount she could receive tax free.

And this is something, everyone should be doing by the way, funds allowing, whether you are married or not. Make use of this annual exemption – use it to gift money to your son or daughter, your siblings, your grandchildren or even to your friends.

Whilst writing this article not only was I was reminded of what happened to ordinary people who ignored the importance of estate planning but also to celebrities.

The death of the great actor Philip Seymour Hoffman is a very good example, because according to reports he left everything he owned to his partner, Marianne O’Donnell. He never married her but I am sure had he known that she would have to pay millions in tax to the IRS he would have done something about it.

What about Marilyn Monroe?

She left the majority of her estate to her acting coach, Lee Strasberg, and when he died, his third wife inherited all of Marilyn’s money – she didn’t even know her and Marilyn’s mistake was not taking the time out to put her assets into a trust fund.

Married or not, and famous or not, this is an area people need to focus on and find out what would happen and who would get what if anything happened to them. Having this information to hand, you can then do something about it whether that it is absolutely making sure the people you want to inherit your estate end up getting it and or making sure they pay as little in taxes as possible to boot!