HLB Sheehan Quinn Tax Consulting Partner Bruce Stanley highlights some pitfalls with regards to estate planning in the absence of a will.
Capital Acquisition Tax (“CAT”) arises on gifts and inheritances received by a beneficiary. On death, when a beneficiary takes ownership from the estate of the deceased, without proper planning or where the deceased dies intestate (i.e. without a will), this can create unintended and unnecessarily large tax liabilities for beneficiaries and could result in assets being distributed in a way which was not intended.
An individual’s wishes as to how their assets are to be distributed following their death is generally set out by way of a will. However, in situations where a person dies intestate, their assets are distributed under the provisions of the Succession Act 1965 (“the Act”). Under the Act the manner in which the estate is distributed depends on the relationship to the deceased.
Where the deceased is married with children, the surviving spouse (which includes separated couples until such time as their marriage has been renounced) should be automatically entitled to two-thirds of the deceased person’s estate with the remaining one-third being divided equally between the deceased’s children. In the event that a child of the deceased (and this child has children of their own) has pre-deceased him/her, the interest which would have passed to this child should pass to their children (i.e. the deceased grandchildren). This is known as “per stripes”.
Where the deceased person does not have any children, their surviving spouse is entitled to the entire estate. Where the deceased person has surviving children but no spouse, the whole estate is passed to the deceased’s children equally, per stripes.
In the event that the deceased has neither spouse nor issue, the entire estate should ordinarily pass up to the parents of the deceased in the event of intestacy. However, where the parents are also deceased, the estate should pass per stripes to the deceased’s siblings (or nieces/nephews where a sibling is also deceased). The estate should then pass equally between the next nearest relatives of the deceased. In the event that the deceased does not have any relatives, the estate goes to the State.
Similar rules apply in the event that the deceased is in a civil partnership. However, in the event that the deceased dies with children, there is a provision that the children of the deceased may make an application to increase their share of the estate and where such claim is successful, the share of the surviving civil partner should then be reduced.
Finally, in respect of co-habitants, it may be possible for a “qualified cohabitants” to be regarded as falling within the rules under the Civil Partnerships and Certain Rights and Obligations of Cohabitants Act 2010 and therefore having similar rights of a civil partner. In order to qualify, a cohabiting couple are required to be living together for a period of five years, or two years in the event of having children together.
Problems with Intestacy
A number of issues may arise in the event of intestacy, too many to detail in full here, but some common examples include:
Shares in a family business may be distributed to minor children or it may be that some children are working in the business and others aren’t but they all get an equal share. The children not working in the business may want to sell their shares, creating difficulties for those that want to keep a hold of the family company but cannot afford to buy them out.
It may be the case that grandchildren are not provided for in accordance with the deceased wishes. In may have been the intention that the deceased would provide for the educational or other needs of grandchildren, both those born at the time of death or those not yet born. However, under the rules of intestacy, such intention would not be followed unless done so by the surviving spouse or children of the deceased. This could create a double tax bill (initially for the beneficiary of the estate on inheritance and separately to the grandchildren).
Another issue which may arise is that assets may not be passed in a manner which best utilise available reliefs to minimise tax liabilities. A number of reliefs exist that reduce the tax burden for beneficiaries, particularly in relation to the family home or business assets, including farms. To qualify for the reliefs conditions apply that the beneficiary must meet. If the assets are distributed in line with the Act the reliefs may be limited or lost, creating an unnecessary tax burden for the family.
As you can see from the above, a number of unintended scenarios can arise from intestacy. As such, it is important that a will is in place to manage any tax liabilities or commercial considerations, but also to ensure that the estate is distributed in line with the wishes of the individual and not under the rules of the act.
Bruce Stanley is Tax Consulting Partner at HLB Sheehan Quinn. A Fellow of Chartered Accountants Ireland, an AITI Chartered Tax Advisor CTA and a Trust & Estate Practitioner, Bruce has 20 years' experience in practice across all tax heads.
If you would like to learn more about succession planning from a tax perspective, speak to Bruce and our advisory team today.Contact us